RULE MAKER PORTFOLIO

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

The Foolish Broker?

By Al Levit (alanl@ix.netcom.com)

Glendale, CA (Jan. 11, 1999) -- Hi everybody, and Happy New Year! It's Monday, and the first thing we do on Monday is look at how the Rule Maker portfolio did during the past week. I'm happy to say that the market started the year off right, and our portfolio did even better. Specifically:


Rule-Maker       Last    This   Change
Cisco            $92.81 $106.69 15.0%
Intel           $118.56 $129.69  9.4%
Gap Inc.         $56.13  $61.19  9.0%
Microsoft       $138.69 $149.88  8.1%
T. Rowe Price    $34.25  $36.44  6.4%
American Express 102.50 $108.06  5.4%
Coca-Cola        $67.00  $68.00  1.5%
S Plough         $55.25  $55.00 -0.5%
Pfizer          $125.00 $122.25 -2.2%

Fool Four        Last    This   Change
GM               $71.56  $80.00 11.8%
Exxon            $73.13  $74.31  1.6%
Chevron          $82.94  $83.94  1.2%
Kodak            $72.00  $72.31  0.4%

S&P 500           1,229   1,275  3.7%
Total R-M       $28,699 $30,077  4.8%

R-M History through 1/8/99:      37.61%
S&P History through 1/8/99:      26.76%
Normally at this point I'd look at what went right and wrong with our individual companies over the past week -- a lot sure seemed to go right with our technology trio of Cisco (Nasdaq: CSCO), Intel (Nasdaq: INTC), and Microsoft (Nasdaq: MSFT). However, I'm going to skip that because there is too much else going on. Over the next two days I want to spend some time discussing how we can spread the knowledge we build on online out to our friends who may be newer to investing. Then I'm going to wrap up the week talking about the current excitement over Internet stocks, and whether we Rule Making investors have any part in it.

I'll begin by noting that during this past holiday season, I got a lot of questions from friends and family about investments, and occasionally, the questions themselves were not very Foolish. For example, I was asked, more than once, for my "favorite ten stocks for the next five years." It made me feel like a Foolish Broker.

For this Fool's keyboard, the idea of a full-service Foolish Broker is an oxymoron. One of The Motley Fool's prime tenets is that each individual make her own investment decisions. By doing so, we have control of our financial life, and we also save a heck of a lot of investment expenses in the process. Most of us who have spent some time with the Fool online understand this. However, as the months and now years go by, I've come to the conclusion that those of us that spend time online with The Motley Fool are not only a tiny part of the investing public, but we are probably a small part of the Foolish public as well. The books, radio shows, and weekly newspaper columns have expanded our reach far beyond the Internet (a medium, which still, by the way, is only accessible in 22% of American homes).

In addition, I know that part of the reach of The Motley Fool among my friends and family has come because of my own personal efforts to pass the word along. I'm sure this word-of-mouth experience has been repeated countless times, as we all know that the Fool's investing strategies are being developed and continually tested, and they actually beat the market averages. This seems to be something that over 90% of mutual funds can't do, and would prefer that we didn't talk about.

At any rate, a lot of ideas that most of the "old-timers" online might take for granted have not necessarily penetrated the newer Fools. Therefore, I thought it might be helpful to include some of the ideas that I have run across in the last few weeks that needed a little "gentle correction," since I bet that more than a few of you are being asked to be Foolish brokers as well.

First, and perhaps most important, is time horizon. It is essential to make sure that new Fools asking for advice on making their own stock picks really intend to invest for at least five years. A few weeks ago, I wrote about donating stock to charity. At the time, I mentioned that the charity might want to keep the stock to set up an endowment. Fortunately, I talked to the charity specifically about this, because when I did, I found out that their time horizon might be as short as six months. The stock I was donating was Cisco Systems, a wonderful performer for the long term, but relatively volatile over the short term. With their short time horizon, I told them it might be a good idea to sell the stock as soon as they took possession.

Second, I have sung the praises of Dow Dividend investing over the years, and I continue to do so. However, a lot of refinements have been made in the past year, and it's important to make sure that your friends and family are up-to-date. Specifically,

  • Seasonality must be respected, and rebalancing should either be done in December or January. Taxable accounts are better off starting in December. If that would involve taking short-term gains in a taxable account (as was the case for the Rule Maker Portfolio), then wait until next December.

  • The RP method is preferred (we got it right in the Rule Maker Portfolio). See this column by Ann Coleman for an explanation of this variation on the Fool Four.

  • The idea of "doubling up" on the number two stock isn't worth it. There's too much risk involved for the extra reward. You are better off to divide your investment equally between four or five RP top stocks (discarding the first).

Third, current price is not nearly as important to the success of an investment as is the long-term quality of the business. We drive this point home all the time in our column on-line, but off-line the rest of the financial media gives exactly the opposite message. For a more sophisticated investor who already has a portfolio of fine companies and is deciding which position to add to today, price may enter the picture. For a beginning investor (and that's the kind who tend to solicit MY advice :)), it's probably best not to confuse the issue with more advanced concepts.

I'll continue this discussion tomorrow when I look at a concern currently being expressed by new investors about entering the stock market.

Until then, Fool on!

CashKingAl

01/11/99 Close
Stock  Change    Bid
AXP   -1 13/16 106.25
CHV   +  3/16  84.13
CSCO  -2       104.69
KO    -2       66.00
GPS   -1 5/8   59.56
EK    +2 15/16 75.25
XON   -3 5/16  71.00
GM    +6 3/8   86.38
INTC  +9 3/4   139.44
MSFT  -2 3/8   147.50
PFE   -4 3/4   117.50
SGP   -2 1/4   52.75
TROW  -  1/2   35.94

                   Day   Month    Year  History
        R-MAKER  -0.72%   4.98%   4.98%  36.62%
        S&P:     -0.89%   2.81%   2.81%  25.63%
        NASDAQ:  +1.71%   8.75%   8.75%  43.10%

Rule Maker Stocks

    Rec'd    #  Security     In At       Now    Change
    2/3/98   24 Microsoft     78.27    147.50    88.45%
   6/23/98   34 Cisco Syst    58.41    104.69    79.23%
    5/1/98 55.5 Gap Inc.      34.06     59.56    74.88%
   2/13/98   22 Intel         84.67    139.44    64.68%
    2/3/98   22 Pfizer        82.30    117.50    42.77%
   8/21/98   44 Schering-P    47.99     52.75     9.91%
    2/6/98   56 T. Rowe Pr    33.67     35.94     6.72%
   5/26/98   18 AmExpress    104.07    106.25     2.10%
   2/27/98   27 Coca-Cola     69.11     66.00    -4.50%

Foolish Four Stocks

    Rec'd    #  Security     In At     Value    Change
   3/12/98   17 General Mo    72.41     86.38    19.29%
   3/12/98   20 Eastman Ko    63.15     75.25    19.17%
   3/12/98   20 Exxon         64.34     71.00    10.36%
   3/12/98   15 Chevron       83.34     84.13     0.94%

Rule Maker Stocks

    Rec'd    #  Security     In At     Value    Change
    2/3/98   24 Microsoft   1878.45   3540.00  $1661.55
   6/23/98   34 Cisco Syst  1985.95   3559.38  $1573.43
    5/1/98 55.5 Gap Inc.    1890.33   3305.72  $1415.39
   2/13/98   22 Intel       1862.83   3067.63  $1204.80
    2/3/98   22 Pfizer      1810.58   2585.00   $774.42
   8/21/98   44 Schering-P   2111.7   2321.00   $209.30
    2/6/98   56 T. Rowe Pr  1885.70   2012.50   $126.80
   5/26/98   18 AmExpress   1873.20   1912.50    $39.30
   2/27/98   27 Coca-Cola   1865.89   1782.00   -$83.89

Foolish Four Stocks

    Rec'd    #  Security     In At     Value    Change
   3/12/98   20 Eastman Ko  1262.95   1505.00   $242.05
   3/12/98   17 General Mo  1230.89   1468.38   $237.49
   3/12/98   20 Exxon       1286.70   1420.00   $133.30
   3/12/98   15 Chevron     1250.14   1261.88    $11.73

                              CASH    $120.62
                             TOTAL  $29861.59
  
Note: On 8/4/98 $2,000 cash was added to the
portfolio. $2,000 will be added every six months.


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