RULE MAKER PORTFOLIO

Rule Maker Portfolio
Ten Rules for Successful Investing
A Survival Guide

By Tom Herman (THerman@Cinci.rr.com)

ALEXANDRIA, VA (Oct. 8, 1999) -- Today's report comes from Tom Herman, a regular reader of the Rule Maker Portfolio. His 10 points of investing philosophy are chock-full of investment insight. Enjoy! -- Matt Richey

1) Timing the market doesn't work. If you try, eventually you will get burned. Rebounds usually happen quickly and if you're out of the market, you will miss out. Invest early, regularly, and for the long haul. If you happen to get very lucky and make some money trading a small portion of your money for fun, remember to leave the casino. The longer you stay, the more likely you will give your winnings back to the house. Also, be sure to ask yourself, "Is all the time I spend worrying about my stock trades the best investment of my time for my future?"

2) Buy companies, not stocks. Invest in what you know or what you use or what you believe to be a long-term trend. Look for companies which have great barriers to entry or whose products or services would be extremely costly to be replicated or replaced in the market.

3) Corrections happen! You can't live in fear of stock market crashes, because if you don't play, you don't win. The market has a "must be present to win" criterion. There will always be artificial reasons that someone will tell you why you should sell stocks and go to cash. Ignore it! The most money that has ever been lost in the stock market is that which sat on the sidelines because of fear.

4) Bigger is usually better. Dollar cost averaging into large, quality stocks is the recipe for compounding your money steadily into an eventual fortune. By saving just $2,000 each year for 30 years at the stock market's historical 11% annual return, you'll accumulate a nest egg of nearly $400,000. Be wary of speculating on some obscure company with "great potential." I trust Bill Gates with my money, and I realize he knows more than I do. Stick with the sure thing. Gambling is for Las Vegas, not your retirement.

5) Some diversity is good, but too much is bad. Forget mutual funds! They are outdated. During the 1990s, fully 90% of actively managed funds have underperformed the market averages, according to Lipper Analytical Services. You can diversify your stock portfolio by buying index tracking stocks, such as the S&P 500's Spiders (AMEX: SPY) or the Nasdaq Index 100 (AMEX: QQQ). This also lowers commissions and fees. Having too many stocks can be worse than too few. In addition to Spiders and QQQ's, I suggest picking no more than 10 of the best-known, best-run companies, with low debt, strong balance sheets, high demand, and great vision for the future. For more on how to find such companies, check out the Rule Maker Criteria.

6) Always buy the companies that people want to own when they get cheaper, because they usually never do! Expensive stocks are expensive for a good reason, so don't rule them out simply on that basis.

7) Sell reluctantly and don't panic. Corrections create opportunities. You wouldn't want to buy always at the market highs. All stocks eventually have a selloff period, regardless of how great an investment the company may be. It usually takes six months or so to reach a bottom (so give it time to get there). Be patient before you add more to your positions. Stocks are the one thing that no one buys when they go on sale. If you believe in the company, buy more when Wall Street has a fire sale or falls out of love with your company. But always re-evaluate why a stock has become cheap. There may be a reason other than the typical emotional market whims. Be true to yourself and ask some tough questions. Compare this investment to others that are doing well in your portfolio. Where is the best place for your hard-earned money?

8) As you get older, it makes sense to lighten your load in equities. This is not because stocks are not a good long-term investment. They are. It is because a good investment takes time, and if you need the money in the next five years, you are better off if you don't have to wait even longer. Enjoy life in the meantime and don't fret about temporary market gyrations. Remember that a watched portfolio rarely grows. Avoid "scared" money. Be comfortable with your investment style and goals. High risk doesn't mean high returns -- it means high volatility. Can you stomach that? Ask yourself, "What if this stock drops 40%? Can I live with that? What would I do?" When you reach your goals, enjoy your money but contribute to society, otherwise you weren't a successful investor regardless of how much you made through the years.

9) The most important bill you have to pay each month is the one to yourself. Always pay yourself at least 10%. Let your money work for you. If you cannot save 10% of what you make (and you can because no matter how little you make, someone is making less), you are spinning your wheels.

10. There are no sure things or get-rich-quick strategies that work. If you know it, everyone knows it. "Gurus" abound, and they make a lot of money by selling two things: hype and fear. The best advice you get is in the mirror. Only you know why you buy what you buy when you buy. Listen to thyself!

Have a Foolish weekend!


 




Rule Maker Portfolio

10/8/99 Closing Numbers
Ticker Company Dly Pr Chg Price
AXPAMER EXPRESS13/16$149.69
CHVCHEVRON CORP-7/16$85.38
CSCOCISCO SYSTEMS15/16$71.81
DPHDELPHI AUTOMOTIVE SYSTEMS1/4$16.25
EKEASTMAN KODAK-11/16$74.75
GMGENL MOTORS11/16$67.31
GPSGAP INC3/16$38.00
INTCINTEL CORP1/16$75.69
KOCOCA-COLA CO1/16$53.06
MSFTMICROSOFT CORP3/16$94.94
PFEPFIZER, INC7/8$39.50
SGPSCHERING-PLOUGH11/16$49.81
TROWT.ROWE PRICE ASSOC-25/32$29.28
XONEXXON CORP-3/8$72.75
YHOOYAHOO INC7/8$192.13

  Day Week Month Year
To Date
Since
2/2/98
Annualized
Rule Maker 1.37% 5.66% 6.34% 15.07% 43.82% 24.13%
S&P 500 1.39% 4.15% 4.16% 8.69% 36.29% 20.22%
S&P 500(DA) 1.39% 4.15% 4.16% 9.27% 38.06% 21.15%
S&P 500(DCA) n/a n/a n/a n/a 22.77% 12.98%
NASDAQ .90% 5.47% 5.11% 31.65% 78.25% 41.04%

Trade Date # Shares Ticker Cost/Share Price LT % Val Chg
6/23/9875CSCO32.865$71.81118.51%
2/3/9859MSFT49.352$94.9492.37%
5/1/9882GPS22.708$38.0067.34%
2/13/9852INTC46.928$75.6961.28%
2/17/9916YHOO126.309$192.1352.11%
2/3/9866PFE27.433$39.5043.99%
5/26/9818AXP104.067$149.6943.84%
3/12/9820EK63.148$74.7518.37%
3/12/9820XON64.335$72.7513.08%
3/12/9817GM60.400$67.3111.44%
8/21/9844SGP47.993$49.813.79%
3/12/9815CHV83.343$85.382.44%
3/12/9811DPH17.190$16.25-5.47%
2/3/9856TROW33.673$29.28-13.04%
2/27/9827KO69.107$53.06-23.22%

Trade Date # Shares Ticker Cost Value LT $ Val Ch
6/23/9875CSCO$2,464.86$5,385.94$2,921.08
2/3/9859MSFT$2,911.79$5,601.31$2,689.52
2/13/9852INTC$2,440.28$3,935.75$1,495.47
5/1/9882GPS$1,862.06$3,116.00$1,253.94
2/17/9916YHOO$2,020.95$3,074.00$1,053.05
5/26/9818AXP$1,873.20$2,694.38$821.18
2/3/9866PFE$1,810.58$2,607.00$796.43
3/12/9820EK$1,262.95$1,495.00$232.05
3/12/9820XON$1,286.70$1,455.00$168.30
3/12/9817GM$1,026.80$1,144.31$117.51
8/21/9844SGP$2,111.70$2,191.75$80.05
3/12/9815CHV$1,250.14$1,280.63$30.49
3/12/9811DPH$189.09$178.75($10.34)
2/3/9856TROW$1,885.70$1,639.75($245.95)
2/27/9827KO$1,865.89$1,432.69($433.20)
  Cash: $160.96  
  Total: $37,393.21  


Notes
The Rule Maker Portfolio began with $20,000 on February 2, 1998, and it added $2,000 in August 1998 and February 1999. Beginning in July 1999, $500 in cash (which is soon invested in stocks) is added every month.