Rule Breaker Portfolio

Rule Breaker Portfolio
Get Thee to a Classroom!
Foolish courses abound...

By Selena Maranjian (TMF Selena)

ALEXANDRIA, VA (Oct. 18, 1999) --

A little learning is a dangerous thing;
Drink deep, or taste not the Pierian spring:
There shallow draughts intoxicate the brain,
And drinking largely sobers us again.

-- Alexander Pope

I think we probably all agree that the Fool is about learning. Learning to get out and stay out of debt. Learning to invest. Learning to save money in many varied endeavors.

But our site is so rich, and so full of all kinds of different features, that it can be hard to find spots where education takes a front seat to amusing and enriching. Instead, readers often end up gathering random insights.

Now, I happen to be a big fan of the randomly gleaned insight. For example, did you know that when the elderly fall and break a hip, it's usually because the hip broke first, causing the fall, rather than the fall causing the break? Did you know that when Europeans switched from the Julian to the Gregorian calendar in 1752, eleven days in September were "lost" -- and never occurred? (Explanation)

Despite the pleasures of serendipitous schooling, a more systematic approach will usually yield more effective learning, especially in regard to investing. It just helps to get into some nitty-gritty definitions, examples and formulas, at least for a while. You might think that you're learning all you need by reading a portfolio report and a Fribble every other day -- but you're shortchanging yourself. Here's just one example:

Ever wonder what "net profit margin" really is and where it comes from? Well, it's fairly simple. Grab a company's annual report and turn to its "Income Statement." The first item will be "Revenues" (sometimes called "Sales"). Notice that from this total of incoming funds, many things are subtracted, one after another (cost of goods sold, salaries, administrative expenses, interest expenses, taxes, etc.). By the time you near the bottom, you're looking at "net income." This is what's left after everything has been subtracted. It's essentially the company's profit.

To calculate net profit margin, you simply take net income and divide it by revenues. Let's look at Chevron's (NYSE: CHV) the last few years:

           Net Income  /  Revenues   =   Net Profit Margin
(in millions)
Chevron 1998    1,339  /  30,557    =  0.044   = 4.4%
Chevron 1997    3,256  /  40,596    =  0.080   = 8.0%
Chevron 1996    2,607  /  42,782    =  0.061   = 6.1%
This tells you that in 1998, for every dollar of sales that Chevron took in, it earned 4.4 cents in ultimate profit. You can also see how the number has been changing in recent years. This is far from enough information from which to draw any conclusions. But it should be enough to get you thinking of questions to explore. Such as:
  • How does Chevron stack up next to its competitors?
  • What was going on in 1998 to make the margin drop?
  • How likely is it that Chevron will be able to boost its margins?

Wasn't that little bit of learning exhilarating? Don't you feel [insert less annoying word than empowered here]? Aren't you eager to dig through some financial statements now? No? Well, that's OK. It's not necessarily the best first step. But by learning about little things like net profit margins, operating earnings, run rates, how to calculate sales growth, and so on, your examinations of companies will be much richer. (And your pockets will likely eventually be much richer, too.) Permit me now to point you to a few corners of Fooldom where you can learn some vital lessons in painless and often fun ways:

-- For starters, drop by our Fool School area online. That's where we house collections of articles that are purely educational, tackling topics such as "How to Value Stocks" and why buying and holding is the way to go. We've also got a great "Investing Basics" collection, which is a terrific first stop, along with the "13 Steps to Investing Foolishly." If you'd like to learn more about mutual funds, we've got a collection on that, too.

-- Direct e-mails. You can sign up here for a variety of free e-mail subscriptions. One of them, the weekly "Fool School: Investment Basics," offers definitions of investing terms, explanations of key topics, and answers to common questions. (Examples: reading a balance sheet, stock dilution, the earnings yield, roll-ups, margins, multiples, price-to-sales ratios.) You can also subscribe to e-mails about Fool portfolios, women and investing, Fool U. (college students), investment clubs, personal finance topics, and new product discounts.

-- Portfolio reports. While you'll learn much about the Rule Maker and Rule Breaker approaches in their respective nightly portfolio reports, there are other portfolios deserving attention. For example, a nice feature of the Drip Portfolio is that it frequently spends a month or two at a time studying an industry. You can dig through its archives to learn all about the oil industry, financial services companies, food and beverage companies, and more. The Foolish Four Portfolio reports often spend time teaching valuable concepts such as P/E ratios and dividend yields. The Boring Portfolio archives house many discussions of high-level investing topics, such as return on invested capital.

-- One exciting new Fool offering is Tom Gardner's investment seminar. I'll admit that, being a skeptical sort, I wasn't sure how well a seminar could be conducted online. But with the class just about over, I must admit that I was wrong. This is a very cool way to learn a lot about investing -- especially for those who are just starting to get their feet wet. I've seen it help many people in their thinking about the stock market. This is actually an offering that'll cost you some money ($18), but FoolMart will happily refund all your money should you not be satisfied -- so please don't let the money issue deter you. It's a laughable price compared to almost any other kind of course.

Let me explain briefly how the seminar works. For 20 weeknights in a row, participants receive an e-mailed lesson, often including some homework. Also included is access to some private message boards, where classmates share questions and revelations and where they can interact with Tom, each other, and some Fool staffers like myself who scurry around trying to help. I've been amazed at how much like a classroom these message boards feels. But don't just take my word on how helpful this seminar is. Listen to one participant, MaudeWright:

"This has been great. You have made the research needed for investing in a company suddenly fun. I used to put off looking at annual reports, but now I'll be eagerly waiting for them.... I also like the message boards because I can find out if others are having the same problems as me in interpreting some of the data and I don't have to sit in class to listen to any long-winded and boring questions. I can skip past them."

-- You can learn a lot on our message boards, too. Every Fool should explore the boards at least a little. (Have some reservations? I bet that I can shoot them down here.) We've got boards on reading financial statements, understanding jargon, and myriad other topics. Here's a handy message board tutorial for you.

-- Finally, a last good way to learn investing is through books. Many people other than Fools have written very helpful ones. (Phil Fisher, Peter Lynch, and Ben Graham come to mind.) FoolMart features a book department with recommended titles. Perhaps the most instructive Fool book is our Motley Fool Investment Workbook, which takes you all the way from personal finance and budgeting to how to make sense of annual reports. It does this in an interactive fashion, with many exercises throughout the book.

That's it, fellow Fools. Remember -- get thee to a classroom!

P.S. If you'd like to effortlessly fight hunger, pop over to www.hungersite.com and bookmark it. Visit and click on one button every day, and advertisers will buy food for the hungry on your behalf. A great deal!

Summary of key links in this article:

As always, share any thoughts about tonight's recap in our Rule Breaker Strategies board. And if you are looking into, or for, any new Rule Breaker prospects, the conversation always continues on our Rule Breaker Companies message board.






Rule Breaker Portfolio

10/18/99 Closing Numbers
Ticker Company Dly Pr Chg Price
AMGNAMGEN INC-3/16$80.56
AMZNAMAZON.COM-1$74.06
AOLAMERICA ONLINE1/8$110.13
ATHMAT HOME CORP CL A-2 1/4$38.56
CATCATERPILLAR INC-11/16$55.38
CHVCHEVRON CORP1$89.31
DDDU PONT (EI) DE NEMOURS5/16$63.75
EBAYEBAY INC-4 5/8$129.50
GTGOODYEAR TIRE & RUBBER CO-1/4$45.94
IOMIOMEGA CORP-1/8$3.25
SBUXSTARBUCKS CORP-7/16$21.56
TDFX3DFX INTERACTIVE1/16$8.13

  Day Week Month Year
To Date
Since
8/5/94
Annualized
Rule Breaker -.59% -.59% -1.52% 28.64% 1,193.62% 63.54%
S&P 500 .54% .54% -2.23% 2.03% 173.59% 21.33%
S&P 500(DA) .54% .54% -2.23% 2.60% 187.85% 22.52%
NASDAQ -1.56% -1.56% -2.08% 22.64% 273.40% 28.81%

Trade Date # Shares Ticker Cost/Share Price LT % Val Chg
8/5/942200AOL0.917$110.1311,907.96%
9/9/972640AMZN3.188$74.062,223.52%
5/17/951960IOM1.280$3.25153.82%
12/16/98580AMGN42.889$80.5687.84%
12/4/98900ATHM28.040$38.5637.53%
2/26/99300EBAY100.527$129.5028.82%
2/23/99300CAT46.964$55.3817.91%
2/23/99180CHV79.169$89.3112.81%
2/20/98260DD58.844$63.758.34%
2/23/99290GT48.715$45.94-5.70%
7/2/98470SBUX27.955$21.56-22.87%
1/8/98425TDFX25.667$8.13-68.35%

Trade Date # Shares Ticker Cost Value LT $ Val Ch
8/5/942200AOL$2,017.62$242,275.00$240,257.40
9/9/972640AMZN$8,415.03$195,525.00$187,110.00
12/16/98580AMGN$24,875.50$46,726.25$21,850.75
12/4/98900ATHM$25,236.13$34,706.25$9,470.13
2/26/99300EBAY$30,158.00$38,850.00$8,692.00
5/17/951960IOM$2,509.63$6,370.00$3,860.37
2/23/99300CAT$14,089.25$16,612.50$2,523.25
2/23/99180CHV$14,250.50$16,076.25$1,825.75
2/20/98260DD$15,299.44$16,575.00$1,275.56
2/23/99290GT$14,127.38$13,321.88($805.50)
7/2/98470SBUX$13,138.63$10,134.38($3,004.25)
1/8/98425TDFX$10,908.63$3,453.13($7,455.50)
  Cash: $5,954.23  
  Total: $646,579.90  



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.