Rule Breaker Portfolio State of the Rule Breaker

As 2000 ends, the Rule Breaker reevaluates its mission, which includes beating the market and educating about its strategy, and it also considers how it can improve the Breaker strategy overall. The sell strategy will be re-addressed, as will the strategy of shorting stocks, among other aspects, all in hopes of improvement. Your suggestions are welcome.

Format for Printing

Format for printing

Request Reprints

Reuse/Reprint

By Jeff Fischer (TMF Jeff)
December 28, 2000

This year brought the Rule Breaker Portfolio its first negative one-year return since it was born -- and it is a large negative return, more than 50%. The Nasdaq is down nearly 40% in 2000, and 50% from its March high. With storm clouds all around us, it is a great time to reevaluate our mission and address the current state of the Fool's Rule Breaker Portfolio.

Our goals here are threefold, and each is equally important and all are interdependent. Our first mission here, present since the Fool launched, is to create and gradually develop a market-beating investment strategy. Our second mission, and another one that the portfolio has held dear since inception, is to outperform the major market indices over the long term. When we do, we outperform a majority of professionally managed mutual funds.

Third, and again closely related, we have a mission of sharing our strategy in a clear and Foolish way, so that any investor may understand and use the Rule Breaker strategy, or aspects of it, to long-term benefit.

So, our Rule Breaker mission is primarily threefold:

  1. Create and develop a great investment strategy from which individuals around the world can draw and learn.
  2. Beat the stock market indices over the long term, thereby showing how individual investors can well outperform a majority of professional stock fund managers.
  3. Share the Rule Breaker investment strategy publicly. Demonstrate clearly how this strategy works and doesn't work.

Alongside our hybrid mission, we Foolishly hold ourselves accountable for all of the investment decisions that we make and for our performance numbers; secondly, we want to learn and improve from our past mistakes; finally, we want to enjoy ourselves along the way.

So, how are we doing? As 2001 approaches, what are we doing right, and what needs improvement? Following are the Rule Breaker issues on my radar screen.

Past performance versus recent performance. Since the start, $50,000 here has grown 685% to $390,000, while the major stock indices have gained less than 250%. Our more recent performance lags, though. Part of this is due to the stock market's decline, but a large part of our performance slowdown is due to slow execution on new buys.

We were slow to buy eBay (Nasdaq: EBAY), Celera (NYSE: CRA), and Human Genome Sciences (Nasdaq: HSGI), even as we began to recognize these companies as Breakers months before we finally bought. Foolish investors don't rush, but we missed hundreds of percentage points here when we didn't need to. We're now working to be more efficient. As our principles state, we are normal investors who have separate and busy lives outside the stock market. However, we are now refocusing in order to buy companies that we admire as Breakers earlier rather than months later.

Reflection and accountability on mistakes. The fact that our portfolio is real money and reports daily numbers still makes it one-of-a-kind in the world of investing, so numbers-wise, our accountability is excellent. However, we want to be more accountable for our actions by writing about our mistakes more often and with greater thought. For example, we will further consider why Excite@Home (Nasdaq: ATHM) was a mistake for us. We should also reflect on our early successes more often and thoughtfully. What made Amgen (Nasdaq: AMGN), already an immense company, an excellent buy for us as recently as December 1998?

Sell-strategy improvements. We generally sell a stock when we find something better to buy, but our sell strategy must become more comprehensive if we're to avoid holding stocks too long -- such as when they're falling into penny-stock land and we're still looking for a new buy to replace it. We recently discussed our sell strategy, and we'll be working on it in early 2001, too.

Redefine the role of shorting stocks. When this portfolio launched in 1994, shorting stocks was 20% of the port's strategy. As we evolved to strict Rule Breakers, the role of shorting has faded. We eyed several great shorts the past year, but didn't act on them, unfortunately. We're eyeing more potential companies to short now, and we should redefine what role shorts play in our Rule Breaker port. That's another topic for 2001.

Objectives for each investment. We already agreed that we'll keep a current list of stated reasons for owning each company that we own, and we'll also set our overall expectations for each company publicly. We're working on new pages to hold this type of vital content in 2001.

The Rule Breaker is a work in progress that, if done well, will create an investment strategy that will stand the test of time and aid many Fools on their path toward financial independence. Today, we're still watching just the beginning of this young strategy! If you have any improvement suggestions for the strategy, please post them on the Rule Breaker Strategy board.

Rule Breaker Portfolio


12/28/00 as of ~8:30:00 PM EST

Ticker Company Price
Change
Daily Price
% Change
Price
AMGNAMGEN INC0.751.14%66.44
AMZNAMAZON.COM0.502.96%17.38
AOLAMERICA ONLINE(0.50)(1.40%)35.25
CRAAPPLERA CORP - CELERA GENOMICS2.697.90%36.69
EBAYEBAY INC2.567.27%37.81
HGSIHUMAN GENOME SCIENCES(0.63)(0.87%)71.56
SBUXSTARBUCKS CORP0.130.28%44.38

Overall Return -- total % Gained (Lost)
  Day Week Month Year
To Date
Since
Inception
(8/5/1994)
Annualized
Rule Breaker1.22%(0.88%)(8.53%)(50.78%)700.01%38.38%
S&P 5000.40%2.16%1.47%(9.19%)191.06%18.16%
S&P 500 (DA)0.38%2.06%1.40%(8.80%)205.32%19.05%
NASDAQ0.72%1.62%(1.55%)(37.15%)255.16%21.90%

Trade Date # Shares Ticker Cost/Share Price Total % Ret *
8/5/944020AOL0.4535.254322.12%
9/9/972640AMZN3.1817.38570.97%
12/16/981160AMGN21.4466.44209.81%
7/2/98470SBUX27.9544.3858.74%
12/17/991260CRA39.7636.69(7.72%)
9/22/00560HGSI80.0571.56(10.61%)
2/26/99600EBAY50.2637.81(24.77%)

Trade Date # Shares Ticker Total Cost Current Value Total Gain *
8/5/944020AOL$1,816.44$141,705.00$212,481.00
9/9/972640AMZN$8,408.40$45,870.00$63,285.70
12/16/981160AMGN$24,875.50$77,067.50$52,192.00
7/2/98470SBUX$13,138.62$20,856.25$7,717.63
12/17/991260CRA$50,093.00$46,226.25($3,866.75)
9/22/00560HGSI$44,830.50$40,075.00($4,755.50)
2/26/99600EBAY$30,158.00$22,687.50($7,470.50)
 
Cash: 
Total: 
$5,375.09
$399,862.59
 

* Our long term totals include both our realized and unrealized gains. For instance, we have sold portions of AOL and Amazon in the past, and those realized gains are included in our total returns for these stocks.



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.