Rule Breaker Portfolio Time to Rebuild

Break the Rules of common thought. Think differently than you're used to: Actually be excited and positive about this beaten-up stock market. Because this market offers many more long-term opportunities to succeed than the soaring stock market of recent years.

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By Jeff Fischer (TMF Jeff)
June 18, 2002

Would you describe this current stock market as:

A) Torturous
B) Incorrigible
C) Dishonest

Or...

D) Exciting?

I have to go with "exciting," Regis.

Regis: Exciting? Exciting? Are you one shoe short of a pair? Have you been drinking some sort of mushroom tea? Do you have any money I can borrow? The Nasdaq is down 65% and the S&P has lost 22% since March 2000. So, unless you wanted to see a stock market debacle, this has been anything but exciting, even with corporate scandals a go-go.

But it is exciting now
Okay. True. Only a masochist or a 100% short seller (and over the long-term, there isn't much difference between the two) would argue that the past two years were an exciting time to be in our country's stock market. Most of us would instead use letter "A" above to describe the investing experience since 2000: Financial torture.

But that's the past. This stock market is exciting now. Now, when hundreds of stocks are beaten down to several-year lows; now, when almost nothing results in a surging stock price, not even a buyout; now, when the press doesn't have a dab of ink to give to positive prognostication; now, when most people scoff at the mere notion that some stocks might be bargains. Now. Now is the time to look for investments that could pay off incredibly 10 or 15 years from now.

Now is when we should be excited.

On the flipside, we should not have been excited in 1999. But we were. I was. Even as we wrote here, "This will not last, stocks will eventually decline," I was excited. Many investors, including mutual fund managers, were, at their worst, buying indiscriminately during the bull market. And why? Because they were excited.

Meanwhile, more sober-minded investors viewed the Soaring '90s as an obstacle to success: They couldn't find reasonably priced stocks to buy. Unfortunately, they were a tiny minority. Most of us were excited as prices rose. And now we're bummed.

But we have it all backwards.

Don't focus on now at the expense of ten years from now
We should have been bummed (and incredulous) about stock prices in the late '90s, and we should be excited right now.

Yes. I know. I've yet to meet a stockowner who hasn't somehow been hammered the past few years. And I'm with you. I've lost more than 50% on some holdings. But that's in the past. Don't cry over spilt milk. Stocks that you own right now you should continue to own only if you believe in their potential -- only if you don't believe that you can do better elsewhere.

So, it's important not to get depressed by fallen investments and this stock market. If you do, you'll likely miss long-term opportunities that are unfolding today, both for your new dollars that you want to invest, and for moving money out of poor investments into something much better at a low price.

Thinking optimistically about 10 or 15 years from now isn't always easy, but it's what you need to do if you're aiming to invest funds for that amount of time. Though it's hard to see the sun through all the clouds, now may be a good time to invest with added resolve.

Change how we think about investing
To invest successfully in the stock market the rest of our lives, many of us need to think opposite -- in a Rule Breaking fashion -- from what we've typically been inclined to think in the past. In the past:

• Sharply rising stocks = excitement and increased interest
• Severely falling stocks = withdrawal of interest

Now and in the future, we should think:

• Soaring stocks = caution and increased cynicism
• Pummeled stock market = increased opportunity and interest

Where are we right now? We're in Pummeled Stock Territory. People argue that prices are still historically high, and Warren Buffett says that we shouldn't hope for more than 6% annualized returns the next decade, so by no means should you (ever) start buying stock haphazardly. But now is not the time to recoil from your wounds, either. Now is the time to rebuild.

Additionally, if you have at least 10 years to retirement (and many of you have the luxury of 20 years or more), now may be a good time to increase your 401(k) contributions to an index fund; try to max out your annual IRA contribution; start an investment account for your child who may not even be born yet. In summary, when you have 10 years or more, save and gradually invest more during record-sharp downturns, rather than withdrawing your interest.

Be diligent and rational in your decisions, but think positively about where we might be 10 or 15 years from now. Because we'll be there before you know it; and if things are still dark then, well, at least you'll have thought positively for much of your life; and if things are bright again, then you won't have missed out – you'll have invested for it years ago, amidst thick nay-saying and doubt.

Stock idea resources
The column ends there. That's the end. But if we don't point to resources, we provided a message without direct means to act on it. So here are a few resources we believe can help: The Motley Fool Select, a monthly in-depth stock report offering three timely stock ideas a month; the Fool's brand new book by the Gardners, What to Do With Your Money Now; TMF Stock Advisor, Tom and David's monthly stock newsletter, offering two new investment ideas per issue; additionally, our online columns -- all free! -- are a regular source of ideas to consider, including the recent Rule Breaker purchase; and the Fool's personal finance area offers you everything from high-interest CDs, to tips on IRAs and 401(k)s (in the retirement area). Put yourself in a position of investing strength, for now and especially for the future.

Jeff Fischer recently laughed at "The Importance of Being Earnest." His stock holdings are vaunted online under the Fool's universally loved (and rapped about by Nelly) disclosure policy.

Rule Breaker Portfolio Returns as of 6/17/02 Market Close:

            RB        S&P     S&P 500
            Port      500      DA*    Nasdaq
Week      -0.64%**    0.53%   --       1.48%
Month     -3.57%**   -2.90%   --      -3.86%
Year     -20.54%**   -9.75%   --     -20.36%
CAGR***
 since 
 8/4/94   23.21%     10.91%  12.79%   10.25%

*Dividends added.

**Please keep in mind that these figures will be distorted for the RB Port once a quarter when we deposit $12,500 in new cash. See next note! 

***Compound Annual Growth Rate using Internal Rate of Return. This performance measure accounts for the periodic deposits. Total return wouldn't be meaningful, because we started adding cash to the portfolio in July 2001. In a total return calculation, or (Current Value - All Cash Deposited)/All Cash Deposited, cash added shows up as returns.