<THE RULE MAKER PORTFOLIO>
By Rob Landley ([email protected])
Austin, TX (Jan. 21, 1999) -- Let's think of a corporation as an abstract machine for a moment. We put money in one end, pull a couple levers, press a couple of buttons, it hums and whirrs for a moment, and more money comes out the other end.
That's the ultimate purpose of any for-profit corporation: to provide a process to turn money into more money. A vending machine with a "more money" button. Taking the money from the "out" bin and stuffing it back into the front end is called "funding from operations," which means the thing can just keep generating more and more money for as long as we feel like doing this.
A money making machine is a wonderful thing, but it's wonderful for what it can do, not how shiny it is or how many interesting parts it has. The process of money going through the machine gives us more money, and that process is what's important. Spending money to build the machine in the first place is actually an expense. So is money spent to keep the machine in working order. A profitable business is simply the process of turning money into more money, and all the equipment and labor involved is there to support that process.
If we tinker around with the machine, we might be able to improve the process by which it makes money. There are two obvious areas we can improve on: "make a greater amount of money," and "take less time to do it."
A Cash-King style money making machine is (among other things) optimized to produce as big an increase as possible for each trip the money makes through the machine. It's got the fuel-injected turbo charged engine that can really produce -- RESULTS! The processes by which a Cash-King turns money into more money are extremely effective.
A Merchant-King style money machine is instead optimized to reduce the time the money spends trapped in the machine, so cash goes from the "in" bin to the "out" bin as quickly as possible. While a Merchant-King's process doesn't necessarily produce a very big result on each trip through the machine, the money can make a lot more trips in a given amount of time, and the cumulative result is still a boatload of money. If at first we're not satisfied, try it again, and again, and again.
Eventually, a successful machine can produce so much money that it's running at capacity. We can't squeeze anymore money through the equipment we've got because it's handling all it can take, and there's no room in the "in box" for all the money coming out of the "out box." When our business starts spinning off excess capital, we have to find something to do with it. We have to expand our business somehow.
Expansion is dangerous. Many profitable companies have been killed by poorly executed expansion. If we buy some other unrelated money-making machine to put our spare cash into (which happens all the time, as when GE bought NBC or Berkshire Hathaway bought Dairy Queen), do we know the right buttons to push and levers to pull to get it to make as much money for us as it did for the last guy? Can we hire the guy who used to run it to work for us pulling levers and pushing buttons on salary?
If we buy a money-making machine similar to our own, one we think we know how to run, will running the second machine ourselves distract us from keeping the first one running well? Perhaps we can glue the two machines together, swap a couple of parts around, and have one big, integrated money-making machine. (Compaq is doing that with Digital. Silicon Graphics did it with Cray. 3Com did it with U.S. Robotics.) But if anything, it's even more dangerous because we're messing with our original machine and if we screw up it may not work anymore when we're done.
The most straightforward way to expand our capacity to handle money is to build another, identical money-making machine. A consulting firm opens a branch office, Home Depot opens another location, Intel builds another chip fabrication plant. Perhaps the new one is an improvement on the old, perhaps not. But if we build it ourselves, we're most likely to know how it works. And if there's a shortage of materials (can't find a good location, can't find qualified people to run it), at least we're sure we understand the problem.
Cash-Kings can expand by throwing money at the problem. They have the brute force earnings power and huge cash reserves to afford whatever painful expenses are required to get new money making machines up and running. Cash-King expansion is slow and steady, and it wins most races.
Merchant-King money-making machines are streamlined. In optimizing them so they run quickly, the design is simplified so that they're also cheap and easy to build. The raw materials they need are cheap and plentiful, new workers can be trained in-house, and most of the action takes place in easily built warehouses. Merchant-kings are designed to expand and get a lot of bang for the buck doing so.
Real life is a lot more complex, of course, but the principles are the same. Cash-Kings and Merchant-Kings have chosen different ways to optimize their businesses, but to the same end: make more money. Tomorrow, I'll talk about two companies that have successfully made Cash-King and Merchant-King principles work together.
Stock Change Bid AXP + 1/2 102.50 CHV - 13/16 79.19 CSCO -4 13/16 101.31 KO -1 7/8 61.56 GPS - 5/8 58.38 EK -2 7/8 65.25 XON + 1/8 71.13 GM +1 89.94 INTC -4 3/4 133.50 MSFT -4 5/16 158.31 PFE -3 5/16 116.38 SGP -3 1/8 51.63 TROW -1 5/16 32.56
Day Month Year History R-MAKER -2.61% 2.48% 2.48% 33.36% S&P: -1.70% 0.48% 0.48% 22.78% NASDAQ: -2.93% 6.94% 6.94% 40.71% Rule Maker Stocks Rec'd # Security In At Now Change 2/3/98 24 Microsoft 78.27 158.31 102.27% 6/23/98 34 Cisco Syst 58.41 101.31 73.45% 5/1/98 55.5 Gap Inc. 34.06 58.38 71.39% 2/13/98 22 Intel 84.67 133.50 57.66% 2/3/98 22 Pfizer 82.30 116.38 41.40% 8/21/98 44 Schering-P 47.99 51.63 7.57% 5/26/98 18 AmExpress 104.07 102.50 -1.51% 2/6/98 56 T. Rowe Pr 33.67 32.56 -3.30% 2/27/98 27 Coca-Cola 69.11 61.56 -10.92% Foolish Four Stocks Rec'd # Security In At Value Change 3/12/98 17 General Mo 72.41 89.94 24.21% 3/12/98 20 Exxon 64.34 71.13 10.55% 3/12/98 20 Eastman Ko 63.15 65.25 3.33% 3/12/98 15 Chevron 83.34 79.19 -4.99% Rule Maker Stocks Rec'd # Security In At Value Change 2/3/98 24 Microsoft 1878.45 3799.50 $1921.05 6/23/98 34 Cisco Syst 1985.95 3444.63 $1458.68 5/1/98 55.5 Gap Inc. 1890.33 3239.81 $1349.48 2/13/98 22 Intel 1862.83 2937.00 $1074.17 2/3/98 22 Pfizer 1810.58 2560.25 $749.67 8/21/98 44 Schering-P 2111.7 2271.50 $159.80 5/26/98 18 AmExpress 1873.20 1845.00 -$28.20 2/6/98 56 T. Rowe Pr 1885.70 1823.50 -$62.20 2/27/98 27 Coca-Cola 1865.89 1662.19 -$203.70 Foolish Four Stocks Rec'd # Security In At Value Change 3/12/98 17 General Mo 1230.89 1528.94 $298.05 3/12/98 20 Exxon 1286.70 1422.50 $135.80 3/12/98 20 Eastman Ko 1262.95 1305.00 $42.05 3/12/98 15 Chevron 1250.14 1187.81 -$62.33 CASH $120.62 TOTAL $29148.25 Note: On 8/4/98 $2,000 cash was added to the
portfolio. $2,000 will be added every six months.