Rule Breaker Portfolio

<THE RULE BREAKER PORTFOLIO>

Does The News Matter?
Yes... No... It Depends.

By Nico Detourn (TMFNico)

SILICON VALLEY, CA (May 21, 1999) -- "Such great news today -- and my stock goes down!"

"This news could sink a battleship. Yet this crazy stock goes up!"

"This news hit after the bell. It's gonna be a bumpy ride tomorrow morning!"

If you've spent much time on our Fool message boards, you've probably read comments like these. News comes out. Common sense says the market will react in a certain way. Yet when the closing bell rings, our intuition is confounded. Not always, obviously. Sometimes news has just the impact we expect. More often, though, news is rarely clearly good or bad, nor as significant as it can initially appear. So no matter how expected and commonsensical it might appear, it is usually only over the longer haul that we learn how important any piece of news actually was. Once that fuller context has been filled in, the market's initial reaction might be seen as little more than a bump or a dip on an old stock chart, if it's visible at all.

It's been an unusually active news period for Rule Breaker companies. The last month in particular saw the portfolio's oldest and second newest holdings cast as players in a drama billed to have great ramifications on the very future of the Internet. I'm taking about @Home (Nasdaq: ATHM) and America Online (NYSE: AOL), of course, and their supporting roles in AT&T's (NYSE: T) acquisition of cable TV operator MediaOne Group (NYSE: UMG).

@Home's involvement in this deal stems from its being majority-owned by Ma Bell, while AOL, a competitor to @Home, is currently locked-out of formal cable distribution of its flagship service. The initial reaction to AT&T-MediaOne news cast AOL as the loser, an assessment apparently also reflected in its sagging stock price. This could indeed turn out to have been a defining moment for AOL and the Internet. To coin a phrase, only time will tell. It brings to mind an earlier episode, though, also involving AT&T and AOL, and similarly seen as a great turning point -- or at least that was the initial reaction.

It was back on February 27, 1996 -- practically the dark ages in terms of the modern online medium -- that the AT&T WorldNet Service was announced, offering all AT&T long distance customers five free hours of Internet access and unlimited access for $19.95 per month. The news was reported as the beginning of the end for the companies then competing in Internet space, and none more so than America Online which then, as now, was easily painted as a last-generation relic.

Shares of these companies naturally sank as investors bowed to the inevitable triumph of AT&T's "marketing muscle," and visions of its 80 million residential telephone customers signing up for the 28.8-kbps dial-up service which, adding convenience to the competitive low-cost, included a free AT&T-branded version of Netscape Navigator.

That day's Fool Portfolio recap shows us how AOL -- whose Nasdaq ticker was AMER at the time -- closed with a split-adjusted bid of about $6.11, down almost 9% on the day. A somewhat less than obvious reason for the hit to AOL was that the AT&T WorldNet service would compete directly with the AOL's GNN, an ISP the company acquired in June 1995 -- and shut down in early 1997. Other ISP stocks getting disconnected on the AT&T WorldNet announcement included those of UUNet (now part of MCI WorldCom), Netcom (now part of MindSpring), and H&R Block, which just the week before had announced the spin-off of its CompuServe unit (now part of America Online).

The bloodbath was understandable at the time. AT&T wasn't then and certainly isn't now a force to be sneered at. An understandable reaction to current news, and a more considered interpretation of events in their context, are not the same thing, however -- though telling the two apart is admittedly not easy.

Reverberations from that 1996 AT&T WorldNet announcement can still be heard in the news that today surrounds Rule Breakers @Home and America Online.

In it's acquisition of the GNN ISP service, AOL also acquired the WebCrawler search site which, in late 1996, was sold to Excite (Nasdaq: XCIT) in the deal that made the latter AOL's default search service. As most regular readers know, Excite -- with WebCrawler in tow -- is due to merge with @Home one week from today. Coming full circle, the sale to @Home of the AT&T WorldNet service itself is reportedly under consideration, something that would make the "new @Home" not just a broadband but an "all-band" Internet service, and one more formidably positioned as a competitor to AOL.

Where does this all lead? Why, to an unknown future -- of course! The details of that future can be guessed at, or reasoned towards, and Foolishly debated. Sometimes we'll come close a bull's-eye, or, if you prefer, a bear's-eye prediction. But this moment's news, hot off the modem, will often benefit from some cool-down time -- a day, a week, a quarter, or more -- before we can know what it actually means, and before we can most-effectively plug it into our ongoing analysis.

It's not that the latest news doesn't matter. It just matters more in context. The thing is, once it's in context, it's no longer news. That's OK, though -- as long as you don't need to make a decision right now -- on the spot -- at this very moment. And why put yourself in a position, whether in your investments or in your day-to-day life -- where you're compelled to do that?

Fool on and on!

Nico

05/21/99 Close
Stock  Change    Bid 
------------------ 
AMGN  -2 3/16    61.25
AMZN  -2 1/4    128.56
AOL   -3 1/4    126.00
ATHM  -6 3/4    130.00
CAT   +  11/16   59.63
CHV   -  1/16    93.44
DD    -  13/16   68.25
DJT   +  1/8      6.31
EBAY  +4 5/16   190.94
GT    -  1/4     59.13
IOM   +  1/8      5.06
SBUX  +  5/16    36.56
TDFX  -  3/4     20.50


                  Day     Month  Year   History   Annualized 
      R-BREAKER  -1.85% -13.34%  40.71% 1312.33%   73.78%
        S&P:     -0.64%  -0.37%   8.54%  203.76%   26.10%
        NASDAQ:  -0.84%  -0.87%  14.96%  250.02%   29.89%


    Rec'd    #  Security     In At       Now      Change
   8/5/94  2200 AmOnline       0.91    126.00   13763.67%
   9/9/97  1320 Amazon.com     6.58    128.56    1854.06%
  5/17/95  1960 Iomega Cor     1.28      5.06     295.38%
  12/4/98   450 @Home Corp    56.08    130.00     131.81%
  2/26/99   300 eBay         100.53    190.94      89.94%
 12/16/98   580 Amgen         42.88     61.25      42.86%
   7/2/98   470 Starbucks     27.95     36.56      30.79%
  2/23/99   300 Caterpilla    46.96     59.63      26.96%
  4/30/97 -1170*Trump*         8.47      6.31      25.46%
  2/23/99   290 Goodyear T    48.72     59.13      21.37%
  2/23/99   180 Chevron       79.17     93.44      18.02%
  2/20/98   260 DuPont        58.84     68.25      15.98%
   1/8/98   425 3Dfx          25.67     20.50     -20.13%

    Rec'd    #  Security     In At     Value      Change
   8/5/94  2200 AmOnline    1999.47 277200.00  $275200.53
   9/9/97  1320 Amazon.com  8684.60 169702.50  $161017.90
  12/4/98   450 @Home Corp 25236.13  58500.00   $33263.87
  2/26/99   300 eBay       30158.00  57281.25   $27123.25
 12/16/98   580 Amgen      24867.50  35525.00   $10657.50
  5/17/95  1960 Iomega Cor  2509.60   9922.50    $7412.90
   7/2/98   470 Starbucks  13138.63  17184.38    $4045.75
  2/23/99   300 Caterpilla 14089.25  17887.50    $3798.25
  2/23/99   290 Goodyear T 14127.38  17146.25    $3018.88
  2/23/99   180 Chevron    14250.50  16818.75    $2568.25
  4/30/97 -1170*Trump*     -9908.50  -7385.63    $2522.88
  2/20/98   260 DuPont     15299.43  17745.00    $2445.57
   1/8/98   425 3Dfx       10908.63   8712.50   -$2196.13

                              CASH   $9924.87
                             TOTAL $706164.87
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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