RULE MAKER PORTFOLIO

<THE RULE MAKER PORTFOLIO>

Earnings Week

By Phil Weiss (pweiss@homemail.com)

Towaco, NJ (Feb. 1, 1999) -- Many market pundits keep saying that the market is overvalued and is overdue for a correction. I really don't pay much attention to what the Wise have to say, but I wouldn't be too upset if they were right. I'd like to get a chance to purchase more shares of companies like the great ones in our portfolio at lower prices.

I agree with what Warren Buffett said in the 1997 Chairman's letter to Berkshire Hathaway shareholders: "Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers much prefer falling prices." I expect to be a net saver for at least the next 10-20 years, so I'd much prefer buying in at the lowest level possible.

However, at least my long-term focus allows me to continue to invest without focusing all that much on current valuation. When it comes to purchasing the stocks of great companies like our Rule Makers, I certainly emphasize quality over valuation.

I can't deny that it's comforting to watch my personal portfolio increase in value and outperform the S&P 500, though it wouldn't be so bad if things slowed down a bit. But when I look at the overall picture I can't fret too much. I've got a wonderful family, good friends, a nice home to live in and an investment portfolio that I believe is forming a foundation for a wonderful future for my family and me.

I would also like to comment on a subject that's come up recently in our Strategies Message Board. A thread of messages questioned the use of the S&P 500 as a point of comparison for the performance of mutual funds as well as the portfolios run here at The Fool. While it's true that the S&P 500 is simply a basket of large capitalization companies that's most likely not representative of the market as a whole, that doesn't take away from it's value as a reference point for performance.

The overriding premise is that if you can't exceed the performance of the S&P 500, then you shouldn't bother to spend time investing in individual stocks on your own. The S&P 500 has outperformed approximately 90% of all managed mutual funds over the past ten years. An S&P 500 index fund is more tax efficient than the vast majority of managed mutual funds. The expenses paid to the manager of such index funds are also substantially lower than those paid to the managers of the vast majority of all mutual funds. So, the easiest thing to do is just park your money in an S&P 500 index fund.

Based upon these facts, it makes sense to compare results to those of the S&P 500. When you invest, your primary goal is to maximize your returns and minimize your costs. An S&P 500 fund offers an efficient, low cost alternative to managed mutual funds or underperforming common stock investments.

The stocks in our portfolio concluded a great month with a terrific week. As a matter of fact, the overall market value of our portfolio crossed the $30,000 barrier for the first time last week. Not bad considering that we only started the portfolio a year ago investing $20,000 up front and adding $2,000 in August.

We'll be adding another $2,000 this week. This also means that we'll be purchasing another stock pretty soon. We'd like to thank everyone for all the great suggestions that have been made over on our Companies Message Board. If you haven't had a chance to check them out yet, you ought to read through the posts from last week.

Here's a look at how our stocks performed last week:


Rule-Maker       Last     This     Change
T. Rowe           $32.00   $36.56  14.3%
Microsoft        $156.25  $175.00  12.0%
Pfizer           $116.00  $128.50  10.8%
Intel            $128.88  $140.88   9.3%
Cisco            $102.81  $111.06   8.0%
Gap Inc.          $59.44   $64.19   8.0%
Coca-Cola         $60.88   $65.25   7.2%
S Plough          $52.00   $54.50   4.8%
American Express  $98.19  $102.88   4.8%

Fool Four         Last     This    Change
Kodak             $65.00   $65.50   0.8%
Exxon             $71.38   $70.44  -1.3%
GM                $91.00   $89.75  -1.4%
Chevron           $80.00   $74.75  -6.6%

S&P 500            1,225    1,280   4.4%
Total R-M        $29,018  $31,010   6.9%

For the month our stocks were up 9%, while the S&P only increased by 4%. Microsoft (Nasdaq: MSFT) was the best performing stock in our portfolio for the month as it jumped ahead by more than 26% on yet another strong quarter of earnings.

Last week I had to travel out of the country for a meeting, so I wasn't able to keep up much with the news related to our stocks. I do know that four of our companies released earnings, though, so I'll provide a brief synopsis and a link to each of the related press releases. Other than that, I'm not going to spend much time looking to see what I missed. After all, we plan to hold the stocks in this portfolio for at least ten years, and I doubt that anything happened that was significant enough to influence our long-term view of any of these companies.

Plus, the time that I would have spent catching up on that news would have left me less time to spend with my family after I got back from my trip. I particularly enjoyed helping my son make things with his Play*Doh.

American Express (NYSE: AXP) released fourth quarter earnings on Monday. If you're a shareholder of this company, you might also want to check out the additional details that you can find in these two supplementary reports: one and two (both are in Adobe Acrobat). American Express increased operating earnings per share by 11.5% over last year's fourth quarter and 15% for the year. Revenue growth was 8.3% on a comparable quarter basis and 7.7% for the year. Earnings per share growth exceeded revenue growth due to our company's ongoing share repurchase program. We would like to see our company increase its revenue growth by at least 10% in the year ahead.

Schering-Plough (NYSE: SGP) reported fourth quarter earnings on Tuesday. Revenues grew by 16% for the quarter and 19% for the year. Gross margins were essentially flat for the quarter and the year. Net margins showed a slight improvement. All in all, it was yet another solid year for this company, which is one of the most financially solid pharmaceutical companies in the industry.

Coca-Cola (NYSE: KO) also reported earnings on Tuesday. This quarter finished off a disappointing year for Coke. Revenues were down 5% for the quarter and basically flat for the year. Gross margins increased by 2 points for both the quarter and the year, but net margins fell by about 3 points. However, net margins are comfortably ahead of the target levels we look for in Rule Makers. The company also continued to reduce the number of diluted shares outstanding. We're looking forward to the years ahead when all the cheap foreign assets that Coke has been purchasing lead to higher profitability down the line.

The last of our companies to release earnings last week was T. Rowe Price (Nasdaq: TROW). Earnings for the quarter exceeded expectations by $0.04. The strong earnings were most likely behind the significant increase in T. Rowe's share price last week. Revenues and earnings for our company were up 13% for the quarter and 17% and 19%, respectively, for the year. Gross and net margins remained relatively flat.

Tomorrow night I'll be reviewing Intel's latest earnings release in more detail. I'll use the measures that Tom outlined in the latest book by the Fool brothers, Rule Breakers, Rule Makers.

Phil Weiss, Fool

02/01/99 Close
Stock  Change    Bid
AXP   -2 1/8   100.75
CHV   -1 1/16  73.69
CSCO  +3 15/16 115.00
KO    -1 3/16  64.06
GPS   -  11/16 63.50
EK    +  1/4   65.75
XON   -  13/16 69.63
GM    +3 5/8   93.38
INTC  -3       137.88
MSFT  -2 1/16  172.94
PFE   +3 1/2   132.00
SGP     ---    54.50
TROW  -1 13/16 34.75

                   Day   Month    Year  History
        R-MAKER  -0.26%  -0.26%   8.74%  41.51%
        S&P:     -0.52%  -0.52%   3.88%  26.54%
        NASDAQ:  +0.17%   0.17%  14.48%  50.63%

Rule Maker Stocks

    Rec'd    #  Security     In At       Now    Change
    2/3/98   24 Microsoft     78.27    172.94   120.95%
   6/23/98   34 Cisco Syst    58.41    115.00    96.88%
    5/1/98 55.5 Gap Inc.      34.06     63.50    86.44%
   2/13/98   22 Intel         84.67    137.88    62.83%
    2/3/98   22 Pfizer        82.30    132.00    60.39%
   8/21/98   44 Schering-P    47.99     54.50    13.56%
    2/6/98   56 T. Rowe Pr    33.67     34.75     3.20%
   5/26/98   18 AmExpress    104.07    100.75    -3.19%
   2/27/98   27 Coca-Cola     69.11     64.06    -7.30%

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     69.63     8.22%
   3/12/98   20 Eastman Ko    63.15     65.75     4.12%
   3/12/98   15 Chevron       83.34     73.69   -11.58%

Rule Maker Stocks

    Rec'd    #  Security     In At     Value    Change
    2/3/98   24 Microsoft   1878.45   4150.50  $2272.05
   6/23/98   34 Cisco Syst  1985.95   3910.00  $1924.05
    5/1/98 55.5 Gap Inc.    1890.33   3524.25  $1633.92
   2/13/98   22 Intel       1862.83   3033.25  $1170.42
    2/3/98   22 Pfizer      1810.58   2904.00  $1093.42
   8/21/98   44 Schering-P   2111.7   2398.00   $286.30
    2/6/98   56 T. Rowe Pr  1885.70   1946.00    $60.30
   5/26/98   18 AmExpress   1873.20   1813.50   -$59.70
   2/27/98   27 Coca-Cola   1865.89   1729.69  -$136.20

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   1392.50   $105.80
   3/12/98   20 Eastman Ko  1262.95   1315.00    $52.05
   3/12/98   15 Chevron     1250.14   1105.31  -$144.83

                              CASH    $120.62
                             TOTAL  $30930.00

  
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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