RULE MAKER PORTFOLIO

<THE RULE MAKER PORTFOLIO>

Light Business Models, Part I
Brand Name and Mindshare

By Phil Weiss (pweiss@homemail.com)

TOWACO, NJ (March 3, 1999) -- Do you ever wonder what the keys are to our companies' light business models. Or, what it is that we like about their lightness? In nearly every case, our companies' most valuable assets can't be found on any financial statement at all. Intangible assets such as brand names and patents are what give our Rule Makers their mindshare. These intangibles help to build what Warren Buffett calls a "moat" around their businesses.

As a general rule, the companies that we own are not capital intensive. For example, Coca-Cola (NYSE: KO) doesn't need to plow much money into its syrup-manufacturing equipment. Rather, expenditures in research and development (R&D) and advertising are what create the critical assets of these businesses. Through their investments in intangibles, Rule Makers build strong brand names and create mindshare. In many ways it is the ability of our companies to create intangible asset value that has led to their prior success and will lead to future success as well.

Consider the enhanced profitability of a strong brand name. Financial World last ran its calculations of the value of brand names in 1997. At that time, Coca-Cola had the most valuable brand name in the world. Coke's $48 billion brand name has been generated through the company's significant investment in the advertisement and promotion of the Coke brand � if you look back over Coke's history, this number is in the billions of dollars.

Believe it or not, at that time, Financial World determined Intel (Nasdaq: INTC) to be the eighth most valuable brand with a value of over $13 billion. Microsoft (Nasdaq: MSFT) came in 18th on the list with a value of $9 billion.

The advantage gained by the creation of brand names and patents is quite significant in the marketplace. Coke's brand is so strong that the generic term cola is oftentimes referred to as Coke. There are many people that are so loyal to the Coke brand that they won't drink anything but Coke regardless of the price. If a Coca-Cola product isn't available, then I know of many people that will drink water rather than order a competitor's product.

Among our non-tech companies, Gap Inc. (NYSE: GPS) and American Express (NYSE: AXP) also have built strong brand names. One of the big advantages of building a strong brand is that over time companies can proportionately cut back on advertising and promotion expense as the brand has enough mindshare that it starts to sell itself. The result should be that the net profit margins of companies with strong brand names should increase due to the decrease in advertising and promotion expense as a percentage of total revenues.

Our pharmaceutical companies -- Pfizer (NYSE: PFE) and Schering-Plough (NYSE: SGP) invest significant sums in R&D as a means of developing new products. When pharmaceutical companies receive Food and Drug Administration (FDA) approval for a new product, they are able to sell such products free of competition for a number of years (though competitors can develop variations of patented drugs). Patent protection is the return granted to companies that spend significant sums on R&D. If you're interested in reading one business school professor's attempt to quantify the value of this "Knowledge Capital," check out this article.

Recently, pharmaceutical companies have started to advertise their products to consumers as a means of increasing mindshare as well. Schering-Plough has heavily advertised Claritin, a product for allergy sufferers. This advertising campaign has been cited as a key reason for Claritin's robust sales growth.

Of our technology companies, Yahoo! (Nasdaq: YHOO) has a focus similar to that of Coke, Gap, and American Express. Product development only represents a small part of Yahoo!'s budget. It has, however, invested much more heavily in advertising and promoting the Yahoo! brand. This investment has helped to make Yahoo! the leading Web portal and one of the most frequently visited sites on the Internet.

The recent addition of Yahoo! to this portfolio has certainly generated a lot of controversy over on our Companies message board (discussed in the following two message threads --Yahoo! Analysis? and YHOO? Disappointing!). Reading through these posts had me thinking more about our decision to purchase Yahoo! for this portfolio even though we acknowledged in the buy report that it's presently a Tweener. Then, I was reading a series of articles this weekend on Internet stocks in which someone suggested that one of the advantages that will come to Amazon.com (Nasdaq: AMZN) over time is that in some ways using a website is like using software -- the more familiar you become with software, the less likely you are to change to another vendor's product.

As soon as I read this comment, Yahoo! immediately came to mind. I think that this really applies even more to a company like Yahoo! than it does to Amazon. Here's an example of why: On Friday, my wife called me because she was having trouble finding information on a company. I immediately told her to go to Yahoo!'s Finance page and was able to describe the steps she could use to find the company's ticker symbol as well as which links to follow from that point to find the information she was seeking.

I found out about Yahoo! because of its strong brand name. Since I'm now familiar with its site, I'm inclined to stick with it. Further, I use Yahoo! to track my personal portfolio. Yahoo! was the first site that made this kind of information available to me. The time I spent inputting my portfolio information has created a rather strong barrier to switching.

Not surprisingly, Yahoo! is currently among the Web's most-visited sites with the most loyal users. The value built by the intangible asset of Yahoo!'s strong brand name helps it attract users and keep them coming back.

I'll discuss the rest of our companies from this perspective in tomorrow night's report. In the meantime, if you would like to continue this discussion, we can do so in our Companies Folder (linked below) or on the Yahoo! message board.

Finally, the Rule Maker Spreadsheet is now available in two versions -- Excel 95 and Excel 97. The links for both will permanently reside below with the Strategy and Companies message folder links. In addition, as we tweak the spreadsheet, these links will be regularly updated with the changes.

The spreadsheet already has been updated to resolve the "net cash problem" that several of you so Foolishly discovered. For those of you who downloaded the spreadsheet last night, be sure to re-download the newest version using the links below.

Have a Foolish evening,

Phil Weiss

03/03/99 Close
Stock  Change    Bid
AXP   -1 7/8   107.81
CHV   +2 5/16  78.00
CSCO  -  9/16  95.13
KO    -  1/2   61.63
GPS   +1 11/16 66.38
EK    -  11/16 64.38
XON   +  7/8   65.69
GM    +  3/16  82.88
INTC  +4 7/8   114.69
MSFT  +1 1/16  149.63
PFE   -1 7/16  131.56
SGP   +  3/8   54.69
TROW  -  1/16  32.88
YHOO  +  1/4   153.44

                   Day   Month    Year  History
R-MAKER  +0.59%  -0.54%   3.68%  31.19%
        S&P:     +0.18%  -0.86%   0.19%  24.03%
        NASDAQ:  +0.27%  -1.00%   3.31%  37.04%

Rule Maker Stocks

    Rec'd    #  Security     In At       Now    Change
    5/1/98   55 Gap Inc.      34.37     66.38    93.12%
    2/3/98   24 Microsoft     78.27    149.63    91.17%
   6/23/98   34 Cisco Syst    58.41     95.13    62.86%
    2/3/98   22 Pfizer        82.30    131.56    59.86%
   2/13/98   22 Intel         84.67    114.69    35.45%
   2/17/99   16 Yahoo Inc.   125.81    153.44    21.96%
   8/21/98   44 Schering-P    47.99     54.69    13.95%
   5/26/98   18 AmExpress    104.07    107.81     3.60%
    2/6/98   56 T. Rowe Pr    33.67     32.88    -2.37%
   2/27/98   27 Coca-Cola     69.11     61.63   -10.83%

Foolish Four Stocks

    Rec'd    #  Security     In At     Value    Change
   3/12/98   17 General Mo    72.41     82.88    14.46%
   3/12/98   20 Exxon         64.34     65.69     2.10%
   3/12/98   20 Eastman Ko    63.15     64.38     1.94%
   3/12/98   15 Chevron       83.34     78.00    -6.41%

Rule Maker Stocks

    Rec'd    #  Security     In At     Value    Change
    5/1/98   55 Gap Inc.    1890.33   3650.63  $1760.30
    2/3/98   24 Microsoft   1878.45   3591.00  $1712.55
   6/23/98   34 Cisco Syst  1985.95   3234.25  $1248.30
    2/3/98   22 Pfizer      1810.58   2894.38  $1083.80
   2/13/98   22 Intel       1862.83   2523.13   $660.30
   2/17/99   16 Yahoo Inc.  2013.00   2455.00   $442.00
   8/21/98   44 Schering-P   2111.7   2406.25   $294.55
   5/26/98   18 AmExpress   1873.20   1940.63    $67.43
    2/6/98   56 T. Rowe Pr  1885.70   1841.00   -$44.70
   2/27/98   27 Coca-Cola   1865.89   1663.88  -$202.02

Foolish Four Stocks

    Rec'd    #  Security     In At     Value    Change
   3/12/98   17 General Mo  1230.89   1408.88   $177.99
   3/12/98   20 Exxon       1286.70   1313.75    $27.05
   3/12/98   20 Eastman Ko  1262.95   1287.50    $24.55
   3/12/98   15 Chevron     1250.14   1170.00   -$80.14

                              CASH    $185.03
                             TOTAL  $31565.28

Note: The Rule Maker Portfolio began with $20,000 on February 2, 1998, and it adds $2,000 in cash (which is soon invested in stocks) every six months.

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