Rule Breaker Portfolio

<THE RULE BREAKER PORTFOLIO>

A Generation Grows Up
It's hardship testimony. Plus, AOL and Starbucks.

by Jeff Fischer (TMFJeff)

SERENDIPITY, USA (June 30, 1999) -- Stocks rejoiced after the Federal Reserve raised interest rates a quarter point, as was expected, and resumed a neutral bias toward further rate increases. This was the Fed's first rate increase in over two years. As we've said here for years, over the long term this stuff is just scenery along the highway, and certainly not worth stopping for. It makes this much sense: stocks fell on the fear that rates would rise. When rates did rise, stocks then rose in relief. And the Wise report this stuff in the most serious manner.

How amusing.

The final year of the 1900s is now half-gone. The year, let alone the final decade of this century, has brought remarkable change for the Internet connected -- change that baffles. For the unconnected, the change may be even more baffling. Long-entrenched businesses have been upset at the retail and wholesale level. Decade-long brand leaders have become also-rans. (Amazon has a stronger brand name than Barnes & Noble according to a recent study.) New language has emerged, starting in www and ending in .com. And, as with any great change, many people have made money.

It is official that Generation X, once branded as lazy slackers, has been saved by the Internet. Now the young generation basks in prosperity and holds the responsibility of building the future. In the early 1990s, when many Gen-Xers were graduating college, the job market was at a multi-decade low. In 1992, a bachelor of science degree in management or finance landed you a job managing a gas station, or it gave you an entry-level trainee position at a downsizing retailer, where you replaced a middle-manager.

Many graduates didn't accept these jobs and many instead moved back home. Many opted for graduate school. Many other graduates decided to accept neither a permanent job nor moving back home nor graduate school, and instead wandered the planet, job to job, or no job, as slackers, thereby making a name for this great generation.

Those bucolic days seem a lifetime ago. Fortune magazine hasn't run a cover story on lazy, nonconformist twenty-somethings in the workplace for several years. Instead, it now runs cover stories on billionaire twenty-somethings four years out of school and worth more than small countries. We had the opportunity to interview some young people who have succeeded via the Internet. The following is what they have to share with their generation and all generations...

Paul, Age 28. Net-software company founder.

Fool: Paul, can you please tell us your story?

Paul: Certainly. I graduated a few years ago at the age of twenty-five. I spent the last few years of college just surfing around the Internet and thinking about it. I was pretty confident I would work in the software industry. I studied computer science, so I had the background, plus I've been messing around on PCs since I was sixteen. Anyway, before I graduated, I spent some time building this shopping cart software. I finally sold it last year for a lot of money.

Fool: Can we ask how much?

Paul: About $20 million.

Fool: And what's next for you?

Paul: Well, you know, I'm already 28 and it seems like I've been waiting 100 years to finally have this -- this money, I mean. I worked for three years after college to finally achieve this. What they say is definitely true. There is nothing to prepare you for how hard life is outside of school. Really nothing. My parents always said that work and making money was hard, but I didn't think it'd be this difficult.

Fool: And so what's next?

Paul: Well, I bought my mom a nice house and I put some money away. I bought a big sports utility vehicle, too. And now I'm trying to think of new software to write, you know -- kind of like an author thinks. It's an art. You can't be creating all the time. You have to think. Sometimes for a long time. So, while I'm doing that, I'm thinking that golf is next. I've always thought that golf was an activity for much later in life. At this age, I wanted to be more active with sports -- rafting, hiking, biking, those things. But then I golfed a lot when I was working, and I found that it's nice to be outside at least. And you think a lot. You have to focus, but you can think. It's a focus sport. I like that. That's next for a while.

Fool: Do you have any thoughts for your fellow generation members?

Paul: Keep the faith. You'll get there eventually. It might take a few years to reach your goals -- I mean life is hard -- but you deserve it. Especially if you work at an online business, you should get millions.

Fool: Uh, okay. Thanks, Paul.

Sharon, age 26. Administrator at an online content company.

Fool: Sharon, can you tell us about yourself?

Sharon: Of course! I've been working for three years at a company that publishes on the Internet, and it's going really well. I moved to Silicon Valley from the East Coast in 1996, after school, and I landed this job right away and the pay keeps rising and I get stock options, too. It's been great. But it's not perfect. It's been hard, too -- all of this. I think our generation has it tough because change, you know, change is just... it's everywhere! But anyway, if you can adapt, you will survive. So I think our generation has been brilliant, sheer brilliant really. So many geniuses have emerged thanks to us.

Fool: Who?

Sharon: Who what?

Fool: What geniuses?

Sharon: All these online geniuses who use the Internet for things, to build and sell things and write things and stuff. You know. And everyone is making so much money. That can be hard, too. Some of my new friends out here have so much money now that it changes your life and it's hard to accept. It's really overwhelming. I don't know how everyone does it.

Fool: Do you know who created Mosaic? And where it was created?

Sharon: No, what?

Fool: Mosaic essentially launched the consumer Internet. It made Web browsing possible. After it was created, everyone began to build businesses based on it. Is that really genius, would you say? I mean the original invention is, yes. Quite so. Only a handful of people created it. But once something is invented, is leveraging it truly genius? Or is it common sense?

Sharon: Well.... Wait.... What? But not everyone can do it.

Fool: No.

Sharon: What's this about, anyway?

Hip-Hop Tommy, age 24. Day-Trader with a Day Job.

Fool: Hip-Hop Tommy, a pleasure to see you again. Last time we talked you were losing money on an eBay trade. How are you today?

Hip-Hop Tommy: Hang on a minute. Okay. The market did close. Yeah, hi. I'm great. I'm working now, though. I got a job at this Internet startup. I got a deal on this place. Through a friend. If this company can just go public I'll be vested. I could make more money than I would trading in the next three years. Plus, the bonus -- I still day-trade right here at work. I made... hang on... I made 54 trades today, looks like. Not nearly as many as usual, but not bad. I wonder if I made money.

Fool: Hip-Hop, we've asked you the following question before, but you couldn't respond. Perhaps you could today?

Hip-Hop: Sure.

Fool: How would you define your generation? What will history remember about these times? A network was built and filled with content. New ways of business emerged. Work changed. Communication changed. Peoples' past-times changed. But what will be your generations' defining legacy? Its willingness to help others so openly online, perhaps? Its willingness to build a new, close-knit world, together, in cyberspace?

Hip-Hop: ... Shoot. Looks like I didn't make any money today. Hang on. What was the question? Somebody's instant messaging me.

++Click++

Catch ya next time, Hip-Hop.

News and Coming Highlights

America Online(NYSE: AOL) announced that it will offer anyone who signs up for three years of CompuServe a $400 rebate on a low-cost personal computer made by eMachines. AOL moves fast. This news arrives one day after Microsoft (Nasdaq: MSFT) said it would offer new MSN Internet subscribers a $400 credit to buy a personal computer.

So, where is the dial-up Internet service provider (ISP) business headed? Will it be free in North America as it is in Europe? This will be a future topic here soon. For now, it isn't a burning issue anyway. Broadband access is the cat's meow on the horizon, and dial-up access is destined to be commoditized and see lower pricing whatever happens. Forrester Research estimates that AOL could snap up to 90% of the broadband DSL market. AOL will make money on many subscribers via broadband, and on all subscribers via commerce, advertising, and transactions. Meanwhile, Excite@Home is whipping the cable market into profitability, hopefully by Q4 of this year. Our ISP companies are long-term groovy in our minds.

Two weeks ago, Starbucks (Nasdaq: SBUX) announced a pact with Oxygen Media to develop a lifestyle-oriented Internet portal and cable television business targeting upscale women. Today, Starbucks said it would launch its own lifestyle portal selling coffee, tea, music and other products. The site, called Starbucks X (curiously enough), will exist by the holiday season. The portal will encompass the Joe magazine publishing venture that Starbucks has with Time Warner (NYSE: TWX), too, and it will handle the Oxygen Media venture as well.

At the same time, Starbucks shared that same-store sales rose 7% last month -- strong results -- and retail profit margins rose (recall the recent price increase). Before this news could cool, however, the company spilled the beans on an earnings per share (EPS) shortfall for the fiscal year. Due to slow growth of some business (perhaps the food business?), and due to the cost of its Internet venture, SBUX will post EPS of about $0.54 per share this year. The estimate was $0.60. Being long-term owners in the business, we need to trust management to more than compensate for the cost of new ventures in years hence.

For more reading, tonight Drip Port puts a price on Johnson & Johnson's (NYSE: JNJ) head.

Fool on!

06/30/99 Close
Stock  Change    Bid 
------------------ 
AMGN  +  15/16   60.88
AMZN  +9 1/16   125.13
AOL   +4 13/16  110.38
ATHM  +2         53.94
CAT   -1 1/8     60.00
CHV   +1 3/8     95.06
DD    +  5/16    68.25
DJT   +  3/16     4.56
EBAY  +10 1/4   151.00
GT    +1 1/4     58.81
IOM   +  5/16     4.94
SBUX  +1 1/4     37.56
TDFX  +  11/16   15.63


             Day     Month  Year   History   Annualized 
      R-BREAKER  +4.80%  -3.87%  28.65% 1191.22%   68.54%
        S&P:     +1.58%   5.45%  12.26%  213.74%   26.28%
        NASDAQ:  +1.67%   8.73%  22.50%  272.98%   30.81%


    Rec'd    #  Security     In At       Now      Change
   8/5/94  2200 AmOnline       0.91    110.38   12044.47%
   9/9/97  1320 Amazon.com     6.58    125.13    1801.81%
  5/17/95  1960 Iomega Cor     1.28      4.94     285.62%
  12/4/98   900 Excite@Hom    28.04     53.94      92.36%
  2/26/99   300 eBay         100.53    151.00      50.21%
  4/30/97 -1170*Trump*         8.47      4.56      46.13%
 12/16/98   580 Amgen         42.88     60.88      41.98%
   7/2/98   470 Starbucks     27.95     37.56      34.37%
  2/23/99   300 Caterpilla    46.96     60.00      27.76%
  2/23/99   290 Goodyear T    48.72     58.81      20.73%
  2/23/99   180 Chevron       79.17     95.06      20.07%
  2/20/98   260 DuPont        58.84     68.25      15.98%
   1/8/98   425 3Dfx          25.67     15.63     -39.13%

    Rec'd    #  Security     In At     Value      Change
   8/5/94  2200 AmOnline    1999.47 242825.00  $240825.53
   9/9/97  1320 Amazon.com  8684.60 165165.00  $156480.40
  12/4/98   900 Excite@Hom 25236.13  48543.75   $23307.62
  2/26/99   300 eBay       30158.00  45300.00   $15142.00
 12/16/98   580 Amgen      24867.50  35307.50   $10440.00
  5/17/95  1960 Iomega Cor  2509.60   9677.50    $7167.90
  4/30/97 -1170*Trump*     -9908.50  -5338.13    $4570.38
   7/2/98   470 Starbucks  13138.63  17654.38    $4515.75
  2/23/99   300 Caterpilla 14089.25  18000.00    $3910.75
  2/23/99   290 Goodyear T 14127.38  17055.63    $2928.25
  2/23/99   180 Chevron    14250.50  17111.25    $2860.75
  2/20/98   260 DuPont     15299.43  17745.00    $2445.57
   1/8/98   425 3Dfx       10908.63   6640.63   -$4268.00

                              CASH   $9924.87
                             TOTAL $645612.37
 
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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