Rule Breaker Portfolio

Rule Breaker Portfolio
Just Show Up!
A Foolish view to beating the pros, and the market

By Tom Gardner

Editor's note: The original version of this classic Fool column appeared on January 2, 1997.

ALEXANDRIA, VA (Oct. 22, 1999) -- Woody Allen has said that "90% of life is just showing up." I see no reason to expect the percentages to change much in the years ahead. I also see no reason not to apply this basic life principle to the world of finance.

Mediocre money management houses will, no doubt, continue to present themselves as Sovereign Kings in the years ahead, with their concern for the greater good exhibited most gloriously in non-numerical, full-color advertisements during televised events. Great money managers, of course, will continue to run contrary by preaching that 90% of investing is just showing up and being common sensical.

I believe Charlie Munger opined that a class designed to spell out Warren Buffett's entire investment approach to novice and veteran investors would take Mr. Buffett no more than two weeks to teach. Do you think the investment firms in Manhattan would be tickled to see Mr. Munger on Good Morning, America?

How about... every day of the year?!

Keeping our fingers crossed for the impossible, knowing that it won't happen, we need to reiterate today's point again ourselves: 90% of investing is just showing up.

That being the case, it still doesn't hurt to engage the ongoing complexities of the stock market. It is time that we all teach everyone in America that stocks have risen at a rate of nearly 11% per year over the 20th century. Not every year, but there's the average. Knowing that, we don't think you should pay any fees for market underperformance in the money that you have to invest over any period of time greater than three years. I suggest that you, friends, and family members write or call any of your mutual funds that have underperformed the market over the past three years. Request that your fee payments be returned. And demand that henceforth the fund charge is nothing higher than a 0.10% expense ratio during years that they lose to the market.

Does that sound unreasonable?

What seems radical in fact makes perfect sense to anyone who survived third grade. With Vanguard's S&P 500 Index Fund garnering a mere 0.20% in expenses for shadowing the market, why should other funds be paid considerably more for offering considerably less? Their pay should be linked to their performance.

It's a simple principle applied by thousands of companies of all shapes and sizes outside of the financial industry. Let's move the theory back onto Wall Street. Financial institutions regularly pressure the businesses that they invest in. "Do better or expect less." Is it not time for the clients of these financial institutions to apply the same logic, to ask for the same price-to-performance assumptions from The Firm? Shouldn't we expect that if they know enough about business to invest in and advise others, they apply the same theorems to their own (mutual fund and otherwise) operations?

This isn't a radical proposition. It isn't an original one, either. We here at Fool HQ think ourselves no more radical and no less duncical than the next Fool on the block. We think ourselves no less mathematically challenged than the average citizen, with no greater insights than your standard curmudgeon, living on a pond in the woods, thinking. The answer to the succeeding question seems as clear to us as it would to a child:

Should mutual funds and brokerage firms that
underperform the market over three-year periods
be paid more or less than the index fund?

Ninety percent of private investing is just showing up by investing in the S&P 500 Index fund, saving money, plowing it back into the market, and allowing the stock market to grow the growing base of your savings at a long-term rate of 11% per year.

But a Fool can do better.

It isn't so great an imaginative leap to posit that everyone in America can understand and employ the Foolish Four approach to high-yielding Dow stocks. I will endeavor here briefly to outline some of the Foolish Four's logical underpinnings and to review the performance numbers -- in hopes of defending the notion that all of America can grasp it, would benefit greatly from it, and consequently that The Foolish-Four Approach fits neatly into Mr. Allen's theorem: 90% of life is just showing up.

The Foolish Four approach holds the following:

  1. that very large companies whose stocks are out of favor are far more likely to bounce back than small companies whose stocks are out of favor;

  2. that high dividend yields attract income investors;

  3. that it is not unreasonable to believe that the popularity of this approach will only enhance the performance of the model, as it'll only give these companies greater access to capital (Soros, I think, would agree);

  4. During the 1973-1974 bear market, with stocks down 30%, the Foolish Four rose 40%;
Nothing terribly complex there. Let's look at some numbers:
                Fool-Four   S&P 500
 15-yr returns:   2263%      1084%
 5-yr returns:     328%       141%
 1-yr returns:      30%        20%
Those are pretty convincing returns. True, in 1996, you wouldn't have garnered The Rule Breaker Portfolio's 43% rate of growth, but you also wouldn't have endured the huge rise in spring, the huge decline in summer, and the healthy autumn recovery that this portfolio endured. Your Dow stocks would simply have grooved ahead, more like a snowplow than a sports car on ice.

For your edification, a thorough look at the Fool-4 Approach, at all of the Dow numbers, along with a daily report on the group, is available in our Stock Strategies area, one click away: The Foolish Four area.

To close today's report, let's review some 25-year performance numbers for various "investment" vehicles:
  1. State Lottery: - 50% per play
  2. Casino Games: - 5% per play
  3. High-fee brokerage firm: < + 7% per year
  4. High-fee mutual fund: < + 9% per year
  5. S&P Index Fund: +10.5% per year
  6. Dow 30 w/dividends: + 13.0% per year
  7. The Foolish Four: + 23.0% per year
Now let's look at the 25-year effects of each on a portfolio of $30,000 -- all figures are pre-tax:
                                $30,000 
                                     in
                               25 years

              State Lottery:         $0
               Casino Games:      $8322 
        Avg. brokerage firm:   $162,823
           Avg. mutual fund:   $258,692
             S&P Index Fund:   $364,064
           The Foolish Four: $5,305,778
These numbers occasion the final parting questions as we head toward 2000:
  1. Should politicians that support state lottery systems be allowed to walk around without handcuffs?

  2. Is it ironic that while casino advertising is regulated, LottoBucks can promote itself at every corner market?

  3. Would it have been a good idea to pay mutual funds handsome fees in order that they might earn you $100,000 less than the S&P 500 over a 25-year period?

  4. Is it unreasonable to close your eyes and see $5.2 million every time a professional money manager scoffs at your daring to manage your own money?

  5. Which should our nation hope for in 2000 -- more marketing dollars spent on the lottery or on The Foolish Four?

  6. Do we think the Communications Revolution is hurting or helping people in America?

  7. Do we think that the LA Times and the Chicago Tribune -- which have written aggressively in favor of the Digital World -- will be held in higher or lower regard than Dow Jones and The New York Times -- which have consistently berated online communications?

  8. If 90% of investing is just showing up, what's the other 10% about?
That is there for your taking, Fool... and perhaps it typically involves sharing. Share your thoughts on which charities the Fool should donate to this year. And enjoy!

Tom Gardner

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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

10/22/99 Closing Numbers
Ticker Company Dly Pr Chg Price
AMGNAMGEN INC1$81.13
AMZNAMAZON.COM-2 1/8$78.63
AOLAMERICA ONLINE-1 7/8$120.38
ATHMAT HOME CORP CL A-1 1/16$39.06
CATCATERPILLAR INC1/16$55.19
CHVCHEVRON CORP1/16$93.75
DDDU PONT (EI) DE NEMOURS15/16$64.81
EBAYEBAY INC-5 7/8$142.63
GTGOODYEAR TIRE & RUBBER CO-5/8$43.69
IOMIOMEGA CORPUnch.$3.13
SBUXSTARBUCKS CORP-1/8$23.38
TDFX3DFX INTERACTIVE1/8$8.44

  Day Week Month Year
To Date
Since
8/5/94
Annualized
Rule Breaker -1.53% 5.62% 4.64% 36.68% 1,274.48% 65.28%
S&P 500 1.41% 4.35% 1.48% 5.89% 183.96% 22.15%
S&P 500(DA) 1.41% 4.35% 1.48% 6.47% 198.21% 23.31%
NASDAQ .52% 3.10% 2.56% 28.45% 291.09% 29.88%

Trade Date # Shares Ticker Cost/Share Price LT % Val Chg
8/5/942200AOL0.917$120.3813,025.61%
9/9/972640AMZN3.188$78.632,366.66%
5/17/951960IOM1.280$3.13144.06%
12/16/98580AMGN42.889$81.1389.15%
2/26/99300EBAY100.527$142.6341.88%
12/4/98900ATHM28.040$39.0639.31%
2/23/99180CHV79.169$93.7518.42%
2/23/99300CAT46.964$55.1917.51%
2/20/98260DD58.844$64.8110.14%
2/23/99290GT48.715$43.69-10.32%
7/2/98470SBUX27.955$23.38-16.38%
1/8/98425TDFX25.667$8.44-67.13%

Trade Date # Shares Ticker Cost Value LT $ Val Ch
8/5/942200AOL$2,017.62$264,825.00$262,807.40
9/9/972640AMZN$8,415.03$207,570.00$199,155.00
12/16/98580AMGN$24,875.50$47,052.50$22,177.00
2/26/99300EBAY$30,158.00$42,787.50$12,629.50
12/4/98900ATHM$25,236.13$35,156.25$9,920.13
5/17/951960IOM$2,509.63$6,125.00$3,615.37
2/23/99180CHV$14,250.50$16,875.00$2,624.50
2/23/99300CAT$14,089.25$16,556.25$2,467.00
2/20/98260DD$15,299.44$16,851.25$1,551.81
2/23/99290GT$14,127.38$12,669.38($1,458.00)
7/2/98470SBUX$13,138.63$10,986.25($2,152.38)
1/8/98425TDFX$10,908.63$3,585.94($7,322.69)
  Cash: $5,954.23  
  Total: $686,994.60  



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.