Rule Breaker Portfolio
Revolutions and Rule Breakers
The coming Biotech Era

By David Gardner

ALEXANDRIA, VA (Dec. 22, 1999) --

Wherever there is revolution, there will my investment dollars be.
-- David Gardner

I've quoted many others in epigraphs over the years, so I guess I'm entitled once in a while to quote myself. I'm 33. Near the middle of my tether. What the hay.

Wherever there is revolution, there will my investment dollars be.

Investors who truly understand the Rule Breaker approach -- whether by reading our book, checking out our portfolio management principles, or reading our message boards -- know something most people don't: that the way to maximize your returns as a stock market investor is to identify what are the most Rule-Breaking technologies and who's leading the way, and then to make yourself a part owner of those companies. Those who make the most money and (far more important) maximize their quality of life are those who make the right selections, and hold the winners. No cap gains taxes, no short-term guessing, no sitting in front of computer monitors all day every day.

It's not always easy. Inevitably, you're not always right. And sometimes, you're quite wrong! Take a look at our transaction archives to discover losing investments in ATC Communications, Sonic Solutions, KLA-Tencor, 3dfx, and a handful of Dow Jones Industrials. Some of our losers are huge -- at least three of the investments just listed were more than cut in half. No, it's not always easy.

In fact, even a Rule Breaker investor's winners are not always easy to hold, no worries, blindly, without noticing. (That's an approach we would never advocate. We believe in buying to hold -- we do not believe in buying blindly and automatically holding forever.)

America Online was one example for us. Observers look today at our gaudy five-year-return on the stock of 18,000% and some discount that, saying, "That was easy. America Online, of course, sure. But what would the portfolio look like WITHOUT America Online?" That last, generally said with a smile. (Here was one answer, by the way, last time we checked.)

Not only is this akin to asking how the Bulls would have done without Michael Jordan, but it also fails to respect the patience and value of holding. The wag's question implies that it was easy and automatic to see one's way to holding AOL all these years.

Really? In fact, the stock dropped 75% in the summer of 1996. And it's been cut in half more than once in just the past few years, having regularly seen declines of 25% or more. At every one of those points you had a combination of media entities printing headlines calling the company "America Offline" and a bunch of professionals, Wall Street brokerage firms, market timers, media types, saying America Online was going down, America Online was overvalued, America Online was going to get crushed by Microsoft, et cetera, et cetera.

I would love to find out among AOL's total outstanding share count of 2.2 billion how many shares have actually been held for five years. Or how about three, even? Outside of those held by company employees, I would guess less than 1%.

It isn't as easy as it looks to hold great stocks -- so many people are tempted to sell what is greatly profitable, or dump what is temporarily out of favor.

Let's stay on Rule Breaking, and return to today's epigraph: Wherever there is revolution, there will my investment dollars be. Do you invest this way?

You need not. Rule Breaker investing is, as I have so frequently written in the past, for a rather small minority of investors who (1) have the knowledge and interest, (2) can accept large amounts of risk, and (3) have a long time horizon. Breaker investing is especially for investors who actively look to learn from their mistakes. This will not be everybody. Perhaps, not many at all.

But if you do invest this way, I think you were investing in the Internet before the mainstream media began using (misleading) phrases like "Internet stocks." You were looking to buy Amazon.com well before Bezos was on the cover of Time magazine, looking to buy AOL back when the industry they were in was merely called "online services."

And if you invest this way, you are already looking very carefully today at biotechnology. You are reading up all you can on the subject. You have an insatiable intellectual curiosity anyway -- you probably love to read -- and you probably have a copy of Improving Nature? in one hand and the other hand on your mouse clicking through our Biotechnology message board. You are looking to gain all this knowledge to benefit you as an investor (benefit you greatly) and as a member of society. Because you better believe we're all going to be increasingly involved with biotechnology in our headlines and our lives and the questions that we ask and answers that we give for many years to come.

Mark my words: biotechnology will create more value in the next century than the Internet will, and I say that as a big Internet fan. I believe that the same buzz that we hear about "Internet stocks" today will transfer itself over time to "biotechnology stocks" (as it did briefly in the early '90s when the world first realized this was a viable technology, despite a lack of profits or evident results back then).

Interestingly, there were people on our message boards a while ago saying that we should compare our portfolio results not to the S&P 500, favorably, but to the Internet indices (in some cases, unfavorably). Not only did this not make sense at the time given that we held four Dow stocks and Starbucks and Amgen, but it never would make sense to compare our results to a sector index because what we're doing is not sector plays. We're investing in Rule Breakers, which span all industries and span all times and eras. Our attributes can be applied to any company or industry... with very few companies managing to pass the tests. (And ultimately, we're going to measure ourselves against the simplest, no-brainer, first step of stock market investing: the S&P 500 index fund -- which is the default measure for all of us, and for Wall Street as well.)

Of course, portions of our money will group in certain sectors at times... and why? Well, quite obviously because Wherever there is revolution, there will my investment dollars be. Revolutions are not an everyday thing, and neither do many happen concurrently. But with the Internet and (as I believe you'll see) with biotechnology, these are absolutely revolutions and you will absolutely see our money gravitate there... before (we believe and generally hope) most others' money. That's the art, not science, of Rule Breaking investing.

Our portfolio dropped a couple of percentage points today, versus an up market. Celera settled down a bit -- actually, a bit more than a bit -- dropping 11%. That, combined with double-dollar drops in AOL and Amazon.com, severely limited our ability to beat the market.

To close, I have a funny story to share with you about Celera. It comes from Philip Marston, a neighbor and Fool whose wit I've drawn off of once or twice in the past in this column.

Philip did this, and you can do what he did: Go to Yahoo! Finance (quote.yahoo.com). Type in "Celera." It will say "no quote." But it offers a link: "Try Symbol Lookup." So hit that, and then type in (again) "Celera." Go ahead! (After reading this column.) Notice what happens... it gives you the (incorrect) ticker symbol "XLA."

Now hit that and check the chart this week, both the volume and the price movement. Look familiar?

What to make of it? You make the call.

And have a very Merry Christmas and happy holidays whoever you are and whatever you believe.

Fool on!

Something we do care about: The Motley Fool's 1999 Charity Drive. Have you donated yet?






Rule Breaker Portfolio

12/22/99 Closing Numbers
Ticker Company Dly Pr Chg Price
AMGNAMGEN INC13/16$52.94
AMZNAMAZON.COM-2 3/16$97.69
AOLAMERICA ONLINE-2 1/8$82.88
ATHMAT HOME CORP CL A-1 7/16$45.69
CATCATERPILLAR INC-1$43.38
CHVCHEVRON CORP-11/16$84.75
CRAPE CORP - CELERA GENOMICS GRP-13 7/8$111.13
DDDU PONT (EI) DE NEMOURS-7/16$63.38
EBAYEBAY INC1/8$149.50
GTGOODYEAR TIRE & RUBBER CO11/16$27.19
SBUXSTARBUCKS CORP-3/16$25.50

  Day Week Month Year
To Date
Since
8/5/94
Annualized
Rule Breaker -2.20% 2.27% 12.47% 73.77% 1,647.44% 70.14%
S&P 500 .18% 1.05% 3.38% 16.82% 213.26% 23.63%
S&P 500(DA) .18% 1.05% 3.38% 17.40% 227.52% 24.66%
NASDAQ .67% 4.91% 18.02% 79.56% 446.71% 37.11%

Trade Date # Shares Ticker Cost/Share Price LT % Val Chg
8/5/944020AOL0.460$82.8817,931.46%
9/9/972640AMZN3.188$97.692,964.69%
12/16/981160AMGN21.444$52.94146.86%
12/4/98900ATHM28.040$45.6962.94%
2/26/99300EBAY100.527$149.5048.72%
12/17/99630CRA79.513$111.1339.76%
2/20/98260DD58.844$63.387.70%
2/23/99180CHV79.169$84.757.05%
2/23/99300CAT46.964$43.38-7.64%
7/2/98470SBUX27.955$25.50-8.78%
2/23/99290GT48.715$27.19-44.19%

Trade Date # Shares Ticker Cost Value LT $ Val Ch
8/5/944020AOL$1,847.65$333,157.50$331,309.80
9/9/972640AMZN$8,415.03$257,895.00$249,480.00
12/16/981160AMGN$24,875.50$61,407.50$36,532.00
12/17/99630CRA$50,093.00$70,008.75$19,915.75
12/4/98900ATHM$25,236.13$41,118.75$15,882.63
2/26/99300EBAY$30,158.00$44,850.00$14,692.00
2/20/98260DD$15,299.44$16,477.50$1,178.06
2/23/99180CHV$14,250.50$15,255.00$1,004.50
2/23/99300CAT$14,089.25$13,012.50($1,076.75)
7/2/98470SBUX$13,138.63$11,985.00($1,153.63)
2/23/99290GT$14,127.38$7,884.38($6,243.00)
  Cash: $359.36  
  Total: $873,411.30  



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.