RULE MAKER PORTFOLIO

<THE RULE MAKER PORTFOLIO>
What Happened to Cash-King?

Diversifying in One Company
GE as a mutual fund?

By Rob Landley (landley@flash.net)

Austin, TX (Dec. 23, 1998) -- Several recent Rule Maker articles have criticized mutual funds without talking about what I consider to be the core issue: Why would anyone buy a mutual fund when they can buy into a diversified company instead?

Take General Electric (NYSE: GE) as an example. You want to diversify? GE is inherently more diversified than most mutual funds. It makes washing machines, jet engines, street lights, industrial abrasives, light bulbs, digital medical x-ray machines, telephones, hi-fi stereo systems, televisions, VCRs, camcorders, production quality video equipment, refrigerators, microwaves, air conditioners, ovens, water heaters, dishwashers, in-sink garbage disposals, glue, caulk, rubber, plumbing, electrical wiring, switches, plugs, circuit breakers, aircraft parts, factory automation systems, batteries, battery chargers... This list continues for DAYS, check the GE website if you don't believe me.

GE doesn't just manufacture stuff, it provides services, too, with a financial arm that does mortgages, home equity loans, automobile leasing and insurance, credit cards, and mutual funds. GE owns the NBC television network and several radio stations, and licenses bandwidth on some of the satellites it has manufactured. Businesses can outsource their entire information technology department to GE.

GE also acquires and divests itself of businesses, with famous acquisitions including RCA and NBC. If a business doesn't fit in with what it's doing, GE sells it to someone who can take better care of it, freeing the capital up for re-investment elsewhere. This "active money management" is not driven by commissions for some brokerage, but by the bottom line for the next annual meeting of shareholders.

If all your portfolio contained was GE stock, you would be diversified into literally thousands of separate businesses, with a full time management team devoted to making money for you and figuring out where to reinvest it. General Electric is a mutual fund, run by managers motivated to produce results for shareholders rather than commissions and fees for a brokerage. GE simply doesn't advertise to attract new shareholders, because its job is to satisfy existing ones.

Another highly successful, highly diversified company is Berkshire Hathaway (NYSE: BRK.A and BRK.B), which also has a core business of "making money." It owns the Dairy Queen fast-food chain, See's Candy stores, Geico insurance, jewelers, furniture stores, shoe stores, a newspaper publisher, a couple of aviation companies, large chunks of Coke, Gillette, and American Express, and is the world leader in the highly profitable "re-insurance" industry (insuring other insurers against catastrophic events like Hurricane Andrew). The price of a Berkshire-Hathaway "Class A" share (BRK.A) has steadily increased from around $15 when the current management took over, and is around $62,000 today.

The attributes of diversification and actively managed money that mutual fund managers praise are already provided by diversified corporations. These days, many brokers insist that investing in just one mutual fund isn't enough, and mutual funds have sprung up that invest only in other mutual funds. This fear-mongering neatly defeats the original argument that mutual funds provide significant advantages over diversified corporations.

There's nothing wrong with the idea of a mutual fund. At the Fool we promote index funds as a great starting point for investors who aren't yet confident in their ability to judge individual stocks, or who simply don't want to take personal control of their finances for whatever reason. Index funds don't attempt to add another layer of management, they merely mechanically spread your investment out evenly over most of the market, diversifying to the maximum and more or less guaranteeing you will get average performance (whatever that average happens to be). Sadly, this beats most mutual funds.

Our Rule Maker portfolio is an attempt to spend a little of our time and effort to beat the performance of those index funds by cherry-picking the best companies from the list. We've mostly concentrated on more focused companies with an easily understood core business, and we've diversified by owning several different stocks. This way, we have more control over exactly what businesses we diversify into, at the expense of ignoring huge sectors of the economy. This doesn't mean that inherently diversified corporations are bad. They're just not our style.

For more on the Fool's take on mutual funds, check our Mutual Fund Center.

- Oak


 Recent Rule Maker Portfolio Headlines
  12/28/00  Cisco's Aggressive Call
  12/27/00  What's Wrong With This Market?
  12/26/00  Intel's Pentium 4 Comeback
  12/22/00  Better Brand, Better Investment
  12/21/00  Wireless Struggle Over the Airwaves
Rule Maker Portfolio Archives »  

Order your copy of David and Tom Gardner's new book, Rule Breakers, Rule Makers, in advance. This Simon & Schuster beauty doesn't arrive until January, but you can reserve your copy today! The first half of the epic book, on Rule Breakers, elucidates the Fool Port's investment style; the second half, on Rule Makers, further explains Cash-King investing.

Give us your 2 cents! Join the Fool Charity Drive.

FoolWatch -- It's what's going on at the Fool today.


12/23/98 Close
Stock  Change    Bid
AXP   +1 3/4   103.38
CHV   +1 1/4   85.00
CSCO  +2 11/16 96.50
KO    +2 1/2   69.94
GPS   +  3/4   53.06
EK    -  1/8   73.31
XON     ---    74.94
GM    -1 3/8   72.50
INTC  +5 15/16 125.00
MSFT  +5 1/8   143.56
PFE   +3 3/16  120.38
SGP   +1 3/4   55.19
TROW  -1 15/16 34.06

                 Day     Month   Year    History
        R-MAKER  +1.83%   8.03%  31.53%  31.53%
        S&P:     +2.07%   5.58%  22.12%  22.12%
        NASDAQ:  +2.43%  11.44%  30.38%  31.38%

Rule Maker Stocks

    Rec'd    #  Security     In At       Now    Change
    2/3/98   24 Microsoft     78.27    143.56    83.42%
   6/23/98   34 Cisco Syst    58.41     96.50    65.21%
    5/1/98 55.5 Gap Inc.      34.06     53.06    55.79%
   2/13/98   22 Intel         84.67    125.00    47.62%
    2/3/98   22 Pfizer        82.30    120.38    46.27%
   8/21/98   44 Schering-P    47.99     55.19    14.99%
   2/27/98   27 Coca-Cola     69.11     69.94     1.20%
    2/6/98   56 T. Rowe Pr    33.67     34.06     1.16%
   5/26/98   18 AmExpress    104.07    103.38    -0.66%

Foolish Four Stocks

    Rec'd    #  Security     In At     Value    Change
   3/12/98   20 Exxon         64.34     74.94    16.48%
   3/12/98   20 Eastman Ko    63.15     73.31    16.10%
   3/12/98   15 Chevron       83.34     85.00     1.99%
   3/12/98   17 General Mo    72.41     72.50     0.13%

Rule Maker Stocks

    Rec'd    #  Security     In At     Value    Change
    2/3/98   24 Microsoft   1878.45   3445.50  $1567.05
   6/23/98   34 Cisco Syst  1985.95   3281.00  $1295.05
    5/1/98 55.5 Gap Inc.    1890.33   2944.97  $1054.64
   2/13/98   22 Intel       1862.83   2750.00   $887.17
    2/3/98   22 Pfizer      1810.58   2648.25   $837.67
   8/21/98   44 Schering-P   2111.7   2428.25   $316.55
   2/27/98   27 Coca-Cola   1865.89   1888.31    $22.42
    2/6/98   56 T. Rowe Pr  1885.70   1907.50    $21.80
   5/26/98   18 AmExpress   1873.20   1860.75   -$12.45

Foolish Four Stocks

    Rec'd    #  Security     In At     Value    Change
   3/12/98   20 Exxon       1286.70   1498.75   $212.05
   3/12/98   20 Eastman Ko  1262.95   1466.25   $203.30
   3/12/98   15 Chevron     1250.14   1275.00    $24.86
   3/12/98   17 General Mo  1230.89   1232.50     $1.61

                              CASH    $120.62
                             TOTAL  $28747.65
  
*Please note: On 8/4/98 $2,000 cash was added to the
portfolio. $2,000 will be added every six months.

*The year for the S&P and Nasdaq is as of 02/03/98

</THE RULE MAKER PORTFOLIO>

Read More Rule Maker Reports