Rule Breaker Portfolio

<THE RULE BREAKER PORTFOLIO>

6,570 Days
Plus, the Fed is biased

by Jeff Fischer (TMFJeff)

ALEXANDRIA, VA (May 18, 1999) -- The Fed, curse its old soul, has a bias! A bias, I tells ya.

Today the Federal Reserve announced that it's leaning towards tightening interest rates. The stock market immediately descended. But wait. Then it rescinded, and next it actually ascended to end nearly unchanged. Even so, from here forward we all must live with the fact that the Fed has a bias. A bias!

Big deal.

The Fed has been neutral since last fall, so this change of mood follows more than six months of fence sitting. Being neutral, the Fed had to eventually move in some direction, and given the recent sign of inflation, it went -- logically -- towards tightening. It's new, but it's hardly big news. In fact, the Fed has leaned towards tightening at 15 of its last 26 meetings since 1996, but it raised interest rates only once as a result. March of 1998 was when the Fed last had a tightening bias. Do you even remember it?

Probably not.

The Fed never reported its biases to the public until today. Instead, the Wise had to wait up to eight weeks for the minutes from Fed meetings and then read through them to find the bias. Why the Fed is suddenly pandering to the public desire for instant information is anyone's guess, but at least the instant information makes the markets more -- ahem -- efficient, and it removes the drudgery of speculation that we had to witness for weeks in the past.

Remember this: "Next, on Market Watch. What is the Fed's bias? Join us as we technically analyze Greenspan's smirk following last week's meeting."

Yes, even Greenspan's expression has been news in the past. Speaking of which, here's how to measure the public's infatuation with the stock market: do popular comedians joke about Greenspan as if he were President? Is Porsche an advertiser on CNBC? Does every fourth person you know talk about how well they've done "on the market"?

Yes, yes and yes.

With so much short-term thinking and excitement, all a Fool might want to do is seek adventure outside the financial world. Enjoy the spring and summer outdoors. As someone once said, "Oh, tedious is this thing called watching one's finances. If all is in order, all is in order. Be Foolish about it. After all, time is a' tickin'."

6,570 Days

Two years ago we ran a column titled 7,300 days. Not counting leap years, that's 20 years -- just 7,300 days. We asked readers to think 20 years ahead as they invest. It's only 7,300 days. One year ago, we ran a column titled 6,935 days. That's 19 years. This column is called 6,570 days. Yes. 18 years. We'll see you next May for the 6,205 day installation. Fools with us since the beginning, congratulations! How the years go, eh?

The point of the original 7,300 day column was to remind us that 1) new investors are far from too late to the stock market, and 2) being a long-term investor is a relative matter.

The average human life is 27,100 days. If you agree with me that nobody lives long enough to truly get old (think about that one second: even if a person lives to be 110, they're not old except when compared to other people -- they're actually still an infant relative to most things on the planet), then you might agree that being a long-term investor can only mean being a life-long investor. You want to thrive in a career -- typically a life-long one. You want to thrive with life-long relationships. You should also want to thrive through life-long investment. Anything less is child's play.

Long-term must mean life-long. But, we must ask as we did in 1997: are you ever too late to invest in technology-based leaders? From our May 1997 column on the perception of time:

"On a cool morning only 823,000 hours ago the air was whipping around the Wright Brothers' plane as it slowly lifted off the sand; 674,000 hours ago the first radio station opened; 402,000 hours ago the first color television broadcast ran, and thousands watched -- the screens glowing against their faces. Commercial airlines have been flying regularly for 23,725 days. Those giant, heavy birds that you see rolling down the runway, lifting up, and climbing away into the sky -- they've been flying for only 500,000 hours, total."

Entire industries are but hours old on this world. And time never goes backwards, so when can you ever be too late?

You can only ever be too late when an opportunity is gone. As long as time moves forward, there will be opportunity. See the 1997 column for more on the issue of hours, minutes, and seconds -- what makes an investment career.

The Future of Interest Rates

Back to interest rates: the Fed will of course raise them eventually, and it could prove to have long-term benefit for Rule Breaking companies. Rule Breakers are likely to grow whatever occurs with interest rates and inflation. Eventually, investors will seek fast-growing, inflation-safe companies like Rule Breakers in order to stay ahead of inflation or rising interest rates.

Beyond that, the very fact that the Fed is being so diligent about restraining inflation, including today's announcement, should be seen as a positive for investors, if anything. If the Fed was willy-nilly about the issue, then we should worry. It isn't. It's watching for inflation and it will act quickly to squelch it. Bravo. That's good for the economy and all investors.

Shotgun Weddings

Okay, so every business will have a presence online. That doesn't mean that every one of them will be a good business. Online grocery delivery will have a future, sure, but will it be profitable? Amazon.com (Nasdaq: AMZN) might think so. The company invested $42.5 million for a 35% stake in HomeGrocer.com, which sells 11,000 grocery products online and delivers them to your door.

Foolish thought: Although Whole Foods (Nasdaq: WFMI) is interesting, I probably wouldn't invest in a traditional grocery store and the business isn't much more appealing to me online. Too many potential problems, including food returns, waste and rot, and order fulfillment. How capital intensive is it to fill someone's order for 2 pounds of apples, 1 pound of potatoes, 1 skim milk, 4 green peppers, 1 onion -- geesh, what a time-burn. No matter how automated, it could take an employee 20 minutes to fill a single order. Now imagine millions of orders. And what are the profit margins?

Anyway, Amazon is taking a shotgun approach to growth, it appears, investing in online pet stores, drugstores, groceries, and so on. If there was ever a time to land-grab, now is the time -- that's true. If Amazon succeeds, it will succeed on several fronts. If not, it could become a giant debt-laden company. Given its many investments in new online ventures, Amazon is as close to an Internet venture capital firm as it is a bookstore.

By the way, Books-A-Million (Nasdaq: BAMM) announced 55% off some best-sellers, topping Amazon's 50% offer -- apparently a mini-price war is under way.

Somewhat related: eToys should go public this week under ticker symbol ETYS. How long before toy manufacturers sell directly to consumers online? And book and music makers, for that matter? The Internet as we've come to know it will probably be very different ten years from now. Much of the activity these days -- these days of first movers -- could prove a mistake for many companies in retrospect.

Foolish Bits

3dfx (Nasdaq: TDFX) announced first quarter year 2000 results of $0.14 per share in losses on declining revenue of $40 million versus $50 million last year. The estimate was for $0.03 in profit. Living up to its contrarian nature, the stock rose. Here are the results. Please visit the 3dfx board for Foolish discussion.

To close, tonight Drip Port offers an Interest List of companies that it's considering for investment. Finally, are you ever bored reading these sometimes one-way columns? Who wouldn't be? All the Foolish interactivity is taking place on the Fool message boards. Hit 'em. Hit 'em hard. We're looking for great posts -- especially about Rule Breaker companies, negative or positive -- to share in this column.

Fool on!

05/18/99 Close
Stock  Change    Bid 
------------------ 
AMGN  +  9/16    59.63
AMZN  -5        132.63
AOL   -1 1/4    134.50
ATHM  -1        150.25
CAT   -2 7/16    58.69
CHV   -3 1/4     92.63
DD    -  7/8     69.00
DJT     ---       5.38
EBAY  -8 7/8    189.56
GT    -  15/16   59.00
IOM   +  1/16     5.06
SBUX  -2 13/16   36.69
TDFX  +  1/2     18.88


                  Day     Month  Year   History   Annualized 
      R-BREAKER  -1.98%  -9.41%  47.09% 1376.36%  75.57%
        S&P:     -0.46%  -0.14%   8.79%  204.42%   26.21%
        NASDAQ:  -0.14%   0.61%  16.68%  255.24%   30.35%


    Rec'd    #  Security     In At       Now      Change
   8/5/94  2200 AmOnline       0.91    134.50   14698.92%
   9/9/97  1320 Amazon.com     6.58    132.63    1915.81%
  5/17/95  1960 Iomega Cor     1.28      5.06     295.38%
  12/4/98   450 @Home Corp    56.08    150.25     167.92%
  2/26/99   300 eBay         100.53    189.56      88.57%
 12/16/98   580 Amgen         42.88     59.63      39.07%
  4/30/97 -1170*Trump*         8.47      5.38      36.53%
   7/2/98   470 Starbucks     27.95     36.69      31.24%
  2/23/99   300 Caterpilla    46.96     58.69      24.96%
  2/23/99   290 Goodyear T    48.72     59.00      21.11%
  2/20/98   260 DuPont        58.84     69.00      17.26%
  2/23/99   180 Chevron       79.17     92.63      17.00%
   1/8/98   425 3Dfx          25.67     18.88     -26.46%

    Rec'd    #  Security     In At     Value      Change
   8/5/94  2200 AmOnline    1999.47 295900.00  $293900.53
   9/9/97  1320 Amazon.com  8684.60 175065.00  $166380.40
  12/4/98   450 @Home Corp 25236.13  67612.50   $42376.37
  2/26/99   300 eBay       30158.00  56868.75   $26710.75
 12/16/98   580 Amgen      24867.50  34582.50    $9715.00
  5/17/95  1960 Iomega Cor  2509.60   9922.50    $7412.90
   7/2/98   470 Starbucks  13138.63  17243.13    $4104.50
  4/30/97 -1170*Trump*     -9908.50  -6288.75    $3619.75
  2/23/99   300 Caterpilla 14089.25  17606.25    $3517.00
  2/23/99   290 Goodyear T 14127.38  17110.00    $2982.63
  2/20/98   260 DuPont     15299.43  17940.00    $2640.57
  2/23/99   180 Chevron    14250.50  16672.50    $2422.00
   1/8/98   425 3Dfx       10908.63   8021.88   -$2886.75

                              CASH   $9924.87
                             TOTAL $738181.12
Note: The Rule Breaker Portfolio was launched on August 5, 1994, with $50,000. Additional cash is never added, all transactions are shared and explained publicly before being made, and returns are compared daily to the S&P 500 (including dividends in the yearly, historic and annualized returns). For a history of all transactions, please click here.

</THE RULE BREAKER PORTFOLIO>

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