Rule Breaker Portfolio
Fool Selling Fraction AOL, IOM
April 16, 1997

PARTIALLY SELLING

America Online AND Iomega

NYSE: AOL
Type: Mid-Cap Monster
HQ: Dulles, VA
Phone: (703) 448-8700
Closing price: $45 5/8

Trailing 12-month sales: $1.4 billion
Trailing 12-month earnings per share: Loss of $5.16
Last quarter reported: 2Q Fiscal '97 (December)
Next quarter reported: 3Q '97 (March), around May 8th
Consensus EPS for quarter: Loss of $0.07
Fool Ratio: N/A

Trade: SELLING $15K of $31K position

NYSE: IOM
Type: Mid-Cap Monster
HQ: Roy, UT
Phone: (800) 778-1000
Closing price: $17 3/4

Trailing 12-month sales: $1.4 billion
Trailing 12-month earnings per share: $0.43
Last quarter reported: 2Q Fiscal '97 (December)
Next quarter reported: 3Q '97 (March), April 17th
Consensus EPS for quarter: $0.14
Fool Ratio: 0.50

Trade: SELLING $19K of $35K position

OVERVIEW

We must cultivate our garden.

A changing wind blows over the Fool Portfolio this week. It uproots bits and pieces of existing vegetation and pollinates fresh ground, to prepare the way for various new blooms. It must be Spring.

And not a moment too soon. Underperformance has been dogging our step much of 1997, except for a decent past month or two. Sure, we're beating the Nasdaq, but that doesn't leave us satisfied. Anyway, you might think we Foolish portfolio managers are eager to shake things up a bit. You might think right. To that end, we'll be trimming hedges and planting bulbs during the month of April, because as Voltaire concluded his timeless Candide, "We must cultivate our garden."

Selling some America Online and Iomega?! What? The Fool giving up on its two biggest horses?!! Emphatically not. You see, we lead off with today's two sales not out of any dissatisfaction with either stock, but expressly for the purposes of being able to purchase new seeds for our Foolish flower beds. Thus, this report concentrates not on America Online or Iomega, their prospects or valuation (which we write about on a daily basis in our Fool Portfolio recaps), but simply on making our rationale very clear to you the reader.

RATIONALE

When you need cash, the time-honored option has been the sugar daddy. Dad?

The traditional lingo used in recommendations by brokerage firms and financial newsletters is fairly blunt: STRONG BUY, HOLD, etc. At The Motley Fool, we're quite different. First of all, our portfolio moves aren't recommendations; they're merely reports on what we are doing with our money. That's the whole spirit of the Fool Portfolio. We're not over here in Virginia managing anybody's money; our goal is to teach each person to do it on her own. The Fool Portfolio exists to walk the walk, so that we're not just talking the talk.

Here's the key: The Fool Portfolio is a managed portfolio, not a stock-picking service. To that end, sometimes we make trades based not on intrinsic valuation calls ("Buy!" "Sell!") but for the sake of pure portfolio management. It's a novel concept to which some people have to adjust their mentalities.

In the case of our partial upcoming sales of America Online and Iomega, we do so for the sole reason that we wish to put some other new investment ideas into play. And the cash has to come from somewhere! If you look over the Fool Portfolio, you'll see that we have approximately 52% of our assets socked into two investments. That's happened the only way we'd ever let it: purely through appreciation. (The initial amounts invested in AOL and Iomega were small; we let our winners run.) Anyway, today these stocks taken together make up our primary source of funds.

We're selling $15K of AOL and $19K of Iomega in order to bring both of those investments down to $16K each, in line with our holding of General Motors. Together, the three will still represent our three largest holdings, which we're quite comfortable with as we believe in each, going forward.

WHAT THIS ISN'T

No lack of faith in our two biggest holdings.

It's comic to think that some people may represent our sales this way: "The Motley Fool is selling America Online!" "The Motley Fool is ditching Iomega!" As if we're cashing out totally. As if we're no longer believers. On the contrary, as already noted, America Online and Iomega will remain our biggest investments for no other reason than that we strongly believe in them.

In fact, we hope to hold these stocks the better part of this decade and beyond. Nothing's for sure in this life, so we'll always reserve the Foolish right to change our minds. Any investor should... don't fall in love with your stocks. But at present, we see strong futures for both... as strong, in fact, as their pasts and their past performances.

Look here, in the best of all possible worlds (to echo Voltaire again), we wouldn't have to write this section at all. It would be enough just to say that we're selling these stocks to raise some cash for new purchases, and people would understand. But we know that some in the media, or Internet newsgroupies, might only look at the headlines. So if some misleading person runs this headline:

The Motley Fool Is Selling America Online and Iomega

... they obviously didn't read our report or take the time to understand us, or what we're doing. Here's the real headline:

Fool Portfolio Sells Portions
of Its Two Biggest Holdings

Portfolio managers raise cash
to establish new positions

Read it again in black and white: We just want to make a few new purchases, and the place to draw cash from is our disproportionately huge holdings. As much as we'd like to, we really cannot buy much with the money from our ATC Communications holding!

THE TIMING

Hey, we don't do timing.

Iomega announces its first-quarter earnings tomorrow. As shareholders, we hope they're great! As investors, we expect them to be good. But the effect they have on the share price are well-nigh irrelevant to us. We don't invest for earnings announcements or press releases, or big weeks or months. This move of ours has nothing to do with tomorrow's earnings announcement. In fact, with our trading policy, we have five days to execute this new move. We may do the sell before or after the earnings. To tell you the truth, we have no idea.

We're moving into summer now, historically a time of lower market performance (the numbers prove this out) and perhaps lower expectations. That's the general rule... there have been and will always be exceptions. Anyway, we're looking at spending at least a portion of our new proceeds initiating a few short positions, though that's not all we're interested in by any means.

But as for shorts: ever since we closed our short of Quarterdeck (Nasdaq:QDEK) (we made money from $7 to $5... but we're sick about this, because the darn thing's now $2!) we've hungered to raise some funds to do some more shorts. Shorting stocks is for more aggressive, experienced investors... it's definitely not suitable for everyone. But our long-time readers know that we advocate always having a little money short. It's an ongoing ideal for us that we don't always meet, partly due to the shorter-term pressures of that approach. Anyway, that's one definite direction we're looking in now.

Flush with cash, we'll most likely be doing several trades over the next 4-8 weeks. We look forward to a most unWise summer!