Rule Breaker Portfolio

<THE RULE BREAKER PORTFOLIO>

Beginning to Break Rules

By David Gardner (MotleyFool)

ALEXANDRIA, VA (April 22, 1999) -- The market stomped ahead again today, and our stocks with it -- rather, ahead of it. The Rule Breaker Portfolio gained 3.91% to increase its gain for 1999 to 67.11%. Trailing our returns was the Nasdaq (up 2.95% today, and 16.82% for the year), and the Standard & Poor's 500 (up 1.70% today, and 10.86% for the year). Starbucks announced earnings after market bell and hit estimates (I haven't had much time to analyze that tonight, but here's the news and a link to our Starbuck's message board for reaction).

And the Dow hit 11,000 today!!!!

Did you notice?

OK, you probably didn't, because it didn't. But it's plausible, right? After all, the Dow's close at 10,727 Thursday means that we're just 2.55% from that monumental exciting achievement that IS

DOW 11,000

If my sarcasm is not yet evident to you because you're a new reader (never forget: Sarcasm is the wit of Fools), I have now made it explicit. The silliness that WAS Dow 10,000 (who watched the CNBC 5-hour special?) will look juvenile once we quietly and newslessly surpass that magical Dow 11K mark.

As always, the story has nothing to do with round numbers, or an "event," any sort of isolated extravaganza. Nope. It -- the rise of the stock market -- has been happening for decades and will (with bumps and bruises along the way -- as in the past) continue for as long as free-market capitalism remains the economic choice of the global community. You can bet that we will continue to see great individuals form great companies that will revolutionize technology, convenience, entertainment, safety, discovery, efficiency, customer service, and all the rest. It's a beautiful model we're running, and we're all incredibly privileged to be living right here, right now. No time like the present.

Finding which will be those revolutionary companies, those naughty entrepreneurs who kick down the Establishment's door and rock the world, is our fortunate task within this space every day. We don't find a new one every day (couldn't buy them all even if we did), but we find enough in the course of a year or a decade to make lots of money. Which is the whole reason you click in here every night, right?

Right?

No?

I hope not. I hope we're fulfilling our mission to educate, to amuse, and to enrich. We won't do all of these things every day, but we'll always try. Greater than that, though, I hope we're conferring a mentality, a way of seeing the world, a philosophy, as much as we confer any particular piece of information. More than anything, I'd like The Motley Fool and its Rule Breakers to be remembered for doing that, for having taught people to think for themselves about money and about life, and to feel confident in doing so. What a stronger world we'll live in.

Speaking of the world at large, if you'd like to educate yourself and enrich your own understanding of why what happened in Colorado the other day happened, I highly encourage you to read the best thing I came across today, which is this posting by fellow Fool William Campbell explaining why the murder of students was not an "insane" act, but rather quite explicable, even in a way predictable. Mr. Campbell's views are his own, and I doubt he expected anyone to point to them tonight in a well-read column, but when I see analysis this thoughtful and this affecting to me, as a parent, I'm not going to hide that light under a bushel.

I recently attended my first meeting at the New York Stock Exchange as a member of the Individual Investor Advisory Committee and have not made the time yet to write up what I learned. None of it is particularly immediate or market-shattering, but it is important, so rather than rush to summarize tonight I'm going to ask patience of those interested and do so in my next report.

Tonight, I want to focus on a question frequently asked in our Rule Breaker Portfolio message board, namely, "I'm just starting out and would like to buy a Rule Breaker -- which one would that be?"

Right away, there is no single answer to that question.

But here's how I go about answering it. Begin by asking yourself this crucial question:

Which of these companies (or a Rule Breaker outside this silly portfolio) do I really know?

You see, three key characteristics define Foolish investing:

  1. Know thyself. As it was writ on the Greek oracle at Delphi, so too is it true for your investing and your life in general. In this context, you must understand what distinguishes you as a person. Do you really like to take risk? How do you react when things don't go your way? Are you an independent thinker? All of these things are critical to your decisions about how to invest.
  2. Know thy timeframe. This was actually graffiti scrawled on the oracle of the Oonky-Boonky people, an early civilization that was too myopic in its thinking. The Oonky-Boonkies had become convinced that no tool would ever be developed that enhanced humanity's ability to fight, and thus they never tried to develop one. Because the Oonky-Boonkies were physically larger and stronger than their nearby rivals the Peeky-Peekies, they thought that if they continued simply to breed within their culture, they would remain dominant. Well, a few generations came and went, and if you saw the opening to 2001: A Space Odyssey, you saw the documented historical result of where their short-term thinking eventually led them. In the context of investing, we encourage you to think long-term, which means being patient, putting your money only in the best companies you know, trading as infrequently as you can manage, and paying no mind to the short-term noise generated by financial TV, the money rags, etc. If your mileage varies, understand that, and why, as well.
  3. Know thy companies. While this is third on the list, that doesn't mean it's any less important -- or even, urgent. Make sure that in the context of knowing yourself and knowing your timeframe that you understand clearly what you're investing in. Are you a customer of the product or service? I consider that very important -- at the very least you should have a friend or acquaintance who is. Do you know the business model? That's not complicated. It starts with asking a simple question: "How do they make money?" And: "How do they make more money than that?" In other words, what is the company's business model, and what is its incentive? Does the company have a mission statement clearly identified, that you respect and agree with? Does the company appear to be fulfilling that statement? Who's running this company? Do you respect the management team?

Most of these questions are not difficult to answer, particularly through the use of (1) your own knowledge of the business as a customer and a fan, and (2) our Foolish message boards! I think everyone in Fooldom should at least be reading -- if not actively contributing -- to one message board. Whether it's a discussion on an individual stock, or buying a car or a house, making your 401(k) plan decision, or just sharing recipes, the Foolishly interactive sharing of practical and useful information is something many of us are hugely benefiting from.

And always remember the fate of the Oonky-Boonkies. That graffiti that desecrated their oracle, by the way, was scrawled shortly after their demise by their Peeky-Peeky conquerors.

Finally, if you remember this year's April Fool's joke, and you are looking for a possibly belly-laugh to close out tonight's reading, click here and look very closely at that brief article. Share your enjoyment with us, of course, at the eMeringue message board.

Fool on!

David Gardner, April 22, 1999

What's up with Harry Jones today?

04/22/99 Close
Stock  Change    Bid 
------------------ 
AMGN  -1 3/16    62.81
AMZN  +10 13/16 190.06
AOL   +7 1/16   148.56
ATHM  +3 1/2    145.44
CAT   -2 1/16    59.81
CHV   +2 1/8     98.50
DD    -2 13/16   66.13
DJT     ---       4.13
EBAY  +5 1/4    172.00
GT    -  3/4     55.63
IOM     ---       5.06
SBUX  +1 9/16    32.75
TDFX  -  5/8     18.88


                  Day     Month  Year   History   Annualized 
      R-BREAKER  +3.91%   5.14%  67.11% 1577.26%  81.93%
        S&P:     +1.70%   5.63%  10.86%  209.99%   27.14%
        NASDAQ:  +2.95%   4.06%  16.82%  255.69%   30.90%


    Rec'd    #  Security     In At       Now      Change
   8/5/94  2200 AmOnline       0.91    148.56   16246.21%
   9/9/97  1320 Amazon.com     6.58    190.06    2788.82%
  5/17/95  1960 Iomega Cor     1.28      5.06     295.38%
  12/4/98   450 @Home Corp    56.08    145.44     159.34%
  2/26/99   300 eBay         100.53    172.00      71.10%
  4/30/97 -1170*Trump*         8.47      4.13      51.29%
 12/16/98   580 Amgen         42.88     62.81      46.50%
  2/23/99   300 Caterpilla    46.96     59.81      27.36%
  2/23/99   180 Chevron       79.17     98.50      24.42%
   7/2/98   470 Starbucks     27.95     32.75      17.15%
  2/23/99   290 Goodyear T    48.72     55.63      14.18%
  2/20/98   260 DuPont        58.84     66.13      12.37%
   1/8/98   425 3Dfx          25.67     18.88     -26.46%

    Rec'd    #  Security     In At     Value      Change
   8/5/94  2200 AmOnline    1999.47 326837.50  $324838.03
   9/9/97  1320 Amazon.com  8684.60 250882.50  $242197.90
  12/4/98   450 @Home Corp 25236.13  65446.88   $40210.75
  2/26/99   300 eBay       30158.00  51600.00   $21442.00
 12/16/98   580 Amgen      24867.50  36431.25   $11563.75
  5/17/95  1960 Iomega Cor  2509.60   9922.50    $7412.90
  4/30/97 -1170*Trump*     -9908.50  -4826.25    $5082.25
  2/23/99   300 Caterpilla 14089.25  17943.75    $3854.50
  2/23/99   180 Chevron    14250.50  17730.00    $3479.50
   7/2/98   470 Starbucks  13138.63  15392.50    $2253.88
  2/23/99   290 Goodyear T 14127.38  16131.25    $2003.88
  2/20/98   260 DuPont     15299.43  17192.50    $1893.07
   1/8/98   425 3Dfx       10908.63   8021.88   -$2886.75

                              CASH   $9924.87
                             TOTAL $838631.12

Note: The Rule Breaker Portfolio was launched on August 5, 1994, with $50,000. Additional cash is never added, all transactions are shared and explained publicly before being made, and returns are compared daily to the S&P 500 (including dividends in the yearly, historic and annualized returns). For a history of all transactions, please click here.

</THE RULE BREAKER PORTFOLIO>

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