Rule Breaker Portfolio

Rule Breaker Portfolio
Volatility

By David Gardner

ALEXANDRIA, VA (Nov. 17, 1999) -- Volatility. What do you think of it?

Yesterday, the Rule Breaker Portfolio rose 5.24%. Today, it dropped 2.38%. Anyone who's followed our efforts in this space for any significant amount of time has come to recognize that such moves for the BreakerPort are actually more the norm than not. A fan of the stock market will know that the daily percentage moves of the overall market are, by comparison, Fred Astaire to our Michael Jackson. (Hey, I don't care what people say about my man Michael -- the dude can dance.)

You wanna slow-dance or boogey?

In this portfolio, we do the herky-jerk. We gyrate. We swing our hips as a matter of course. It doesn't make no never mind, and we don't tire looking at these numbers. Another day at the office, another day on the dance floor.

Volatility.

Volatility comes from the Latin: volare. To fly.

(Anyone remember that old Plymouth set of wheels? Volare. If you do, there's a 97% likelihood you also remember the television ad that featured -- who was it singing? -- the 1958 Domenico Modugno hit -- later redone in 1985 by David Bowie of all people for the movie Absolute Beginners -- which goes something like this: "VOH-LAAAAAH-RAY, oh oh! CAHN-TAAAAAAH-RAY, oh oh oh!" Though I'm not sure "Drive small the comfortable way" was an original lyric. But I digress.)

So anyway, these stocks fly. And for those of us who've spent a moment or two watching birds fly -- you know, away from the computer... nature and all that claptrap -- we know that birds fly up and they fly down (like today) too. But just as the distance and angle from which we watch the bird fly are significant factors in what we'd report about the bird, so too with the stock market.

Short-termers -- a large subset of people under which we could include daytraders, many CNBC devotees, a ton of money managers, and the guys who hang out at bricks-and-mortar brokerage branches and hit the quote boxes -- need volatility. Volatility for your short-termer is not an amusement, a bauble or a bangle or other plaything. It is a necessity. It's oxygen. A market or stock without volatility is a market or stock that suffocates the short-termer. Suffocates him dead.

Mind you, most short-termers essentially believe they can call the market. Trading off that volatility is a direct bet on one's ability to guess which direction the stock is headed over the next minute, or day. I have yet to meet someone with the ability to do that.

In fact, when Tom and I hosted CNBC's Squawk Box some weeks ago, I had the memorable -- we could almost say, timeless -- opportunity to ask on the air a chief market strategist of a Wall Street firm a question I've always wanted to ask: "Sir, do you believe that anyone can consistently, accurately, call the stock market?" That is a very Foolish question, in the sense that on behalf of many of you I was asking of the emperor whether he was wearing any clothes. This fellow -- clearly an amiable chap -- said, in so many words, flashing a fine smile, "No."

Your honor, I submit that as Exhibit B for the attention of the jury. (Exhibit A was a statement of common sense about how logic dictates that no one could consistently accurately call the stock market because such things defy prediction... plus, she'd be a trillionaire.)

Now on the other hand, the long-termer -- the Fool -- generally doesn't mind volatility. In many cases, this is because the long-termer often doesn't even know what happened on the market, as was the case for me all week until just now. (Been on the road. Been busy doing other things. Hey, I feel comfortable enough with my present portfolio for the next 25 years that I could pull a Rip Fool Winkle, sleep through the quarter century, and be confident I'll be a richer man in 2024.) I'm reminded of the very Foolish fellow who, after using Fool.com for 6 months, used his newfound education to decide that he would only visit online with us once every quarter, when he would check his portfolio once, and maybe post something to the boards. True story. This is the long-termer in action. Volatility means nothing to him, because he doesn't even notice it.

I do generally follow my stocks on a daily basis. I only trade once every several months, but I love the story of the stock market, and admittedly it's always fun to watch your portfolio rise 50% over the course of the past 11 months. (Last year was even more fun.) But I long ago gave up caring whether we ran up 4% on a given day, or lost 6%, or broke even.

To many a new Fool, a perusal of the Rule Breaker Portfolio may be an eye-opening experience. Shocked, the new Fool stares gape-jawed at the computer monitor, seeing yet another day of 3% volatility. Heck, 3% is about one-third of the market's traditional rise in a whole year. In Breakerdom, it's like a daily reality.

That's part of the reason the Rule Breaker Portfolio isn't for everyone. In fact, as I've said repeatedly in many media outlets and many contexts, I don't even think it's for most. For everyone, I can say for sure, this should be just about your last stop on the train ride of investing -- the stop that you ride through all the others to get to. And if you don't make it, that's fine. You'll do great. If you do, you've been through all the others and have learned much before your arrival.

Volatility. What do you think of it? I think following the daily moves of one's portfolio is rather like following the daily temperature highs and lows. My nose is not glued to The Weather Channel, I'm not about to move climates after a few days, and I wouldn't bet my savings or my future on whether it'll rain in the next hour or the next day. Certainly, it's fun to watch occasionally extreme changes in the weather. But it doesn't make for any extreme changes in my views or my life.

I figure I'm not the only one. In fact, in Fooldom I feel consonance with a lot of people. That's one of the reasons I love it so much.

Fool on.

-- David Gardner

What do you think?
Please post your thoughts about tonight's report on our Rule Breaker Strategy board. Alternatively, if you have ideas, analysis, or questions about a particular Rule Breaker company, pull up a chair at the roundtable discussion on our Rule Breaker Companies board.






Rule Breaker Portfolio

11/17/99 Closing Numbers
Ticker Company Dly Pr Chg Price
AMGNAMGEN INC1/8$91.13
AMZNAMAZON.COM-2 7/16$76.50
AOLAMERICA ONLINE-4 1/2$155.50
ATHMAT HOME CORP CL A-3/16$45.00
CATCATERPILLAR INC-1 7/16$55.38
CHVCHEVRON CORP9/16$96.56
DDDU PONT (EI) DE NEMOURS-1/4$62.25
EBAYEBAY INC-5 1/8$141.13
GTGOODYEAR TIRE & RUBBER CO-5/8$38.50
IOMIOMEGA CORP-9/16$4.31
SBUXSTARBUCKS CORP1/2$28.88
TDFX3DFX INTERACTIVE3/8$9.81

  Day Week Month Year
To Date
Since
8/5/94
Annualized
Rule Breaker -2.38% 3.11% 13.38% 53.93% 1,447.89% 67.90%
S&P 500 -.66% 1.05% 3.51% 14.76% 207.75% 23.69%
S&P 500(DA) -.66% 1.05% 3.51% 15.34% 222.00% 24.76%
NASDAQ -.72% 1.50% 10.21% 49.10% 353.97% 33.13%

Trade Date # Shares Ticker Cost/Share Price LT % Val Chg
8/5/942200AOL0.917$155.5016,855.62%
9/9/972640AMZN3.188$76.502,299.99%
5/17/951960IOM1.280$4.31236.80%
12/16/98580AMGN42.889$91.13112.47%
12/4/98900ATHM28.040$45.0060.48%
2/26/99300EBAY100.527$141.1340.39%
2/23/99180CHV79.169$96.5621.97%
2/23/99300CAT46.964$55.3817.91%
2/20/98260DD58.844$62.255.79%
7/2/98470SBUX27.955$28.883.29%
2/23/99290GT48.715$38.50-20.97%
1/8/98425TDFX25.667$9.81-61.77%

Trade Date # Shares Ticker Cost Value LT $ Val Ch
8/5/942200AOL$2,017.62$342,100.00$340,082.40
9/9/972640AMZN$8,415.03$201,960.00$193,545.00
12/16/98580AMGN$24,875.50$52,852.50$27,977.00
12/4/98900ATHM$25,236.13$40,500.00$15,263.88
2/26/99300EBAY$30,158.00$42,337.50$12,179.50
5/17/951960IOM$2,509.63$8,452.50$5,942.87
2/23/99180CHV$14,250.50$17,381.25$3,130.75
2/23/99300CAT$14,089.25$16,612.50$2,523.25
2/20/98260DD$15,299.44$16,185.00$885.56
7/2/98470SBUX$13,138.63$13,571.25$432.63
2/23/99290GT$14,127.38$11,165.00($2,962.38)
1/8/98425TDFX$10,908.63$4,170.31($6,738.31)
  Cash: $6,381.51  
  Total: $773,669.30  



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.