Rule Breaker Portfolio Rule Breaker Port News

After launching in August 1994 as the original Fool Portfolio, it's bittersweet to see the Rule Breaker Port close its doors. But the strategy will live on and thrive at the Fool. We simply are no longer keeping the strategy tied to real money because our current stock-picking content competes with it and we have new content plans on the near horizon.

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By Jeff Fischer (TMF Jeff)
February 18, 2003

As The Motley Fool announced today, we will be closing our real-money portfolios, which include Rule Breaker, Rule Maker, and Drip. When we started the Fool Portfolio in 1994, we were the only ones in America publicly managing money in real time, with full accountability, and announcing trades in advance.  We're proud of it.

So why close these pathbreakers down? We begin to explain why in today's letter from Tom and David Gardner. In this space, we'll delve deeper into what we're doing, why we're doing it, and what the future holds.

The nuts and bolts of the matter are these: In two weeks, this portfolio of stocks will no longer be presented and written about as a column. The portfolio and its past columns, trades, and returns will remain on the site, in archived and mothballed areas, but the portfolio as an entity will end. The Rule Breaker strategy will live on in future columns and Motley Fool research products, and it will continue to be discussed on our boards. So, the strategy itself (and its information) will remain "live" on the site and in our writing. Only the real-money "basket" of strategy stocks is being closed.

Here are answers to some questions you may have.

Why are you closing the portfolios now?
Last year, we launched Motley Fool Stock Advisor, a monthly newsletter by David and Tom Gardner. It has been very successful, both in attracting subscribers and choosing stocks. Both brothers are beating the S&P 500. As of this month, each brother has chosen 11 different stocks in the newsletter. Of those, only three of David's 11 picks are also in the online Rule Breaker Portfolio, and only one of Tom's 11 picks is in the online Rule Maker Portfolio.

So, we've had to work hard to maintain four portfolios of different stock picks and do it well. But we don't want to keep expending our combined resources in this divergent yet limiting way.

Additionally, our research product, The Motley Fool Select, grew steadily more popular in the last year. In Select, those of us writing the Fool's online portfolio columns (Tom Jacobs, Matt Richey, Bill Mann, Zeke Ashton, and I) present three new stock picks per month. As you can imagine, it takes a lot of research each month to find three stock ideas of which we're confident. Again, we don't want to keep expending energy in different directions and to different "portfolios" -- Select representing yet another one.  

This is a decision to better serve our community of customers, who come to us through more routes than ever before -- including our newsletters, radio show, and newspaper column. Fear not, though. We will continue to have just as much daily content on Fool.com -- in fact, we'll have even more.

Does the stock market performance have anything to do with this?
No, it doesn't. The timing of our port closures is tied to the success of Motley Fool Stock Advisor, Motley Fool Select, and a revamp of our free online content that we believe will be a significant improvement come March.

Are you saying this strategy doesn't work? Isn't successful? Sucketh?
No, ma'am and sir. The Rule Breaker strategy has been very successful for us in beating the stock market and it will live on. It plays a large role in The Motley Fool Select, and it continues to guide David in his monthly choice in Motley Fool Stock Advisor. Additionally, we'll write about and reference the Rule Breaker (as well as the Rule Maker and Drip) strategy in many of our free daily online investing columns that start in March.

Since that original Fool portfolio, we've also tried many other real-money learning experiments, including Running With the Market, Boring Portfolio, Harry Jones, Retiree Portfolio, Workshop Portfolio, and the Foolish Four Portfolio. In each case we've learned a great deal, much of it from you, our community of Fools, who have worked alongside us each day to better craft our approach towards investing.

These grand experiments, while beautiful in so many ways, have also been less than perfect. Truth be told, Rule Breaker and Rule Maker aren't actually portfolios in the normal sense of the word. They are high-octane models for employing a very specific type of stock selection that would help you form a portfolio.

I really liked seeing your money on the line. Is this the end of that?
No way! In a financial world where investing performance too often gets swept under the rug, The Motley Fool has always held accountability dear, and always will. The portfolios are not the only place we've been accountable. Each of our columnists has always been, and will increasingly be, held accountable for the stock opinions they communicate. And because we often write about companies we own, our real money is often on the line.

As we move toward a columnist-based format (rather than a more limiting strategy-based format), our writers will write online investing columns every week, employing whatever investing strategy is most appropriate, creating new ones, and writing about companies they believe in or believe you should avoid. Each writer has a profile that shows the stocks personally owned, so you will always know whether that writer has money on the line or not. Plus, writers will regularly review their opinions and show how they are doing.

So, instead of being held accountable for just a few strategies, we're ratcheting up the accountability of each individual Fool writer -- and for whatever strategies they employ.

I liked the interactive learning here. What about that?
Interactivity, another core Foolish value, will certainly continue between each columnist and readers, no matter the strategy they're writing about. As always, you can discuss ideas with our writers and your fellow readers on our discussion boards, and the writers are accessible by e-mail. Interactive learning remains just as important here, if not more so.

What will happen to the actual money in this portfolio?
The money in the Rule Breaker port is David Gardner's. Most likely, he won't do anything with it anytime soon. If we had wanted to change any of the port's positions up to this point, you would have seen us do it. Ditto for the Rule Maker, which is Tom Gardner's money, and the Drip port, which is mine.

What do we do if we own some of these stocks?
A longtime Motley Fool goal is to help readers make their own choices rather than have our decisions copied. So, we hope regular Fool readers are most comfortable when making their own investment decisions. Assuming this, today's news shouldn't change how you invest. Keep reading your companies' quarterly and annual reports, follow each business, and continue to own companies you believe in and understand.

Will your writers stop covering these stocks?
Not a chance. The Rule Breaker, Rule Maker, and Drip Portfolios own the companies they own because we believe them to be some of the most interesting, promising, and relevant of our time. Fool writers will continue to write about these companies as much as before. We own several of them ourselves, as our profiles show. (Each company continues to have a discussion board, too, of course.)

We won't leave unanswered questions about this port's stocks, either. Next week, co-manager Tom Jacobs will review our holdings and share current thoughts on each, and so will the managers of our other portfolios. Hopefully, you'll consider our thoughts with the same skepticism that you've considered everything you've read here. We've always said don't mimic us and we mean that even now. Don't buy or sell any stock based solely on our advice. Do your homework.

How has the Rule Breaker performed?
We'll take a bow. The portfolio has beaten the S&P 500 (yup, with dividends added) handily. And that's not only from the inception of the Fool Portfolio, but from October 1998 when David Gardner announced the name change to the Rule Breaker portfolio and began writing out the principles he had been using and refining since his first days of investing. Take a look:

             INTERNAL RATE OF RETURN*
RB S&P S&P 500 Port 500 Divs.Added Nasdaq
Since 8/4/94 20.04% 7.28% 9.14% 7.26%
10/20/98 -0.55% -5.54% -4.91% -6.32%
*Internal Rate of Return is used so that cash we added in 2001
doesn't show up as return.

Yes, at times those returns would have exceeded the market averages even more, but we are happy to have  beaten the S&P 500 (dividends added) at an annualized rate of almost 11% a year for 8.5 years, and 4.4% a year for the last 4.5 years. Anyone would be.  

But crowing about the returns reveals another reason for closing the portfolio. Most people would be ill served to have actual portfolios that only contained one kind of investment. In fact, it could be very dangerous, particularly dangerous with a high-risk port such as Rule Breaker. We would never recommend anyone have a portfolio composed solely of Rule Breakers, and this has always weighed heavily on us.

I have other questions!
If you do, please post them in the Rule Breaker Strategy board (free 30-day trial to read, membership required to post). We'll be there to field questions, comments, complaints, praise, and whatever else you care to share with us.

Thank you, as always, for your interest in The Motley Fool. We hope you'll like the content changes we will introduce in March -- as soon as we dig out of the snow!

Of the stocks in Rule Breaker, Jeff Fischer owns eBay and Millennium, as his profile shows. He's looking forward to the new columnist-based format on the Fool, where he'll be writing about other potential Rule Breakers as he sees them -- and he's hoping his stock picks will outperform those of his peers. Especially Tom Jacobs'. The Fool has a disclosure policy.

Rule Breaker Portfolio Returns as of 02/14/03 Market Close:

            RB        S&P     S&P 500
            Port      500      DA*    Nasdaq
Week       -0.06%    -0.12%    --      1.04%
Month      -1.60%    -2.42%    --     -1.81%
Year 0.99% -5.10% -- -1.90%
IRR** since 8/4/94*** 20.04% 7.28% 9.14% 7.26%
10/20/98***-0.55% -5.54% -4.91% -6.32%

*Dividends added. Or, danger ahead. Whatever.

**Internal Rate of Return. This performance measure is an annualized number that is more meaningful than total return because we began adding cash occasionally in July 2001. In a total return calculation, or ((Current Value - All Cash Deposited)/All Cash Deposited), cash added would show up as returns. And that wouldn't be cricket!

***What's this? The Rule Breaker Portfolio's precursor, the Fool Portfolio, was born Aug. 4, 1994. In a 10/20/98 column, David Gardner announced the name change of the Fool Portfolio to the Rule Breaker Portfolio. Here we provide returns as if the RB Port started on either date. Remember, don't mimic any online portfolio. Most individual investors should restrict any positions as risky as these to under 20% of their portfolio -- and could have a long and happy investing life with 0%.

Rule Breaker Portfolio

  Ticker Company Price
 Change
 Daily Price
 % Change
 Price 
  AMZN AMAZON.COM, INC. 1.33 6.63% 21.39 
  AOL AOL TIME WARNER INC. 0.56 5.33% 11.07 
  TREE LENDINGTREE INC 0.60 5.41% 11.69 
  EBAY EBAY INC 1.49 1.99% 76.49 
  MLNM MILLENNIUM PHARMACEUTICALS INC 0.26 3.87% 6.97 
 SHORT  SIRI SIRIUS SATELLITE RADIO INC 0.18 24.00% 0.93 
  SBUX STARBUCKS CORP 0.39 1.73% 22.91 
  AMGN AMGEN INC 1.02 1.94% 53.62 
 SHORT  GTRC GUITAR CENTER INC 0.40 2.04% 20.00 
  SPY SPDR TRUST;1 1.48 1.76% 85.63 
      
  Trade Date # Shares Ticker Cost/Share Price  Total % Ret  
 09/09/97 1320 AMZN 3.20 21.39  576.01%
 08/05/94 4020 AOL 0.46 11.07  2,418.57%
 06/03/02 916 TREE 13.72 11.69  -14.73%
 02/26/99 1145 EBAY 46.54 76.49  64.38%
 09/27/01 2260 MLNM 14.69 6.97  -52.53%
 SHORT 01/24/02 2500 SIRI 6.90 0.93  86.52%
 07/02/98 940 SBUX 13.98 22.91  64.01%
 12/16/98 1160 AMGN 21.44 53.62  150.12%
 SHORT 08/21/02 1000 GTRC 16.49 20.00  -21.36%
 04/24/02 290 SPY 110.16 85.63  -22.23%
      
  Trade Date # Shares Ticker Total Cost Current Value  Total Gain  
 09/09/97 1320 AMZN 4,220.20 28,234.80  24,014.60 
 08/05/94 4020 AOL 1,860.42 44,501.40  42,640.98 
 06/03/02 916 TREE 12,565.44 10,708.04  -1,857.40 
 02/26/99 1145 EBAY 53,294.44 87,581.05  34,286.61 
 09/27/01 2260 MLNM 33,207.00 15,752.20  -17,454.80 
 SHORT 01/24/02 2500 SIRI 17,258.26 2,325.00  14,916.74 
 07/02/98 940 SBUX 13,138.62 21,535.40  8,396.78 
 12/16/98 1160 AMGN 24,875.50 62,199.20  37,323.70 
 SHORT 08/21/02 1000 GTRC 16,488.00 20,000.00  -3,528.00 
 04/24/02 290 SPY 31,945.00 24,832.70  -7,112.30 
Cash:573.54 
Total:307,323.33 


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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.