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RULE MAKER PORTFOLIO

<THE RULE MAKER PORTFOLIO>

New Rule Maker
What will it be?

By Tom Gardner (TomGardner@aol.com)

ALEXANDRIA, VA (Jan. 27, 1999) -- February 3rd marks the injection of another $2,000 in cash into the Rule Maker account. I just love the process of deciding where to put that money. The incoming $2,000 is real money, cash which could instead have been spent on:

  1. A full wardrobe from Old Navy.
  2. A new Dell laptop computer.
  3. Six pricey financial newsletters.
  4. 2,000 lottery tickets.

But instead of these, we're going to be directing this money into the 20th century's best-performing investment vehicle -- common stocks. As you must know, the average return from public-business ownership has outperformed that from the ownership of real estate, managed mutual funds, Krugerands, blackjack, corporate bonds, government bonds, municipal bonds, dog-track ticket stubs... indeed, of any investment vehicle available today.

We've chosen to put our $2,000 in savings into the stock market.

This is not without controversy. In 1994, when The Motley Fool launched, the cry went up that individuals "chattering" like Fools over the Internet would soon be parted from their money. In 1995, the market pundits came out of their caves and called for a bear market in stocks -- and then added that Internet chatter was a really bad thing. In 1996, more of the same. Same thing in 1997. And by 1998, everything was wrong. The market was overpriced. People using the Internet were to blame for it. And the Internet stocks were ridiculously overvalued.

And, lo and behold, here we are in 1999. The market is higher. The Internet is more popular than ever before. Eighty million Americans are online, many of them beginning to make this their medium of choice. And, as Fools have been doing since the dawn of our public markets, we're just going to methodically add new savings to our investment account. We will continue to act as the investors that we are -- a concept that many on Wall Street (and many of those responsible for reporting on Wall Street) aren't trained or compensated to understand.

Investing.

For us, in this context, that word means putting our money into a business with the expectation of holding that position for at least five years, better still ten years, ideally twenty years. Now, this doesn't mean that we won't ever sell our stake. If the company isn't maintaining authority in its industry, if management isn't being forthright with its shareholders, or if we see a considerably better place to have our savings invested, we'll carry out a thorough analysis of the situation and may choose to sell off our holding. If we do, you can bet that we'll account for both the commission and tax costs -- an approach that would shock the mutual-fund industry today.

I have to tell you, though, that we're very confident that, by doing solid and simple research in our companies, we'll end up making very few trades in our account. Rather than trying to time entry and exit points, rather than worrying about the short- or intermediate-term direction of the stock market, rather than relying on stock prices to govern our strategy, we'll have located the world's commercial leaders which we can ride to profit for years, decades, even an entire lifetime.

After all, when exactly has Pfizer been overpriced in the last fifty years? When has Microsoft been overpriced in the 1990s, as it closed up another $3 today and set an all-time high this afternoon? When was General Electric been too richly priced this century, for anyone looking at it as an investment rather than a trade? How many people would have been better off trying to time buy and sell points on Johnson & Johnson over the past eighty years -- rather than silently maintaining their ownership position?

Even though the stock market has fallen 10%, 30%, even 50% from its highs at points over the past fifty years, I would argue that these companies always represented a bargain. Why? Because these are among the best companies in the world. To find them, we've had to master a way to evaluate businesses through the stages of their development. And now, as long as management has adapted a sustainable model for expanding markets and expanding profits, I would argue that these highest-quality businesses are always going to be a bargain on the open markets. I know how contrary this thinking is. But look at the performance of the world's greatest companies over the 20th century and likely you will draw the same conclusion. They have just grown more valuable with time, at rates that smashed the stock market's average returns.

Given this, we believe our task is to find these greatest businesses, with your help, rather to generally value stocks in the short-term. By finding the very best companies in the world, we can easily afford to hold -- or add to -- the positions through great, good, okay, mediocre, and very poor market conditions.

That's the approach we'll be taking when the $2,000 of new savings finds its way into our account on February 3rd.

Now, Rob, Al, Phil and I are already 90% of the way toward selecting exactly where we'll put this money. So it's your turn to guess where it's going. Please post in the Rule Maker Companies message folder a one-paragraph description of where you think we will invest the funds (not necessarily where you think we should). The Fool who guesses correctly AND who offers the best explanation of why we're putting it there will earn a Fool ballcap and a signed copy of Rule Breakers, Rule Makers.

You should know that we'll be using the criteria outlined in the Rule Makers section of the new book. And we leave open the possibility that we could: 1) add money to an existing position; 2) invest in a mature Rule Maker; 3) invest in an emerging Rule Maker; or 4) invest in a foreign Rule Maker. Share your thoughts in the Rule Maker message folder, and... Fool on!

Tom Gardner

01/27/99 Close
Stock  Change    Bid
AXP   -2 5/16  99.44
CHV   -3       76.50
CSCO  -4 1/16  103.44
KO    +1 3/8   63.75
GPS   -1 13/16 61.63
EK    -1 5/8   64.63
XON   -1 3/16  71.00
GM    +2 1/8   93.38
INTC  -4 3/16  132.75
MSFT  -2 15/16 168.63
PFE   +1 15/16 121.94
SGP   +1 9/16  54.19
TROW  +  5/16  34.56

                   Day   Month    Year  History
        R-MAKER  -1.13%   5.42%   5.42%  37.18%
        S&P:     -0.73%   1.14%   1.14%  23.58%
        NASDAQ:  -1.08%   9.78%   9.78%  44.46%

Rule Maker Stocks

    Rec'd    #  Security     In At       Now    Change
    2/3/98   24 Microsoft     78.27    168.63   115.44%
    5/1/98 55.5 Gap Inc.      34.06     61.63    80.93%
   6/23/98   34 Cisco Syst    58.41    103.44    77.09%
   2/13/98   22 Intel         84.67    132.75    56.78%
    2/3/98   22 Pfizer        82.30    121.94    48.16%
   8/21/98   44 Schering-P    47.99     54.19    12.91%
    2/6/98   56 T. Rowe Pr    33.67     34.56     2.64%
   5/26/98   18 AmExpress    104.07     99.44    -4.45%
   2/27/98   27 Coca-Cola     69.11     63.75    -7.75%

Foolish Four Stocks

    Rec'd    #  Security     In At     Value    Change
   3/12/98   17 General Mo    72.41     93.38    28.96%
   3/12/98   20 Exxon         64.34     71.00    10.36%
   3/12/98   20 Eastman Ko    63.15     64.63     2.34%
   3/12/98   15 Chevron       83.34     76.50    -8.21%

Rule Maker Stocks

    Rec'd    #  Security     In At     Value    Change
    2/3/98   24 Microsoft   1878.45   4047.00  $2168.55
   6/23/98   34 Cisco Syst  1985.95   3516.88  $1530.93
    5/1/98 55.5 Gap Inc.    1890.33   3420.19  $1529.86
   2/13/98   22 Intel       1862.83   2920.50  $1057.67
    2/3/98   22 Pfizer      1810.58   2682.63   $872.05
   8/21/98   44 Schering-P   2111.7   2384.25   $272.55
    2/6/98   56 T. Rowe Pr  1885.70   1935.50    $49.80
   5/26/98   18 AmExpress   1873.20   1789.88   -$83.33
   2/27/98   27 Coca-Cola   1865.89   1721.25  -$144.64

Foolish Four Stocks

    Rec'd    #  Security     In At     Value    Change
   3/12/98   17 General Mo  1230.89   1587.38   $356.49
   3/12/98   20 Exxon       1286.70   1420.00   $133.30
   3/12/98   20 Eastman Ko  1262.95   1292.50    $29.55
   3/12/98   15 Chevron     1250.14   1147.50  -$102.64

                              CASH    $120.62
                             TOTAL  $29986.06

  
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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