Rule Breaker Portfolio

Rule Breaker Portfolio
Your Favorite Rule Breaker?
Name it, Fool

By Jeff Fischer (TMF Jeff)

JUPITER, FL (Nov. 1, 1999) -- The most substantial returns on a successful investment arrive, and continue to arrive, after the investment has aged many years and as it continues to age. In other words, most of the return on your investment dollar is generated at the tail-end of a long-term investment's life.

A little numerical example never hurts. Put the nearest pencil behind your ear and then continue!

If you invest $10,000 and it grows to become $100,000 in 20 years (10 times your money in 20 years, great job!), any 10% gain from that point onward will earn you at least $10,000 on paper. That is, of course, your entire original investment. When you started, a 10% gain was worth only $1,000 to you.

Assuming that your portfolio eventually grew to $500,000 in value, a 10% gain (which is less than the S&P 500's average annual return since 1926) would equate to $50,000 in added paper value -- five times what you started with. Meanwhile, a mere 1% uptick would add $5,000 to your account's value.

The longer that you can hold winning investments, the more that you can eventually earn on them. The Rule Breaker Portfolio has prospered on this principle at what I call Hypersonic Warp 3000 (2000 is passe already) Super Galactic Speed (patent pending).

The BreakerPort's $2,000 that it invested in America Online (NYSE: AOL) in August of 1994 has already grown to over $293,000, representing a total return of over 14,000%. Now almost any move in the stock's price can result in a daily gain or loss that is often much larger than the portfolio's $2,000 initial stake. Today is a case in point: $11,000 in new value was created on the portfolio's $2,000 investment base -- that's amazing after only five years. After a few decades, however, something like this is merely the reasonably hoped-for outcome. An investment's value will ideally dwarf your initial investment in it. This is compounding at work. Most people don't understand it.

A Washington survey released last week found that 25% of Americans believe that the government-run lottery is their best chance for achieving wealth. In other words, a quarter of people in our country believe that they have a better chance of getting struck by lightning than they do of living with significant monetary comfort. This is unfortunate to say the least. But this fact also represents a great opportunity. It represents an opportunity for Fools everywhere to help others learn about saving and the "surprise" of compounding.

Compounding is so subtle it's deceptive. Compounding means that if you invest just $50 a week for 40 years, and you earn 9% on the money annually, you'll end with over $1,026,850. Plus, that 9% return is below that S&P 500's average 11% annual return, a return which history says you could earn by investing in a simple index fund. At 11%, you'd have close to $2 million after 40 years in the scenario above. To calculate the potential value of your own situation over 10 years, 20 years, or however long, use the Fool's handy compoundulator.

The higher your average annual return, obviously, the greater amount that your money will compound. America Online and Amazon.com (Nasdaq: AMZN) have compounded at typically unheard of rates, but happily this type of success always swims -- along with a school of sharks -- in a Rule Breaker's sea of possibilities. Finding exceptional Rule Breakers while not getting bitten isn't easy. David Gardner presented six Rule Breaker criteria to help light an otherwise dark and vast water. It is upon Fools such as you and me (and David) to dive down and seek the best that the market has to offer.

My favorite Rule Breaker from an ocean of possible choices: eBay (Nasdaq: EBAY).

Why?

In a nutshell, eBay has an unlimited market potential. By not carrying specific inventory (not to mention not carrying any inventory at all), unlike most companies, eBay allows its business to in effect sell anything -- anything, that is, that the public wishes to sell. Therefore, the size of the world market for its business is difficult to fathom. Just as importantly, as eBay's market size reaches ever-long toward infinity (as the world arrives online and as our population grows), eBay's costs to run its business will (eventually) always shrink ever closer to zero as a percentage of sales.

This paradigm -- that of the business's potential size moving to infinity while its costs shrink toward zero, relatively -- makes the company the most attractive long-term Rule Breaker that I know. Now add eBay's dominance. Yahoo! (Nasdaq: YHOO) and Amazon follow eBay as numbers 2 and 3 in the person-to-person online auction industry. However, recent auction completion rates at the two largest competitors are estimated to be only 11% and 14%, respectively, which compares to 65% at eBay. Plus, eBay has three times the items for auction as Yahoo and at least six times as many as Amazon.

eBay is my favorite Rule Breaker. It presents high risk, but I believe that it has the potential to compound at a rate well above the S&P 500's average return over the next 10 to 15 years.

What is your favorite Rule Breaker? If you have a favorite and at least five minutes to spare, please post your favorite Rule Breaker company and its ticker symbol on the Rule Breaker message board. Also, please post an explanation as to why it's your favorite Rule Breaker. Your thoughts can be as brief as the explanation above (we all must do our own homework, after all), or as long as War and Peace. For additional Foolishness, please share your favorite vacation spot and why.

So, on the Rule Breaker Companies board, please post:

  1. Your favorite Rule Breaker company and its ticker symbol
  2. Why it is your favorite Rule Breaker
  3. Your favorite vacation spot and why
Please note: You may not be sure your favorite company is a Rule Breaker yet. That's still Foolish! Post it as a potential Rule Breaker and state why you believe in its potential. In the next Rule Breaker column that I write, we'll run down the complete list of companies that you post and see what we have.

Fool on!






Rule Breaker Portfolio

11/1/99 Closing Numbers
Ticker Company Dly Pr Chg Price
AMGNAMGEN INC9/16$80.31
AMZNAMAZON.COM-1 1/2$69.13
AOLAMERICA ONLINE11/16$134.00
ATHMAT HOME CORP CL A3/4$40.13
CATCATERPILLAR INC-11/16$54.63
CHVCHEVRON CORP1/8$91.44
DDDU PONT (EI) DE NEMOURS-2 3/8$62.06
EBAYEBAY INC7/8$137.00
GTGOODYEAR TIRE & RUBBER CO-2$39.31
IOMIOMEGA CORP-1/16$3.00
SBUXSTARBUCKS CORP-1/8$27.06
TDFX3DFX INTERACTIVE5/16$9.94

  Day Week Month Year
To Date
Since
8/5/94
Annualized
Rule Breaker 1.22% 1.32% 1.22% 37.33% 1,280.98% 64.99%
S&P 500 -.65% -.65% -.65% 10.16% 195.40% 22.95%
S&P 500(DA) -.65% -.65% -.65% 10.74% 209.66% 24.06%
NASDAQ .04% .04% .04% 35.34% 312.07% 31.01%

Trade Date # Shares Ticker Cost/Share Price LT % Val Chg
8/5/942200AOL0.917$134.0014,511.27%
9/9/972640AMZN3.188$69.132,068.62%
5/17/951960IOM1.280$3.00134.30%
12/16/98580AMGN42.889$80.3187.26%
12/4/98900ATHM28.040$40.1343.10%
2/26/99300EBAY100.527$137.0036.28%
2/23/99300CAT46.964$54.6316.31%
2/23/99180CHV79.169$91.4415.50%
2/20/98260DD58.844$62.065.47%
7/2/98470SBUX27.955$27.06-3.19%
2/23/99290GT48.715$39.31-19.30%
1/8/98425TDFX25.667$9.94-61.28%

Trade Date # Shares Ticker Cost Value LT $ Val Ch
8/5/942200AOL$2,017.62$294,800.00$292,782.40
9/9/972640AMZN$8,415.03$182,490.00$174,075.00
12/16/98580AMGN$24,875.50$46,581.25$21,705.75
2/26/99300EBAY$30,158.00$41,100.00$10,942.00
12/4/98900ATHM$25,236.13$36,112.50$10,876.38
5/17/951960IOM$2,509.63$5,880.00$3,370.37
2/23/99300CAT$14,089.25$16,387.50$2,298.25
2/23/99180CHV$14,250.50$16,458.75$2,208.25
2/20/98260DD$15,299.44$16,136.25$836.81
7/2/98470SBUX$13,138.63$12,719.38($419.25)
2/23/99290GT$14,127.38$11,400.63($2,726.75)
1/8/98425TDFX$10,908.63$4,223.44($6,685.19)
  Cash: $5,954.23  
  Total: $690,243.90  



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.