RULE MAKER PORTFOLIO

<THE RULE MAKER PORTFOLIO>

Is Now a Good Time to Buy?

by Matt Richey (TMF Verve)

ALEXANDRIA, VA (April 20, 1999) -- Until lately, technology and Internet stocks were charging upward. With each new high, many investors were torn as they asked, "Is now a good time to get into these red-hot companies? What if the bubble bursts?" Now, as growth stocks have cooled over the past week, investors are wondering, "Is now a good time to get into these fallen stars? What if they continue to fall?" Today, I'll attempt to shed some light on these oft-asked varieties of the basic question:

When is it the right time to buy stocks?

Most of Wall Street's investment community is intently focused on the short-term. Frequent portfolio turnover, market timing, and window dressing are all aimed at looking good in the quarterly fund prospectus. For most of these Wise guys, being at the top of Money's mutual fund rankings is THE GOAL. In seeking every ounce of short-term outperformance, professional money managers don't have time for trivial matters such as minimizing taxes and commissions or something as unimportant as peace of mind. No, these do not get you on the cover of Smart Money. As individual investors, you and I must transcend the myopic mentality of the Wise. At best, a short-term trader's mentality will damage only our karma; at worst, it will hurt our investment returns, too.

Foolish investing is about patience, discipline, and an almost insanely long-term perspective. How long is long? One day recently, I was working from home and had CNBC on in the background. During the Taking Stock program (where a guru takes calls about stock questions), a caller asked for the "long-term -- 6-to-12 month -- outlook" on a company. Ha! Perhaps when measured in dog years, 12 months qualifies as the long-term. But for Fools, our equities investment horizon should be no less than five years, and the longer the better.

Whether you buy stocks this month or next, the question of when to buy isn't nearly as important as what to buy. History has shown that stocks are the single best long-term investment vehicle. Over five-year periods from 1871 to 1992, stocks outperformed bonds more than 71% of the time. By stretching the time horizon to include periods of 30 years or more, stocks always outperformed bonds. (For these and more numbers in support of long-term investing, check out the Fool's Buy-and-Hold Apocalypse.) As these numbers attest, the question of when to buy is also not nearly as important as how long you hold.

The inevitable fact is that whenever you buy a stock, it could drop 50% the very next day. In a matter of weeks, your newly formed portfolio could drop 20% or more. A case in point is that prior to today, the Rule Maker portfolio lost nearly 11% over the previous six market days. This kind of immediate loss of one's hard-earned savings is the fear that most investors struggle with as they try to determine the right time to buy. Yet, even with the potential for near-term stomach-churning losses, I unhesitatingly suggest that now -- whenever "now" is -- is always a good time to invest.

The fact of the matter is that no one knows what the market will do next. Even the Wise, with their 50-day gyrating averages, perfectly memorized stock market history, and insider tips cannot predict the market's near-term direction. What we do know, however, is that corporations across the land are using technology, creativity, and elbow grease to create economic value -- day-after-day, year-after-year. The best time to start participating in that long-term engine of economic growth is -- and always will be -- now.

To drive this point home, let's look at an example using fictitious investor Melissa Murphy. One day, Melissa, a recent college grad, invests $2,000 spread across four Rule Makers that she has researched and believes have excellent prospects in the decades to come. After one year, Melissa's portfolio has suffered a gut-wrenching 20% loss. She unwittingly bought just before the onset of a bear market (Murphy's Law?). It hurts to see $400 of her hard-earned savings vanish before her eyes, but she stays the course. Each year thereafter, her Rule Makers perform quite nicely, returning 15% per year. Here's how her portfolio looks in the years ahead:


      Portfolio     Compound Annual
Year  Value         Growth Rate    
0          $2,000    ----
1          $1,600   -20.0%
5          $2,798     6.9%
10         $5,629    10.9%
20        $22,771    12.9%
30        $92,121    13.6%
40       $372,680    14.0%
50     $1,507,697    14.2%

As you can see, Melissa's single $2,000 investment, which became only $1,600 after one year, stands to make her a millionaire in retirement. If you're interested in playing with these numbers, here's the spreadsheet (formatted for both Excel 95 and 97 versions).

So, is now a good time to buy? I'd say that now is an incredible time to start investing in top quality companies for the long run.

Tomorrow, I'll be back to discuss Microsoft (Nasdaq: MSFT), which just announced diluted earnings per share of $0.35 versus $0.25 a year ago, beating the First Call estimate of $0.32. Have a good Tuesday night.

Matt

04/20/99 Close
Stock Change    Bid
AXP   +1 3/8    127.50
CHV   -4 7/8     97.06
CSCO  +1 9/16   101.56
EK    +  11/16   75.44
GM    -2 13/16   87.19
GPS   +2 3/4     66.38
INTC  +1 1/16    56.56
KO    +  7/16    65.25
MSFT  +2 1/8     83.13
PFE   +  15/16  118.69
SGP   +1 7/8     50.38
TROW  -  5/16    36.66
XON   -1 1/2     80.75
YHOO  +7 5/16   171.00


                  Day     Month  Year    History
        R-MAKER  +1.38%  -1.54%   9.67%  38.77%
        S&P:     +1.29%   1.54%   6.58%  31.86%
        NASDAQ:  +2.73%  -2.12%   9.89%  45.78%

Rule Maker Stocks

    Rec'd    #  Security     In At       Now    Change
    2/3/98   48 Microsoft     39.13     83.13   112.41%
    5/1/98   55 Gap Inc.      34.37     66.38    93.12%
   6/23/98   34 Cisco Syst    58.41    101.56    73.88%
    2/3/98   22 Pfizer        82.30    118.69    44.21%
   2/17/99   16 Yahoo Inc.   126.31    171.00    35.38%
   2/13/98   44 Intel         42.34     56.56    33.60%
   5/26/98   18 AmExpress    104.07    127.50    22.52%
    2/6/98   56 T. Rowe Pr    33.67     36.66     8.86%
   8/21/98   44 Schering-P    47.99     50.38     4.96%
   2/27/98   27 Coca-Cola     69.11     65.25    -5.58%

Foolish Four Stocks

    Rec'd    #  Security     In At     Value    Change
   3/12/98   20 Exxon         64.34     80.75    25.51%
   3/12/98   17 General Mo    72.41     87.19    20.42%
   3/12/98   20 Eastman Ko    63.15     75.44    19.46%
   3/12/98   15 Chevron       83.34     97.06    16.46%

Rule Maker Stocks

    Rec'd    #  Security     In At     Value    Change
    2/3/98   48 Microsoft   1878.45   3990.00  $2111.55
    5/1/98   55 Gap Inc.    1890.33   3650.63  $1760.30
   6/23/98   34 Cisco Syst  1985.95   3453.13  $1467.18
    2/3/98   22 Pfizer      1810.58   2611.13   $800.55
   2/17/99   16 Yahoo Inc.  2020.95   2736.00   $715.05
   2/13/98   44 Intel       1862.83   2488.75   $625.92
   5/26/98   18 AmExpress   1873.20   2295.00   $421.80
    2/6/98   56 T. Rowe Pr  1885.70   2052.75   $167.05
   8/21/98   44 Schering-P   2111.7   2216.50   $104.80
   2/27/98   27 Coca-Cola   1865.89   1761.75  -$104.14

Foolish Four Stocks

    Rec'd    #  Security     In At     Value    Change
   3/12/98   20 Exxon       1286.70   1615.00   $328.30
   3/12/98   17 General Mo  1230.89   1482.19   $251.30
   3/12/98   20 Eastman Ko  1262.95   1508.75   $245.80
   3/12/98   15 Chevron     1250.14   1455.94   $205.80

                              CASH     $70.09
                             TOTAL  $33387.59

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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