Rule Breaker Portfolio Response to the Lamonts

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By Neil C. Bridge (aka Aeglias)
April 12, 2001

Dear Ian, Hannah, and Jacob:

I read your letter with interest, particularly the parts about your initial businesses. The ice-selling business reminded me of a time I tried to sell jugs of ice-cold water from the stream running by my house. This was before bottled water became the latest craze. Perhaps if I'd stayed with it I would have been rich by now.

I will try to give you advice in a logical order. The overall question in your letter seems to be "should we invest our money in our business or elsewhere?" You should, of course, put your money wherever you will make the most money. Deciding exactly where that is can be a challenge. Should you invest in stocks? Bonds? Index funds? In your own business? I cannot and would not try to tell you which of these places will earn the most return but I can say from having read your letter that I am highly impressed with your business skills. It appears you are in an excellent position in both your business and your investing situation:

  1. You have identified possible markets in which to operate (leeks, ice, vegetables, and handmade crafts) and rejected ones that proved unprofitable.

  2. You have managed to get free advertising for your business through the library and local fairs and festivals.

  3. You understand the art of putting a good spin on your product. When the Belgian Flag Throwers didn't show up at the Ommegang Brewery, the Belgian figures you were going to sell instantly became "puppets" and you still made a profit.

  4. You have a steady stream of income in the form of an allowance that does not depend on the performance of your business. This comes out to 208 dollars a year for Ian, 156 dollars for Hannah, and 104 dollars for Jacob (or 468 dollars per year total).

  5. You heard the Gardners talk about the advantages of low-debt companies and you seem to believe that advice is good. I notice that your company not only has no debt, but that it has 80 dollars in the treasury.

  6. Your company has excellent management. Each of you owns a part of the business and therefore each of you is trying to make it do well. I see from the letter that Ian is both treasurer and spokesperson (and a very well spoken spokesperson at that), which tells me that your business is pretty well organized.

  7. I tutor economics to make extra money and the P.S. part of your letter shows that you three have a better understanding of costs and revenue than do many students at my college. You understand intuitively that money you invest in other businesses is money you cannot use to cover costs in your own business.

  8. Time is the investor's best friend. Considering your ages, you are at an advantage to almost everyone who has read your letter.

If you invest the 80 dollars in your treasury in another company, you will have to pay a fee to do so. Even if the fee were very small, say 10 dollars; it would still represent a large percentage of the money you have to invest. Given that and the comments above, I suggest that you seriously consider investing in your own business.

That is the main advice I wanted to give you. I will use the rest of this letter to answer a few of the specific questions posed in your letter.

When can you use the money you make from investing, what good is the money if you just let it grow and don't use it? We can think about these questions together. As mentioned before, time is your best friend in investing. Think of investing as a tradeoff. Instead of thinking about investing money, think about investing what you could have bought with the money. By investing your 80 dollars in your business or someone else's, you give up what that money could buy today (say 3 or 4 Pink Floyd CDs). Why do you give up that money? So you can have more money for things in the future. 30 years from now, you could use your investment to buy much more (perhaps 300 or 400 Pink Floyd CDs). You can also think of the money as insurance. If something comes up in the future and you absolutely have to have some money, your investment will be there. As long as you invest money you don't really need, you will probably end up better off.

Should you invest at a certain time of the year? No.

How do you find out how much shares cost and how good a company is? Since you obviously have access to a computer, you can find out how much a share costs on The Motley Fool website by clicking on the "quotes and data" tab at the top. Then just put in the company's symbol (if you don't know it, you can look it up on the same page) and a little table will come up. The box on the left has the price for 1 share of stock (not including how much it costs to pay someone to buy it for you). If you don't have your computer, you can go to the business section of a newspaper and find the company's name on the page with all the small print. There is a column that has the price for a share. Unfortunately, I can't tell you how to know how good a company is. It's not because it's a secret or because I don't want to but because there are hundreds of things that can make a company good or bad. You already know some of these things from listening to the Gardeners and you can learn about more by reading books like I did or by researching on the Internet. The Motley Fool is made up of people who try to answer this very question, by the way, so it might be a good place to start.

I hope my advice helps answer some of your questions or at least gives you something to think about. Good luck on your business. Considering your apparent business skill, it would not surprise me if one day people (perhaps even myself) are considering investing in your business.

Sincerely, Neil C. Bridge (TMF: Aeglias)

Rule Breaker Portfolio

  Ticker Company Price
 Change
 Daily Price
 % Change
 Price 
  AMZN AMAZON.COM, INC. (0.35) (1.06%) 32.60 
  AOL AOL TIME WARNER INC. (0.05) (0.37%) 13.47 
  TREE LENDINGTREE INC (0.17) (0.79%) 21.37 
  EBAY EBAY INC 0.15 0.15% 97.63 
  MLNM MILLENNIUM PHARMACEUTICALS INC 1.90 15.21% 14.39 
 SHORT  SIRI SIRIUS SATELLITE RADIO INC 0.12 9.76% 1.35 
  SBUX STARBUCKS CORP (0.04) (0.17%) 23.10 
  AMGN AMGEN INC 0.35 0.57% 61.85 
 SHORT  GTRC GUITAR CENTER INC (0.35) (1.53%) 22.54 
  SPY SPDR TRUST;1 (0.2) (0.21%) 94.51 
      
  Trade Date # Shares Ticker Cost/Share Price  Total % Ret  
 09/09/97 1320 AMZN 3.20 32.60  930.29%
 08/05/94 4020 AOL 0.46 13.47  2,964.60%
 06/03/02 916 TREE 13.72 21.37  55.88%
 02/26/99 1145 EBAY 46.54 97.63  109.81%
 09/27/01 2260 MLNM 14.69 14.39  -2.00%
 SHORT 01/24/02 2500 SIRI 6.90 1.35  80.43%
 07/02/98 940 SBUX 13.98 23.10  65.37%
 12/16/98 1160 AMGN 21.44 61.85  188.51%
 SHORT 08/21/02 1000 GTRC 16.49 22.54  -36.77%
 04/24/02 290 SPY 110.16 94.51  -14.16%
      
  Trade Date # Shares Ticker Total Cost Current Value  Total Gain  
 09/09/97 1320 AMZN 4,220.20 43,032.00  38,811.80 
 08/05/94 4020 AOL 1,860.42 54,149.40  52,288.98 
 06/03/02 916 TREE 12,565.44 19,574.92  7,009.48 
 02/26/99 1145 EBAY 53,294.44 111,786.35  58,491.91 
 09/27/01 2260 MLNM 33,207.00 32,521.40  -685.60 
 SHORT 01/24/02 2500 SIRI 17,258.26 3,375.00  13,866.74 
 07/02/98 940 SBUX 13,138.62 21,714.00  8,575.38 
 12/16/98 1160 AMGN 24,875.50 71,746.00  46,870.50 
 SHORT 08/21/02 1000 GTRC 16,488.00 22,540.00  -6,068.00 
 04/24/02 290 SPY 31,945.00 27,407.90  -4,537.10 
Cash:573.54 
Total:390,320.51 


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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.