Rule Breaker Portfolio The Cockroach Criteria

Public companies could do a lot worse than have the survival instincts of roaches -- the little beasts have been around for 325 million years. Will the companies you're investing in meet the cockroach criteria?

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By Tom Gardner
July 20, 2001

        "If there is a God that made all life forms, a particularly 
        rich blessing was bestowed on the roach, because it 
        got the best design of all." 

                    - Richard Schweid, The Cockroach Papers

The most remarkable and beautiful book I've read this year, ironically enough, describes the ways and means of the most detested of all living things: the cockroach.

Dark. Wet. Hairy. And fast. The cockroach has lived on planet Earth for more than 325 million years. That means it rose from evolutionary slime 320 million years before we did (that's an awfully long time without us).

If you're wondering where I'm heading here, think business analogy. As I read Richard Schweid's The Cockroach Papers, I couldn't help relating the growth model of the world's most enduring insect with that of successful public companies.

Although most companies wouldn't favor the comparison, the cockroach's exquisite architecture is built for survival and growth. It eats anything. It hoards food. It reproduces efficiently. And it can run like hell.

The roach magnificently combines super-growth with staying power. As investors, we can't help but note that very few corporations couple the two. The last five years of American business shows how easy it is to overestimate one at the expense of the other.

Survival without growth
Coca-Cola (NYSE: KO) is as permanent a fixture in worldwide business as there is. But for five dismal years now, Coke's sales and earnings have flattened. The company's taste for growth has dulled a bit; their shareholders (I among them) have suffered.

Growth without survival
The reverse is broadly true throughout the recent Internet and technology boom. Companies were engineered for growth, octupling their revenues in short order. They were quickly thrown, like dice, into the public markets, raising tens of millions of dollars. But most were simply accelerating their demise. They ate well; they died young.

Not so the cockroach. It eats and copulates and runs as well as any species or company around. Consider four critical elements of the cockroaches' (or any species' or any business') spread and survival.

1. Food
The scurrying, slimy little insect is the world's great omnivore. Schweid writes, "Cockroaches will eat glue, feces, hair, decayed leaves, paper, leather, banana skins, dead and living human beings, and warm sour beer.... They will eat their dead ancestors and their live offspring."

That feeding frenzy is the business equivalent of scavenging for revenues, any sort of revenues. General Electric (NYSE: GE), particularly under retiring CEO Jack Welch, has munched on any food it could find. GE is in the business of selling aircraft engines, lending money to consumers, broadcasting episodes of Friends, hocking hand blenders, financing heavy commercial equipment, designing water softeners... right on down to molding soft-white light bulbs.

2. Storage
And yet for all its foraging, the cockroach doesn't need food for at least 45 days. In fact, the little hoodlum can lose its head and survive for nine days. Liquid flows through its vessel. And digested meals sit in its fat body, available indefinitely as nutrients. What you see when you crush a roach with a shoe or a magazine or a spatula or the open palm of your hand, is a white-goo smear of its ivory blood and stored fat.

What's the business equivalent? you ask. Well, all that fatty guano in the roach is the cash that sits on the balance sheets of winning companies. As The Motley Fool Select notes this month, Berkshire Hathaway (NYSE: BRK.A) has $30 billion in cash and fixed income investments. Microsoft (Nasdaq: MSFT) has $40 billion set aside for a rainy day. Their cash is the digested fuel of tomorrow.
 
3. Reproduction
The old saw on profit in the business of media and entertainment says, "Create once, replay forever." Cockroaches were perfecting that through reproduction back in the Carboniferous Age. Today, they hook up end to end and mate for an hour. From it, the female roach stores enough sperm to last a lifetime. And that little whisker-legged pest, squeezed in a crevice below your kitchen sink, will give birth to over 10,000 baby roaches in the next year.

In business, those generations of nymphs and baby roaches are the armies of new employees bearing new products, scrounging for new opportunities around the globe. All those eggs are the next 1.2 million employees to go to work for Wal-Mart.

4. Defense
Finally, where would cockroaches be without defenses? A few would eat through refuse, store that for weeks, copulate once, and sleep all day. But most would get wasted by rats, and mice, and cats, and you and me.

Defense is the roach's distinguishing mark. The pest drops limbs in a fight. It can run at the human equivalent of 200 miles per hour. And its sensory tools are extraordinary. Schweid writes, "Just by entering a room, a person sets air in motion.... The cockroach's feelers register those air currents before the lights come on.... And the roach leaves off whatever it's doing and goes immediately into escape mode."

In business, a great defense helps your corporation live to play offense another day. Isn't it telling that cockroaches eat mostly inanimate waste and run from animate beings? The best companies don't beg for competitors. Microsoft is settling with the government.

Conclusion
No one wants to be compared to a roach. They live in huddled masses, scuttle around at night, eat crap, scare everyone, and are the primary cause of asthma. But they've been around for three million centuries. And even though the U.S. government spends $250 million try to extinguish them each year, their numbers are certainly growing.

It's extremely likely that roaches will be here long after our species vanishes. Which means they're more adaptive than any of our public companies. Which means it's not half-bad to have one of your companies compared to the cockroach. No doubt we can learn from them as investors. And so I close by recommending to you a wonderful, five-starred book on Amazon, my favorite read this year: The Cockroach Papers, by Richard Schweid.


- Tom Gardner

Tom Gardner killed a cockroach on his kitchen floor two weeks ago but hasn't seen one since. He holds Microsoft and Coca-Cola in the Rule Maker Portfolio, which is his moolah. To view Tom's other holdings, visit his profile. The Motley Fool is investors writing for investors.

Rule Breaker Portfolio


7/20/01 as of ~8:30:00 PM EDT

Ticker Company Price
Change
Daily Price
% Change
Price
AFFXAFFYMETRIX INC0.774.12%19.48
AMGNAMGEN INC1.222.05%60.71
AMZNAMAZON.COM0.492.97%16.98
AOLAOL TIME WARNER INC1.533.58%44.31
CRAAPPLERA CORP - CELERA GENOMICS0.802.58%31.80
EBAYEBAY INC2.403.73%66.80
HGSIHUMAN GENOME SCIENCES2.405.00%50.40
SBUXSTARBUCKS CORP0.814.17%20.25

Overall Return -- total % Gained (Lost)
  Day Week Month Year
To Date
Since
Inception
(8/5/1994)
Annualized
Rule Breaker3.11%(3.84%)(9.92%)15.32%435.52%27.27%
S&P 500(0.34%)(0.40%)(1.11%)(8.29%)164.15%14.98%
S&P 500 (DA)(0.33%)(0.38%)(1.05%)(7.90%)178.40%15.85%
NASDAQ(0.84%)(2.66%)(6.07%)(17.86%)181.79%16.05%

Our overall return stats understate the portfolio's actual returns; here's why. See the internal rate of return below for an accurate statement of our annualized returns.

Internal Rate of Return -- Annualized Rate of % Gained (Lost)
  Since Inception (8/5/1994)
Rule Breaker32.24%
vs. S&P 50014.26%

Trade Date # Shares Ticker Cost/Share Price Total % Ret *
8/5/944020AOL0.4544.315062.98%
9/9/971320AMZN3.1816.98520.76%
12/16/981160AMGN21.4460.71183.10%
7/2/98940SBUX13.9820.2544.88%
2/26/991145EBAY46.5566.8043.52%
6/21/01(1150)AFFX21.6019.489.83%
12/17/991260CRA39.7631.80(20.01%)
9/22/00560HGSI80.0550.40(37.04%)

Trade Date # Shares Ticker Total Cost Current Value Total Gain *
8/5/944020AOL$1,816.44$178,126.20$248,902.20
9/9/971320AMZN$4,204.20$22,413.60$57,720.50
12/16/981160AMGN$24,875.50$70,423.60$45,548.10
2/26/991145EBAY$53,294.44$76,486.00$23,191.56
7/2/98940SBUX$13,138.62$19,035.00$5,896.38
6/21/01(1150)AFFX($24,843.50)($22,402.00)$2,441.50
12/17/991260CRA$50,093.00$40,068.00($10,025.00)
9/22/00560HGSI$44,830.50$28,224.00($16,606.50)
 
Cash: 
Total: 
$24,861.92
$437,236.32
 

* 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.