Rule Breaker Portfolio

Rule Breaker Portfolio

Weapons Against Chaos
Ownership, and its benefits

By David Gardner

ALEXANDRIA, VA (Sept. 14, 1999) -- The Rule Breaker portfolio rose 1.65% today, a fine day, given that the S&P 500 was down. In the volatile year of 1999, we have been as high as up 80%, and we have seen some tremendous swings both ways.

But who am I kidding? The year 1999 may have been volatile for us, but so was 1998. And 1997. 1996 was also very volatile. By now, it should be evident that it's not so much the years that are volatile, or even the stock market... it's Rule Breaker investing. Rule Breaker investing is inherently volatile. It's exactly as we write in our first principle of managing this portfolio (all five principles are mandatory -- and brief -- reading for anyone not already versed in them, and they're listed right up there in the sidebar on the right, every single night):

We consciously take on lots of risk, believing that for experienced and Foolish investors, high risk will lead to high reward.

That says it, short and sweet. To maximize your long-term returns (which regular Fools know as our second principle), you will live through lots of volatility. This is exactly why Rule Breaker investing isn't for everyone, and in fact, isn't for most people. You have to understand your companies, you have to have a high tolerance for risk, and you have to be investing money that you won't need for any other purpose for at least five years, preferably decades.

This comes as old hat to those of us who have watched eBay's sojourn in our BreakerPort waters. Having bought the stock at $100 at the end of February, we have watched it double, then dive into the red (!), then leap back to its present gain of 54%. A 54% gain is no mean feat for any stock in any given year; rest assured, we are very happy with our shares of eBay. And we don't believe we or anyone else could consistently time this stock or any other so that we could have magically bought, gotten out at the top, and then gotten back in at the low. Not only do Warren Buffett and Peter Lynch agree with us, but so do academic surveys which continue to show the folly (small "f") of trying to time the market. So to get that 54% return (so far) in eBay, you had to watch glory turn to brief confoundment. You doubled your money... no, now you're in the red! In fact, if you're in my seat, you had to sit through the frustration of receiving notes as I did from a reader who wrote me in early August:

"YOU MORONS MADE MY FATHER BUY EBAY WITH YOUR BRAINDEAD RECOMMENDATIONS. HE LOST A LOT OF HIS SAVINGS. IF I EVER SEE ONE OF YOU ********* I WILL RIP YOUR HEAD OFF SCUMBAG!!!!!!!!!!!!!!!!"

(So many unFoolish misconceptions in there, it would take a while to rebuild -- or retrain -- this person's sad thinking.)

So, as I say, to be successful in the next five years as a Rule Breaker investor will take the same character and mindset you've used over the previous five, where you've had to live through the chaos.

A dear and now departed friend, the poet Mary Ewald, has a useful phrase for us to keep in mind. She says we all need Weapons Against Chaos -- things in our lives that we cleave to -- even actively use -- to maintain equanimity, perspective, focus.

What is the Foolish investor's Weapon Against Chaos?

Start with: A sense of ownership.

Most of the messages being sent by the financial services industry today either tell us that we can't manage our money ourselves, or they excite us with the possibilities -- the freedom, the power -- of trading online. In neither case do I consider these messages good or useful. Speaking to the former, you can certainly manage your money yourself; in fact, we think your life will be much the poorer (in many ways) if you fail ever to achieve this worthy end. Speaking to the latter, though, I hope you will not "trade" stocks, thinking them "mere paper" that might be "flipped" in two weeks. That is chaos, generally affecting those who drive down the road with their eyes in the rear-view mirror. When the road turns against them -- goes in a way they weren't anticipating -- they crash.

And so we get back to The Motley Fool's core belief that in buying stock, you are becoming a part owner of that business. It is not "mere paper," and we are not looking to "flip" our ownership in two weeks. Our mentality is that we are essentially partnering with that company -- marrying it, in a sense -- and like any good partnership or marriage, we go in with realistic expectations that some of our time together will be difficult, even painful.

This is the way we invest in the Rule Breaker portfolio, in the Rule Maker portfolio, in the Boring portfolio, and (in a sense) in the Foolish Four portfolio. Different investment approaches, all, but united in this regard.

For my friend Mary Ewald, herself balancing a brilliant academic career with a lifelong marriage and raising three wonderful sons, it was her beautiful poetry that provided her a Weapon Against Chaos:

Poems in the battle with changing armors waged
Against chaos and old night, weapons heard.


For you and me, probably not poets, probably investors, our weapon against the chaos of volatility, CNBC ticker lines, short-term prognosticators, and a world awash in news (most of it not newsworthy), our weapon is OWNERSHIP. Buy and hold. Punch your buy ticket only a few times in life, as Buffett counsels us, and when do you sell? You're buying only the best companies you know! You try for never.

Fool on,

David Gardner, September 14, 1999






Rule Breaker Portfolio

9/14/99 Closing Numbers
Ticker Company Dly Pr Chg Price
AMGNAMGEN INC-1 1/16$86.00
AMZNAMAZON.COM11/16$66.00
AOLAMERICA ONLINE7/8$91.00
ATHMAT HOME CORP CL A1/4$39.00
CATCATERPILLAR INC-1$58.44
CHVCHEVRON CORP-15/16$92.75
DDDU PONT (EI) DE NEMOURS-2 3/8$66.13
EBAYEBAY INC1/16$155.00
GTGOODYEAR TIRE & RUBBER CO-2 1/4$53.19
IOMIOMEGA CORP-1/8$3.25
SBUXSTARBUCKS CORP11/16$22.69
TDFX3DFX INTERACTIVE-5/8$9.31

  Day Week Month Year
To Date
Since
8/5/94
Annualized
Rule Breaker 1.65% -2.57% 3.14% 19.32% 1,099.84% 62.60%
S&P 500 -.58% -1.14% 1.20% 8.71% 191.51% 23.28%
S&P 500(DA) -.58% -1.14% 1.20% 9.29% 205.77% 24.44%
NASDAQ .83% -.65% 4.71% 30.81% 298.27% 31.04%

Trade Date # Shares Ticker Cost/Share Price LT % Val Chg
8/5/942200AOL0.917$91.009,822.58%
9/9/972640AMZN3.188$66.001,970.58%
5/17/951960IOM1.280$3.25153.82%
12/16/98580AMGN42.889$86.00100.52%
2/26/99300EBAY100.527$155.0054.19%
12/4/98900ATHM28.040$39.0039.09%
2/23/99300CAT46.964$58.4424.43%
2/23/99180CHV79.169$92.7517.15%
2/20/98260DD58.844$66.1312.37%
2/23/99290GT48.715$53.199.18%
7/2/98470SBUX27.955$22.69-18.84%
1/8/98425TDFX25.667$9.31-63.72%

Trade Date # Shares Ticker Cost Value LT $ Val Ch
8/5/942200AOL$2,017.62$200,200.00$198,182.40
9/9/972640AMZN$8,415.03$174,240.00$165,825.00
12/16/98580AMGN$24,875.50$49,880.00$25,004.50
2/26/99300EBAY$30,158.00$46,500.00$16,342.00
12/4/98900ATHM$25,236.13$35,100.00$9,863.88
5/17/951960IOM$2,509.63$6,370.00$3,860.37
2/23/99300CAT$14,089.25$17,531.25$3,442.00
2/23/99180CHV$14,250.50$16,695.00$2,444.50
2/20/98260DD$15,299.44$17,192.50$1,893.06
2/23/99290GT$14,127.38$15,424.38$1,297.00
7/2/98470SBUX$13,138.63$10,663.13($2,475.50)
1/8/98425TDFX$10,908.63$3,957.81($6,950.81)
  Cash: $5,954.23  
  Total: $599,708.30  



Note
The Fool Portfolio was launched on August 5, 1994, with $50,000. It was renamed the Rule Breaker Portfolio in October 1998. The investing strategy began with the first investments of the Fool Port and has evolved with time and experience. In July 2001, the portfolio began adding $12,500 each quarter (We missed Jan. 2002, so we added $25,000 in April 2002). We skip a quarter if we have enough uninvested cash or cash available in stocks we would prefer to sell to make new investments. All transactions are shared and explained publicly before being made, and returns are compared in each week's column to the S&P 500 (including dividends where noted) and the Nasdaq composite. For a history of all transactions, please click here.