Rule Breaker Portfolio

Rule Breaker Portfolio
Breaking Rules in Every Age and Context

By David Gardner

ALEXANDRIA, VA (Nov. 23, 1999) -- The Rule Breaker portfolio faked right while the market went left Tuesday. Our assets rose 1.67% in value, while the S&P 500 and Nasdaq posted similar numbers, but in the red.

In addition to an 8% rise in eBay, more immediately noticeable was that America Online split its stock today. I had forgotten about this. As I tapped into my My Fool page to see how the BreakerPort was doing this morning, I was briefly shocked to see AOL down 49%!

"Ah, the split," I realized. So I went into my My Portfolio page and adjusted the AOL holding for a 2-for-1 stock split. (Don't know how to do this? From the My Portfolio Page, click Help in the upper right corner to get an FAQ with the answer.)

I split our cost basis, which read "$29/32," down to our new cost basis: $15/32. "People will think we bought a penny stock," I thought. I also thought: "That is the cost basis of a long-term investor."

I got a note following yesterday's report from a guy who said, "Hey, you should rename this portfolio 'the Internet Portfolio' because your portfolio, just like Internet sector funds, is basically a pure play on the Internet. Your top three stocks are AOL, Amazon.com, and eBay. Gimme a break."

With all due respect, this is shortsighted. Why? The Rule Breaker portfolio goes wherever rules will be broken. You might well find this portfolio holding more biotechnology than Internet technology within three years. Does that mean we should then rename it again, or use a new index benchmark? And in the early 1990s, before the Internet existed in any meaningful consumer sense, we would have owned a spate of consumer non-durable companies that were changing the world right alongside "computer networking" stocks, doing same.

For those who have read Rule Breakers, Rule Makers, they know that Wal-Mart was a Rule Breaker, as was Nucor in the steel industry, just as I believe today that Starbucks is a Rule Breaker. The concept of the Rule Breaker is a business and investing concept that is timeless in its relevance and significance; our Rule Breaker concepts apply to the business and society of every age in every context. Take a look at our portfolio in any given year and you may find a preponderance of investments in a certain industry, or technology, what have you. Chances are, it'll look different the year after, or the year or two after that.

We are investing in Rule Breakers, in any age. It just so happens that at the end of the 1990s companies that are using the Internet to revolutionize the way business is done are the Rule Breakers du jour, or de l'annee, or de la decade, as it were. Even, du siecle.

I spoke to an investment club in Fool HQ today which, among some other questions, asked whether it was problematic to hold too many "tech stocks." Their debate within their club is one that goes on in many investment portfolios in America, and yet I don't see a meaningful debate, here. If you've read the companion guide to our Internet Report or if you read my article in the new Motley Fool Monthly just out this week, you'll see that I reject the phrases "tech stocks," "Internet stocks," et cetera. I do not find these meaningful distinctions because most companies today use technology within their products or services or processes, making any such exclusive class of "tech stocks" amorphous. It is impossible to define what should be included or excluded.

Same for "Internet stocks." Is Dell an Internet stock?

The so-called "dot-com" companies appear to be flooding our various media with their "dot-com" commercials, but do you think this is just a fad or a wave? Many do. I don't. I see the increasing likelihood that virtually all TV, radio, and print ads will include dot-com URLs now and forever. I can't find any compelling reason NOT to include your "dot-com" in your ad. What we're seeing is a sustainable new reality, not just a strange calendar-fourth-quarter of advertising.

So to that investment club I say, "Almost everything is a tech stock, and almost everything is turning into an 'Internet stock,' and so don't concentrate on diversifying in and out of 'tech' or 'Internet' because you'll be asking the wrong questions. Concentrate instead on becoming part owners of 10-15 great businesses over the next 25 years."

And so this is my long-term thinking for the fellow who thinks we should rename our portfolio. Our Rule Breakers often use similar (or competing) technologies, but anyone who tries to lump together America Online (a dial-tone company), Amazon.com (a retailer), and eBay (person-to-person auctions) is lumping together three vastly different business models under the rather useless and misleading rubric "Internet." I prefer the more useful rubric "Rule Breaker."

To repeat the primary point, made once earlier: Our Rule Breaker concepts apply to the business and society of every age in every context.

Let's shift gears, to close. We spend a lot of time talking about and teaching how to invest your money to grow it. You succeed in this endeavor by locating businesses that will create huge amounts of value in its customers' lives, and becoming a part owner of those businesses.

As I suggested in a Philanthropy Magazine interview a few months ago, I believe we will see an increasing number of solutions to society's problems come from for-profit entities. We will see capitalists creating profits (and therefore vibrancy and self-sustaining strength) in whole areas of society once thought off-limits to entrepreneurs. Education is a good example.

But there will always be room for some non-profits that do excellent, needed work providing solutions in aspects of our lives that no one has figured out how to make a profit on. That is the value of the not-for-profit industry (which I do think of as an industry), and each year we as a Motley Fool community come together to give money to the very best of these enterprises.

Two years ago we raised more than $100,000. Last year, we raised $200,000. This year involves you and me and your fellow Fools in our greatest opportunity yet: to donate a portion of the profits we're all making to five of the best not-for-profits in the world today. Following a rigorous process of selection that involved so many of you, the Fool community at large, we have together came up with a short list of Foolish causes that represent our way of thinking on some of the best philanthropy being practiced today. We call it Foolanthropy.

Today, our Fool Charity Drive '99 begins. I hope you'll take a few minutes to read through our Foolanthropy page, and even more I hope you will contribute. Whether it's $1 or $100,000, I would love to see everyone in Fooldom -- and many of those outside it! -- contribute to our Foolish drive. You can donate stock (the most Foolish way to give), too! To find the list of our 5 Foolanthropic beneficiaries this year and get started, click here.

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

11/23/99 Closing Numbers
Ticker Company Dly Pr Chg Price
AMGNAMGEN INC-5/8$47.56
AMZNAMAZON.COM1/4$81.75
AOLAMERICA ONLINE9/16$84.25
ATHMAT HOME CORP CL A-3 5/8$53.38
CATCATERPILLAR INC-1/16$50.19
CHVCHEVRON CORP-1 1/2$89.63
DDDU PONT (EI) DE NEMOURS7/16$60.63
EBAYEBAY INC13 1/4$167.56
GTGOODYEAR TIRE & RUBBER CO-13/16$35.25
IOMIOMEGA CORP-1/8$3.88
SBUXSTARBUCKS CORP-3/4$27.00
TDFX3DFX INTERACTIVE3/16$8.88

  Day Week Month Year
To Date
Since
8/5/94
Annualized
Rule Breaker 1.67% 4.79% 21.28% 64.66% 1,555.81% 69.77%
S&P 500 -1.15% -1.22% 3.06% 14.27% 206.42% 23.51%
S&P 500(DA) -1.15% -1.22% 3.06% 14.85% 220.68% 24.57%
NASDAQ -1.46% -.78% 12.69% 52.46% 364.17% 33.57%

Trade Date # Shares Ticker Cost/Share Price LT % Val Chg
8/5/944400AOL0.459$84.2518,273.13%
9/9/972640AMZN3.188$81.752,464.70%
5/17/951960IOM1.280$3.88202.63%
12/16/981160AMGN21.444$47.56121.79%
12/4/98900ATHM28.040$53.3890.35%
2/26/99300EBAY100.527$167.5666.68%
2/23/99180CHV79.169$89.6313.21%
2/23/99300CAT46.964$50.196.86%
2/20/98260DD58.844$60.633.03%
7/2/98470SBUX27.955$27.00-3.41%
2/23/99290GT48.715$35.25-27.64%
1/8/98425TDFX25.667$8.88-65.42%

Trade Date # Shares Ticker Cost Value LT $ Val Ch
8/5/944400AOL$2,017.62$370,700.00$368,682.40
9/9/972640AMZN$8,415.03$215,820.00$207,405.00
12/16/981160AMGN$24,875.50$55,172.50$30,297.00
12/4/98900ATHM$25,236.13$48,037.50$22,801.38
2/26/99300EBAY$30,158.00$50,268.75$20,110.75
5/17/951960IOM$2,509.63$7,595.00$5,085.37
2/23/99180CHV$14,250.50$16,132.50$1,882.00
2/23/99300CAT$14,089.25$15,056.25$967.00
2/20/98260DD$15,299.44$15,762.50$463.06
7/2/98470SBUX$13,138.63$12,690.00($448.63)
2/23/99290GT$14,127.38$10,222.50($3,904.88)
1/8/98425TDFX$10,908.63$3,771.88($7,136.75)
  Cash: $6,381.51  
  Total: $827,610.90  



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.