RULE MAKER PORTFOLIO

<THE RULE MAKER PORTFOLIO>

Not Only Rule Makers Make Rules

By Al Levit

Glendale, CA (March 11, 1999) --

"What's in a name? A rose by any other name would smell as sweet."
-- William Shakespeare, Romeo and Juliet

Tom Gardner says that Dell Computer Corp. (Nasdaq: DELL) isn't a Rule Maker. I guess since Tom wrote the book that defined Rule Makers, his decision stands. Even so, Dell sure has made a lot of the PC industry rules that others are following. As I noted yesterday, Dell's direct-order method of selling computers is the industry standard. The only question that remains is how closely Dell's competitors can imitate its example.

Dell made the rules; now everyone follows along. For example, Dell has Premiere Web pages for major corporate customers. I wonder how long it will be before Dell's competitors jump on that bandwagon? In addition, Dell is now working to offer customers a chance to buy fast Web connections at the time they buy a Dell computer. No doubt, the competitors will copycat that as well.

But there's more to being a Rule Maker than setting the industry standards. In fact, a Rule Maker doesn't have to be the first-mover in product and service development. (Right Oak?) Microsoft (Nasdaq: MSFT), arguably, has never been first in anything. But woe to the first-mover company when Microsoft decides to enter the game! Seems to me that we're reading the same kind of sentiment from Dale Wettlaufer, co-manager of the Boring Portfolio, which owns Gateway (NYSE: GTW). Here are his thoughts as he considers that Dell might decide to move into the consumer end the PC business:

"Dell might turn up the heat in the consumer sector. As owners of Gateway, that's not something we want to hear. But we have heard it and we have to deal with it. Hearing [rumors] that Dell [might] open stores like Gateway Country validates our appreciation of what Gateway has done here, but it's also a bummer to hear that someone else is jumping into that space so quickly."
-- Dale Wettlaufer (Boring Report -- 2/17/99)

We got a similar thought expressed by Fool analyst Warren Gump after Dell announced it will be selling computer-related products on the Web:

"Who will the winners be [in the computer products e-tailing battle]? Most likely they will be the ones who create a strong brand name, develop a loyal customer base, provide reasonable prices, offer excellent customer service, and have deep pockets. Based on its success in achieving these characteristics in the personal computer business, Dell is likely to be a strong contender in this field as well."
-- Warren Gump (Fool Plate Special, 3/3/99)

Dell's Gigabuys.com site wasn't even up and running when Warren wrote that piece, but the market had already recognized the site as one of the leading computer products e-tailers.

If it looks like a Rule Maker, walks like a Rule Maker, talks like a Rule Maker, and performs better than a Rule Maker, then it must be a Merchant King. Whatever you want to call it, Dell is one great company to own. But the Rule Maker managers have talked it over, and we won't be putting Dell in the Rule Maker portfolio. The company simply does not have the high-margin Rule Maker business model that we require.

But that doesn't mean you shouldn't put Dell in your own portfolio if you want to; just like I put Dell in mine. You'll just have to remember that as a Merchant King, Dell must be analyzed a little differently than a typical Rule Maker. You might want to spend some time over in the Boring Portfolio, because they analyze high asset-turnover companies like Dell all the time.

When I conclude this series tomorrow, I'll start out with a few tips on how to dig into Dell's financials, and then I'll finish up by getting into some of the concerns that Tom laid out last month about Dell going forward.

Don't forget to voice your opinion on the question of the week. We're considering the inclusion of antitrust scrutiny as one of our Monopoly Status criteria. So far, the consensus seems to be that a "Goldilocks" antitrust scenario is best. That is to say, a full-blown antitrust trial is too costly and distracting to be considered a positive for a company. On the other end of the spectrum, a total lack of concern from the trustbusters indicates that a company has no monopoly power whatsoever. But in between lies a scenario that's "just right" -- an antitrust investigation, but with enough company glad-handing to avoid an actual trial. Do you agree? If so or if not, share your thoughts to the Strategy message board.

Finally, if you're new to Rule Maker Land, be sure to bring any and all questions to our new message board, Rule Maker Beginners.

Fool on,

Al

03/11/99 Close
Stock  Change    Bid
AXP   +5 7/8   123.50
CHV   +1 13/16 85.06
CSCO  +1 1/8   105.50
KO    +3 7/16  66.31
GPS   -  3/4   68.75
EK    +1       66.63
XON   +1 9/16  74.69
GM    +1 13/16 89.69
INTC  +1 1/4   118.13
MSFT  +  1/16  161.44
PFE   +  7/8   140.63
SGP   +  7/8   57.19
TROW  +2 5/16  36.13
YHOO  +5 3/8   179.00

                   Day   Month    Year  History
        R-MAKER  +1.81%   7.65%  12.22%  41.99%
        S&P:     +0.84%   4.79%   5.89%  31.01%
        NASDAQ:  +0.25%   5.43%  10.01%  45.94%

Rule Maker Stocks

    Rec'd    #  Security     In At       Now    Change
    2/3/98   24 Microsoft     78.27    161.44   106.26%
    5/1/98   55 Gap Inc.      34.37     68.75   100.03%
   6/23/98   34 Cisco Syst    58.41    105.50    80.62%
    2/3/98   22 Pfizer        82.30    140.63    70.87%
   2/17/99   16 Yahoo Inc.   125.81    179.00    42.28%
   2/13/98   22 Intel         84.67    118.13    39.51%
   8/21/98   44 Schering-P    47.99     57.19    19.16%
   5/26/98   18 AmExpress    104.07    123.50    18.67%
    2/6/98   56 T. Rowe Pr    33.67     36.13     7.28%
   2/27/98   27 Coca-Cola     69.11     66.31    -4.04%

Foolish Four Stocks

    Rec'd    #  Security     In At     Value    Change
   3/12/98   17 General Mo    72.41     89.69    23.87%
   3/12/98   20 Exxon         64.34     74.69    16.09%
   3/12/98   20 Eastman Ko    63.15     66.63     5.51%
   3/12/98   15 Chevron       83.34     85.06     2.06%

Rule Maker Stocks

    Rec'd    #  Security     In At     Value    Change
    2/3/98   24 Microsoft   1878.45   3874.50  $1996.05
    5/1/98   55 Gap Inc.    1890.33   3781.25  $1890.92
   6/23/98   34 Cisco Syst  1985.95   3587.00  $1601.05
    2/3/98   22 Pfizer      1810.58   3093.75  $1283.17
   2/17/99   16 Yahoo Inc.  2013.00   2864.00   $851.00
   2/13/98   22 Intel       1862.83   2598.75   $735.92
   8/21/98   44 Schering-P   2111.7   2516.25   $404.55
   5/26/98   18 AmExpress   1873.20   2223.00   $349.80
    2/6/98   56 T. Rowe Pr  1885.70   2023.00   $137.30
   2/27/98   27 Coca-Cola   1865.89   1790.44   -$75.45

Foolish Four Stocks

    Rec'd    #  Security     In At     Value    Change
   3/12/98   17 General Mo  1230.89   1524.69   $293.80
   3/12/98   20 Exxon       1286.70   1493.75   $207.05
   3/12/98   20 Eastman Ko  1262.95   1332.50    $69.55
   3/12/98   15 Chevron     1250.14   1275.94    $25.80

                              CASH    $185.03
                             TOTAL  $34163.84

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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