RULE MAKER PORTFOLIO

<THE RULE MAKER PORTFOLIO>

My Vote for Cisco

By Rob Landley (TMF Oak)

AUSTIN, TX (June 25, 1999) -- Personally, I'm not a fan of proprietary lock-in. I think it inevitably makes a firm lazy, and invites bad PR and antitrust attention. I'm all for a strong brand name, excellent products, and clever advertising, but I don't want a company wasting effort on blocking their competition that could be spent on improving things for their customers. That said, my pick for our next $500 investment, Cisco Systems (Nasdaq: CSCO), manages to create a fairly high level of proprietary lock-in to its products, while still maintaining rigid compliance to Internet standards and compatibility with any third party hardware you care to hook up to the Internet.

Although Cisco's switches and routers communicate with the world via TCP/IP, the language of the Internet, internally they run a proprietary operating system called IOS (Internetworking Operating System). Companies that use these switches eventually find themselves with a collection of custom IOS applications that they've purchased or written, which only run on Cisco's systems. Yet at the same time, an Internet shop can hook their Cisco router up to a Windows NT server, a Linux box, an IBM RS6000 server, and a Sun server -- all at the same time.

Cisco also has extensive education and training programs producing new network administrators around the world. On the one hand, this directly addresses a global high-tech manpower crunch and gives inexperienced people access to high-paying jobs. On the other hand, Cisco is training and certifying them exclusively on Cisco systems, giving them real world experience but only with Cisco products.

This "collateral proprietariness" approach is not a bad balancing act. The proprietary nature of IOS is an encouragement to stay with Cisco when upgrading, without limiting a customer's choices about what else to use. And nobody can blame Cisco for training high school kids for high paying jobs, even if it's a fairly specialized niche. The iron hand is safely inside the velvet glove. It's refreshing to see a little subtlety in the computer industry.

On top of that, Cisco is practically a Merchant King, considering its lean distribution. It sells 80% of all Internet hardware, and over half of those sales now occur through its website. It hopes to increase its website sales to 80% next year, and is already using the Internet for online product configuration and distribution of support software. Streamlined sales, streamlined distribution, and scaleable up to who knows where. Reminds me a bit of Dell. I like it.

The insatiable demand for bandwidth that Cisco is scaling up to supply looks like it will continue increasing for the foreseeable future. The Internet expands into more American homes every day, and is spreading around the globe even faster. The amount of data each individual receives and transmits continues to increase as new applications like Internet telephony and video on demand become possible. New technologies like cable modems and ADSL allow users to keep their computers connected to the Internet 24 hours a day through a pipe bigger than most businesses had five years ago.

Not only will Cisco be selling brand new switches and routers for a long time, it will be adding more units to existing clusters to ease bottlenecks, and replacing old models with faster versions. The Internet is already replacing the telephone, cable TV, and half the post office with a single communications network that can do it all -- better and cheaper. And that's without talking about new technologies unique to the Internet (Web pages anyone?), most of which probably have yet to emerge.

Preparing for the future, the new IPv6 Internet addressing scheme is slowly replacing the old "4 billion Internet phone numbers" bottleneck with a much longer number that has address ranges reserved for the moon and each of the known planets in the solar system. And, if your old router doesn't understand the new longer numbers, maybe it's time to upgrade...

I don't want to duplicate the financial analysis of Cisco that Phil did on Wednesday, and if you want to read someone praising Cisco's undisputed ownership of the Internet router space, this guy does it better than me: Cisco, god of the Net.

Three of the investments in our portfolio have doubled over the past year, and those are the ones that get my attention. Of those three, the one I see as having the most sustainable growth is Cisco. While I could have put this observation as the first paragraph of today's article, I would have felt obligated to stop afterwards.

Over the past several days, you've seen arguments for our $500 going to additional shares of Microsoft or Cisco. Obviously, we have eight other good companies worth consideration as well. Where do you think the fresh money should go? Drop by the Companies board and let us know your opinion and your reasoning. Your Rule Maker managers will be listening.

Have a great weekend.

- Oak

06/25/99 Close
Stock Change    Bid
AXP   +2 7/16   122.44
CHV   -1 1/2     90.13
CSCO  +1 1/16    61.31
EK    -  1/4     69.50
GM    +  1/4     63.50
GPS   -  13/16   45.69
INTC  +  1/4     55.31
KO    -  13/16   61.88
MSFT  +  5/16    84.94
PFE   -  1/16   101.44
SGP   +  5/16    48.81
TROW  -  1/16    35.81
XON   -  5/16    76.19
YHOO  -4 1/8    146.88


                  Day     Month  Year    History
        R-MAKER  -0.10%   1.88%   6.67%  34.97%
        S&P:     -0.04%   1.03%   7.58%  33.09%
        NASDAQ:  -0.05%   3.32%  16.42%  54.44%

Rule Maker Stocks

    Rec'd    #  Security     In At       Now    Change
    2/3/98   48 Microsoft     39.13     84.94   117.04%
   6/23/98   68 Cisco Syst    29.21     61.31   109.94%
    5/1/98 82.5 Gap Inc.      22.91     45.69    99.39%
   2/13/98   44 Intel         42.34     55.31    30.65%
    2/3/98   22 Pfizer        82.30    101.44    23.25%
   5/26/98   18 AmExpress    104.07    122.44    17.65%
   2/17/99   16 Yahoo Inc.   126.31    146.88    16.28%
    2/6/98   56 T. Rowe Pr    33.67     35.81     6.35%
   8/21/98   44 Schering-P    47.99     48.81     1.71%
   2/27/98   27 Coca-Cola     69.11     61.88   -10.46%

Foolish Four Stocks

    Rec'd    #  Security     In At     Value    Change
   3/12/98   20 Exxon         64.34     76.19    18.42%
   3/12/98   20 Eastman Ko    63.15     69.50    10.06%
   3/12/98   15 Chevron       83.34     90.13     8.14%
   3/12/98   17 General Mo    72.41     63.50   -12.30%

Rule Maker Stocks

    Rec'd    #  Security     In At     Value    Change
    2/3/98   48 Microsoft   1878.45   4077.00  $2198.55
   6/23/98   68 Cisco Syst  1985.95   4169.25  $2183.30
    5/1/98 82.5 Gap Inc.    1890.33   3769.22  $1878.89
   2/13/98   44 Intel       1862.83   2433.75   $570.92
    2/3/98   22 Pfizer      1810.58   2231.63   $421.05
   5/26/98   18 AmExpress   1873.20   2203.88   $330.68
   2/17/99   16 Yahoo Inc.  2020.95   2350.00   $329.05
    2/6/98   56 T. Rowe Pr  1885.70   2005.50   $119.80
   8/21/98   44 Schering-P   2111.7   2147.75    $36.05
   2/27/98   27 Coca-Cola   1865.89   1670.63  -$195.27

Foolish Four Stocks

    Rec'd    #  Security     In At     Value    Change
   3/12/98   20 Exxon       1286.70   1523.75   $237.05
   3/12/98   20 Eastman Ko  1262.95   1390.00   $127.05
   3/12/98   15 Chevron     1250.14   1351.88   $101.74
   3/12/98   17 General Mo  1230.89   1079.50  -$151.39

                              CASH     $70.09
                             TOTAL  $32473.81

Note: The Rule Maker Portfolio began with $20,000 on February 2, 1998, and it added $2,000 in August 1998 and February 1999. Beginning in July 1999, $500 in cash (which is soon invested in stocks) is added every month.

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