RULE MAKER PORTFOLIO
Step 9: Putting It All Together

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11 Rule Maker Steps

By Tom Gardner

Order is Heaven's first law.
-- Alexander Pope

You now have eight of the eleven steps of investing in Rule Maker stocks under your belt, and you're either feeling refreshed, bored, or confused. We'll try our best to keep the remaining few sharp and snappy.

You're now charged with putting together all that you've learned here. In the mish-mash of chatter about investing in healthy businesses, about paying down your short-term credit-card debts, about what to look for on a balance sheet, and about why investors should be looking to tightly control their commission costs, hopefully some general themes are emerging from the mist.

I'll try to restate a few of them here.

A. Invest what you don't need now.

This makes particular sense here at the start of the 21st century, after five years of extraordinary gains for the U.S. stock market. Whereas history has shown a long-term annual rate of return of 11% for stocks, the period from 1995-1999 has brought in excess of 26% yearly growth for the S&P 500 and 40% annual growth for the Nasdaq. Incredible. If you are borrowing money now to buy stocks or you are investing what you'll need in less than 3-5 years, you're playing a game that speculators in decades past have been ruined by. If you need the money in the next 36-60 months, we don't think you should be investing it in stocks.

B. Buy companies, not stocks.

It does continue to amaze us how many bright minds out there remain steadfastly committed to worrying about the valuation of the overall market or today's price-to-earnings ratio of a particular stock. Attempts to nail down a fair price for shares of stock in the short-term, we think, are futile. Why? Because in the short-term, irrationality and emotion rule the marketplace. The guy who gets to see himself on financial television regularly has more of an effect on today's pricing of the stocks he mentions than he should. Instead of buying paper stocks, buy an ownership slice of a business that you'd like to follow for many years.

C. Focus on What Everyone Knows

Why do first-time investors buy so many low-grade promotional businesses with stocks trading under $3 per share and products that the investor has never seen? Why? Because for many, the stock market seems a gamble. They feel they have a low chance of winning, so they figure they might as well bet on the long shot and win big if they're right. What a shame. Throughout this century, the very best investments have been those that are clearly visible to the masses of Fools in America. Gillette. Johnson & Johnson. Microsoft. Campbell's Soup. We think investors should stop gambling on what they don't know, and start owning what they do. It could make all the difference.

D. Play the Overdogs

Playing the Rule Maker game is like rooting on proven winners in the world of sports. For three decades, Dean Smith led the North Carolina Tarheels to one ACC Championship after another. Coach Smith had built a logical, durable plan for creating winning teams, year after year. Just as he built an organization for long-term success, so too great businesses plan on growing for 10, 20 and 30 years, rather than trying to announce great earnings for a few consecutive quarters. We suggest that for the bulk of your portfolio, you look past the underdogs and concentrate on time-tested, proven winners.

E. Let Compounding Work its Magic

Let's say you invest $10,000 into stocks this year. Let's then imagine that the market climbs 10% and your portfolio meets market growth. You just made a thousand bucks (before taxes). Awesome! If the market does the same in year two, you'll make another $1,100 (a hundred bucks more than last year). Fantastic. But don't get too excited. Because while you can earn some denarii on the highly-unpredictable short-term growth of the market, you stand to make so much more looking out decades ahead. Consider this table.

 Initial
Investment   Growth   5 Years   20 Years   50 Years   100 Years
   $10,000      10%   $16,105    $67,275     $1.2 m    $137.8 m

Wheras in the sixth year of this portfolio, you'd make $1,610. In the 51st year, you'd make $120,000. In the 101st year, you'd make $13.8 million. By leaving your money in the market, by generating long-term positive returns, your portfolio will grow much more quickly twenty years from now than it will today.

F. Aim to Learn

You can make no greater committment to your future (and that of your kids and theirs) than to concentrate on learning more and more about the stock market. Rather than rush in blindly, turning trades willy nilly, and trying to triple your money in the next five years. . .instead, focus on learning. Study how businesses fit into society, how managers encourage and motivate their employees, how companies turn profits, and which investments have proven phenomenal in decades past. By reading a handful of books on the subject, and by asking as many questions as you can on our web site, you'll be dramatically improving your chances of both beating the market over time and enjoying the process thoroughly.

Ok, there are six basic principles from Rule Maker investing. There are certainly many more. Please feel free to drop by the folder and share a few of yours.

Step 10: A Rule Maker Retirement »