Rule Breaker Portfolio

<THE RULE BREAKER PORTFOLIO>

Branding, BABY!
The top 60 brands, two Breakers among them

By David Gardner (MotleyFool)

ALEXANDRIA, VA (June 23, 1999) -- The Rule Breaker Portfolio recorded a 1.57% gain Wednesday, recouping some of yesterday's -- and this month's -- losses. The Nasdaq gained 0.69% while the S&P 500 lost ground, giving away 0.21%. For the month, both remain well ahead of the battered BreakerPort.

Top contributors today were 4%+ movers Starbucks, @Home, and 3dfx. Also helping out, our Donald Trump short lost 5% of its value.

An interesting report came out yesterday from Interbrand Newell and Sowell. The company ranked the top 60 global brands, "based on a brand's geographic reach, profile in major market sectors and financial transparency."

Anyone familiar with Foolish investing -- and particularly, Rule-Breaking investing -- knows that branding is a critical component of what we look for in a good long-term investment.

But what is branding?

One of my very favorite 1999 reads has been Harry Beckwith's excellent book, Selling the Invisible. It's an undersized 200-pager that packs an incredible wallop of good marketing and business (and, by extension, investing) lessons. Beckwith defines a brand this way: "A brand is more than a symbol. In the public's eye, a brand is a warranty. It is a promise that the service carrying the brand will live up to its name, and perform."

He goes on: "A brand is even more important than a warranty. No warranty does enough, because no warranty compensates the warranty holder for the lost time, the frustration, and the inconvenience of suffering the problem and making the claim. The brand, then, becomes even more important because it is the closest thing to a guarantee that the customer will not need the warranty and have to endure the claims process.... The value of any brand rises or falls with each demonstration of the company's integrity."

Other views of brands involve the attractiveness of a name or packaging, the "household word" status of the name (presumably, what Interbrand's study was primarily testing), and, well, you might have another thought or definition yourself. What's clear to me, anyway, is that this is a critical component of locating a long-term winning business.

What I particularly love about brands is that most investors continue to underrate them -- in many cases, dramatically. So long as large numbers of people -- particularly, influential journalists -- think retail brands or service brands like Amazon's don't count for nothin', I think we're going to beat the market. That's why I write tonight's column with some mock hesitation. I don't want everyone to find out the secret to beating the stock market. OK, OK, you... but not everyone.

Seriously, though, those of us who believe in branding and its power can and should continue to reap market-beating returns by focusing our investing on branded companies, branded services, branded products. A cup of Starbucks, an Amazon book, an Iomega Zip drive, an AOL e-mail, accessing cable Internet @Home, a 3dfx Voodoo card, auctioning on eBay, you can see where we are putting our money. We'll continue to emphasize the power of branding in our Rule-Breaking investing. I think you should be doing exactly the same thing in your own investing, whatever form it takes.

Now, back to Interbrand. Here's the Top Ten list (quiz your friends):

  1. Coca-Cola
  2. Microsoft
  3. IBM
  4. General Electric
  5. Ford
  6. Disney
  7. Intel
  8. McDonald's
  9. AT&T
  10. Marlboro

The entire list is here.

Two companies jump out on that list, for me. Not surprisingly, they're two we have in our portfolio. Interestingly, neither even existed in any significant form just 10 years ago. They are AOL (#35) and Amazon.com (#57).

The lesson is perhaps obvious, but let me state it explicitly: Anytime we manage to find and invest in a company that quickly rises to be among the Top 60 global brands -- especially when we buy the company within 2-3 years of its inception or IPO -- we are probably going to make an aircraft-carrierload of money. Here's a quick quiz:

What have been the Rule Breaker Portfolio's top two investments, ever?

No surprise there: the two that are among the Top 60 global brands. Foolish investors, draw your conclusions.

Will this always work? No. It's just highly likely. Does this mean that these two companies are good long-term investments, starting today? No. But I personally think that they are. In fact, the more globally branded a company becomes, the harder it is to knock off by competitors, and the more opportunity it has for further expansion and success. Again, that's why a good brand is one of our six elements of Rule Breaking.

One company was, for me, conspicuously absent on the list. Starbucks. I guess Starbucks doesn't have enough of a global presence yet. (It's interesting to see that Amazon does.)

I find Starbucks to be perhaps the most interesting single investment we have in the portfolio right now. The company has assured the public that it will reveal a groundbreaking, billion-dollar-opportunity Internet strategy by the end of the present quarter. The end of the present quarter is June 30. That means Howard Schultz et al. have less than one week to make this announcement.

Starbucks has made recent investments in Talk City, and has launched its own magazine, called Joe. The company is trying something extremely ambitious -- it is trying to morph into a "digital lifestyle" (my phrase) company. That is really far afield from the sale of good coffee and ice cream.

Can Schultz do it? I wouldn't put it past him -- otherwise, I would probably sell my shares. Is it risky? Yes. Could it fail? Absolutely -- it could wind up looking pathetic. I must admit to not being much of a Joe fan, based on just a cursory look at the publication (I'm not a magazine reader -- we did have a good review of it by Palafo right here). It seemed forced. I don't see enough "there there" when I look at Starbucks as a potential media company. I mean, is this a company with a philosophy? Is there really a magazine here? ZeusFool, a huge Starbucks fan, posted this in our folder today. If you're a bear, you'll like it. If you're a bull or a Starbucks employee, consider it a challenge:

"Perhaps I've been around too long, but the idea of a Starbucks culture makes me barf. Manufactured hipness never flies. It becomes a joke. Like NIKE, their logo implies a certain modern feeling, but to try and stretch that into a lifestyle? This is why they experience some backlash when they break into certain communities. I hope they tread carefully with their culture plans."

Thus much for branding, for now. The final word shall never be writ.

Fool on!

-- David Gardner, June 23, 1999

06/23/99 Close
Stock  Change    Bid 
------------------ 
AMGN  +  1/4     53.25
AMZN  +  1/4    117.75
AOL   +2 7/8    112.25
ATHM  +2 3/16    56.44
CAT   -  9/16    59.63
CHV   +2 1/2     92.63
DD    -  13/16   66.81
DJT   -  1/4      4.44
EBAY  -1 3/4    146.44
GT    -  1/4     56.63
IOM   +  1/8      4.88
SBUX  +1 11/16   37.81
TDFX  +  5/8     16.25


             Day     Month  Year   History   Annualized 
      R-BREAKER  +1.57%  -5.41%  26.59% 1170.62%   68.33%
        S&P:     -0.21%   2.40%   9.03%  205.06%   25.67%
        NASDAQ:  +0.69%   5.17%  18.49%  260.76%   30.06%


    Rec'd    #  Security     In At       Now      Change
   8/5/94  2200 AmOnline       0.91    112.25   12250.77%
   9/9/97  1320 Amazon.com     6.58    117.75    1689.72%
  5/17/95  1960 Iomega Cor     1.28      4.88     280.74%
  12/4/98   900 Excite@Hom    28.04     56.44     101.27%
  4/30/97 -1170*Trump*         8.47      4.44      47.60%
  2/26/99   300 eBay         100.53    146.44      45.67%
   7/2/98   470 Starbucks     27.95     37.81      35.26%
  2/23/99   300 Caterpilla    46.96     59.63      26.96%
 12/16/98   580 Amgen         42.88     53.25      24.20%
  2/23/99   180 Chevron       79.17     92.63      17.00%
  2/23/99   290 Goodyear T    48.72     56.63      16.24%
  2/20/98   260 DuPont        58.84     66.81      13.54%
   1/8/98   425 3Dfx          25.67     16.25     -36.69%

    Rec'd    #  Security     In At     Value      Change
   8/5/94  2200 AmOnline    1999.47 246950.00  $244950.53
   9/9/97  1320 Amazon.com  8684.60 155430.00  $146745.40
  12/4/98   900 Excite@Hom 25236.13  50793.75   $25557.62
  2/26/99   300 eBay       30158.00  43931.25   $13773.25
  5/17/95  1960 Iomega Cor  2509.60   9555.00    $7045.40
 12/16/98   580 Amgen      24867.50  30885.00    $6017.50
  4/30/97 -1170*Trump*     -9908.50  -5191.88    $4716.63
   7/2/98   470 Starbucks  13138.63  17771.88    $4633.25
  2/23/99   300 Caterpilla 14089.25  17887.50    $3798.25
  2/23/99   180 Chevron    14250.50  16672.50    $2422.00
  2/23/99   290 Goodyear T 14127.38  16421.25    $2293.88
  2/20/98   260 DuPont     15299.43  17371.25    $2071.82
   1/8/98   425 3Dfx       10908.63   6906.25   -$4002.38

                              CASH   $9924.87
                             TOTAL $635308.62
 
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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