Rule Breaker Portfolio

<THE RULE BREAKER PORTFOLIO>

$336,770.63 Poorer
Summer as Bummer

by David Gardner (DavidG@fool.com)

ALEXANDRIA, VA (July 27, 1999) -- Well, the Rule Breaker Portfolio sits below the market's averages for 1999. We are at present losing to the stock market. As frequently as we have written about being ahead of the averages, we are perfectly willing to admit when we are behind.

We are behind.

OK, not totally behind, yet. I see we're still up on the S&P 500 by a percentage point. Whatever! The point is the same: We have gotten whacked this summer. This point is also the same: We stay focused on beating the market over the long term.

Let's flash back. Summer hasn't yet begun. It's a few weeks past the eMeringue.com IPO, baseball just got underway, and investors are feeling really cheery. We too. It is April 26th, just three months ago. The Breaker Port is sittin' real high in the saddle, sporting a '99 year-to-date return of 80.97%. That's almost precisely 70 percentage points ahead of the S&P 500's 10.96%. Keep in mind that for the previous year recently concluded, we'd scored an annual gain of 199%, vs. 29%.

We are living a fairy tale.

And based on this April success, CNBC, Money magazine, and Barron's were all ringing my phone off the hook, hoping for an interview to highlight America's top-performing public portfolio.

OK, that IS a fairy tale. In five years of managing this portfolio, I haven't ever had anyone set up an interview to discuss our market-beating results. What do you think: Does it undercut their advertisers' messages too much, or are these media entities long-term thinkers uninterested in short-term results? The latter is a very Foolish viewpoint, but I'm somewhat hard-pressed to identify much Foolishness among their general editorial, so I'll go with "What is, undercuts their advertisers' messages too much, Alex?" and leave it at that.

(Unsurprisingly, when our portfolio has a bad few months, one or another article suddenly appears in the rags about how our portfolio is down, Foolishness doesn't work, etc., etc. Invariably, these articles are written one-way, without ever seeking our comment or viewpoint. The allure of this portfolio for many in the media world is the extent to which it does poorly!)

ANYWAY, back to April of this year. To review: Breaker up 81%, market up 11%.

Fast-forward to today: Breaker up 13%, market up 11%. The market hasn't budged -- hasn't BUDGED -- and we have fallen off a cliff!

What happened?!

Well, our holdings today are identical to those of that late April day, so let's look at the changes between then and now:

Stock    April     Now     %Diff
 
AMGN    68.25    74.56    +9.2%
AMZN   207.19   101.00   -51.3%
AOL    160.00    97.56   -39.0%
ATHM    80.29    50.94   -36.6%
CAT     62.00    60.13    -3.0%
CHV     95.44    91.56    -4.1%
DD      66.75    72.13    +8.1%
DJT      4.25     4.75   -11.8% (short position)
EBAY   209.00    99.56   -52.4%
GT      56.75    54.31    -4.3%
IOM      5.06     4.13   -18.4%
SBUX    34.31    24.94   -27.3%
TDFX    17.81    14.06   -21.1%

As you can see, Amazon.com and eBay have both been more than cut in half. (We're actually down on eBay overall, now, having earlier more than doubled our money.) AOL and Excite@Home are both down about 40%. When you combine those four holdings into one package and look at how much that package has lost, the result is (vrrrrrrrrm, szzzzzzz, wahwahwah... BING!):

$336,770.63

That's right. What was once $760,440.63 is now $423,670.00. That equates to a package decline of 44.3%. That is a sizable decline!

OK, so we today we lack over $300,000 that we once had, and we haven't lifted a finger. Are we phased? Are Jeff and I reworking all our investing ideas? Do we doubt eBay's future?

No, no, and no.

Are our minds open? Are we always looking for additional or better investment opportunities? Are we disappointed by the strong selloff?

Yes, yes, and yes.

To speak to that last question, we are certainly not unemotional. We're flesh and blood, much like you. We like to see our investments rise -- rise infinitely high for infinity. This is our goal. However, reality gets in the way. The market overshoots on the upside (and overshoots on the downside). The market loves eBay at $200 -- as do the analysts, the shareholders, the media, most people out there -- and then three months later seriously questions eBay at $100. You don't have to work hard to convince anyone that eBay is a good company at $200; when it gets cut in half, though, all the questions and the doubt and even some fear come out. That's the nature of human reaction. While we try to minimize our own emotion and make room for reason wherever possible, we Fools are fallible as anyone else.

The fact remains that most people are much more excited about investing when they shouldn't be (i.e. the market is high and due to fall back) and much more disappointed about investing when they shouldn't be.

Heck, I probably liked eBay more at $200.

As the wag says, the only certainty about the market is that it will be volatile. It has been. We've had a dramatic summer sell-off, for America's greatest growth companies, anyway. But because we own many of America's greatest growth companies, and because we truly believe these ARE America's greatest growth companies, we sit here and we do not flinch. The market will return. eBay will be $200 again. $200 and beyond. These are our beliefs, and yet we continue to evaluate additional investment opportunities because another investment truism is that capitalism always has something better coming down the pipe. As long as we preserve the amazing economic system we have in operation today, leave it free and enterprising and strong, you ain't seen nothin' yet, Mabel.

$336,770.63 up, or down.

A final note. I did an interview with Philanthropy magazine, which those interested in charity might enjoy reading. It's a brief one, done as a transcript. Here it is. Fool on!

-- David Gardner, July 27, 1999

07/27/99 Close
Stock  Change    Bid 
------------------ 
AMGN  +1 9/16    74.56
AMZN  -4 15/16  101.00
AOL   -2 5/16    97.56
ATHM  +4 3/4     50.94
CAT   +  1/8     60.13
CHV   -  13/16   91.56
DD    +2 3/8     72.13
DJT   -  1/8      4.75
EBAY  -4 13/16   99.56
GT    -  11/16   54.31
IOM     ---       4.13
SBUX  +  1/8     24.94
TDFX  +  9/16    14.06


                  Day     Month  Year   History   Annualized 
      R-BREAKER  -1.24% -12.32%  12.80% 1032.18   62.88%
        S&P:     +1.12%  -0.73%  11.45%  211.56%   25.66%
        NASDAQ:  +2.30%  -0.25%  22.19%  272.03%   30.23%


    Rec'd    #  Security     In At       Now      Change
   8/5/94  2200 AmOnline       0.91     97.56   10634.72%
   9/9/97  1320 Amazon.com     6.58    101.00    1435.13%
  5/17/95  1960 Iomega Cor     1.28      4.13     222.16%
  12/4/98   900 Excite@Hom    28.04     50.94      81.66%
 12/16/98   580 Amgen         42.88     74.56      73.91%
  4/30/97 -1170*Trump*         8.47      4.75      43.91%
  2/23/99   300 Caterpilla    46.96     60.13      28.02%
  2/20/98   260 DuPont        58.84     72.13      22.57%
  2/23/99   180 Chevron       79.17     91.56      15.65%
  2/23/99   290 Goodyear T    48.72     54.31      11.49%
  2/26/99   300 eBay         100.53     99.56      -0.96%
   7/2/98   470 Starbucks     27.95     24.94     -10.79%
   1/8/98   425 3Dfx          25.67     14.06     -45.21%

    Rec'd    #  Security     In At     Value      Change
   8/5/94  2200 AmOnline    1999.47 214637.50  $212638.03
   9/9/97  1320 Amazon.com  8684.60 133320.00  $124635.40
  12/4/98   900 Excite@Hom 25236.13  45843.75   $20607.62
 12/16/98   580 Amgen      24867.50  43246.25   $18378.75
  5/17/95  1960 Iomega Cor  2509.60   8085.00    $5575.40
  4/30/97 -1170*Trump*     -9908.50  -5557.50    $4351.00
  2/23/99   300 Caterpilla 14089.25  18037.50    $3948.25
  2/20/98   260 DuPont     15299.43  18752.50    $3453.07
  2/23/99   180 Chevron    14250.50  16481.25    $2230.75
  2/23/99   290 Goodyear T 14127.38  15750.63    $1623.25
  2/26/99   300 eBay       30158.00  29868.75    -$289.25
   7/2/98   470 Starbucks  13138.63  11720.63   -$1418.00
   1/8/98   425 3Dfx       10908.63   5976.56   -$4932.06

                              CASH   $9924.87
                             TOTAL $566087.68
 
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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