RULE MAKER PORTFOLIO

<THE RULE MAKER PORTFOLIO>

This Fool Has Also Been a fool

By Phil Weiss (TMF Grape)

TOWACO, NJ (June 29, 1999) -- This is kind of a true confessional week for your Rule Maker Managers. I know that there have been times that I have fallen victim to the words of the Wise, failed to do the proper due diligence before purchasing stock, and purchased stock that really wasn't in line with my long-term goals and/or my investment time frame. I suspect that each of my co-managers could say the same thing. In other words, just because we're writing columns here every night doesn't mean that we haven't made a number of mistakes in the past. We'll also make more in the future, but it's likely that they won't be for the same reasons as the ones in the past.

Tonight, it's my turn to share my worst investments with you. The scariest part of this is probably that my wife always reads my column, so now she'll be reminded of some of my past mishaps. At the same time, I'll share a lesson that I learned from each of these experiences that has helped me to become more Foolish in terms of how I invest now. After all, my view is that the most valuable thing one can do after making a mistake is to analyze it and see what can be learned from it. If we can learn from our mistakes, then they're not nearly as bad as they would have been if we stubbornly repeated the same mistake over and over again.

In percentage terms, my worst investment decision was purchasing shares of America West Airlines, in the late 80s or early 90s. I bought the stock at around $11 per share because my broker told me that it was, of all things, a takeover candidate. Having witnessed the kind of money that can be made when a company is taken over, I was more than willing to jump in and take a flyer on this one. A year or so later, the company was on the verge of bankruptcy. I sold my shares for something like $1 per share. At least my 90% or so loss in real dollars did give me a tax benefit.

However, this experience actually taught me one of the most valuable lessons I've learned in investing: Don't purchase a stock simply because it's a takeover candidate. There are rumors of takeovers each and every day. More often than not, they prove to be groundless. If you buy a company based on good, solid fundamental analysis, you'll be a lot better off. As a matter of fact, if you've found a good stock, it's quite possible that you won't want to see it taken over at all as the acquirer may not do as good a job managing the business as the former management did. Those shares of America West are the only ones I've ever purchased based upon the possibility of a takeover -- and they'll be my last.

Next on my list chronologically would probably be my decision to buy and sell America Online (NYSE: AOL) after holding it for only about a month and a half in 1995. In retrospect, I sold AOL at a good time as it fell low enough afterwards that I could have bought the stock back at a tax adjusted price that was lower than my original purchase price. I did eventually buy it back, but, unfortunately, not until it was significantly higher than it had been when I made my initial purchase.

The problem with my holding AOL was that I bought it primarily because I heard a good story about it on CNBC when I was home sick from work one day. After I bought the stock, I realized that the company didn't make any money. This left me feeling uncomfortable, and I didn't do enough analysis or research to be able to comprehend what its real future might be. I started looking for an exit point. I found it and got out. This was also a time in my investment career when I thought that there were stocks that could and should be bought and sold rather than bought and held.

The problem with this one was that I didn't really understand AOL's business well enough before I bought it. If I had, either I wouldn't have bought it at all, or I wouldn't have sold it out of fear. I've since learned that I shouldn't purchase stocks without having an understanding of what the company does, what it's future might be, and what it's financial statements look like. These are all things that are part of analyzing potential Rule Makers. One of the key things to keep in mind when purchasing stock is that taking on the risk that comes with owning stock without doing research is quite similar to gambling. In many ways, my AOL purchase was merely gambling.

In dollar terms, my worst investment was purchasing shares of Micron Technologies (NYSE: MU) in the fall of 1995 shortly after Windows 95 came out. There were a few reasons that I decided to buy Micron at that time. One was that I thought that as Windows 95 became more widely accepted, PC users would want more and more RAM for their PCs. Another was that I purchased the stock in the low 60s on its way down from the 90s. The final reason was that Jeffrey Vinik, the infamous former manager of the Fidelity Magellan Fund, had been talking up the stock out of one side of his mouth while, out of the other, he was selling shares owned in the Magellan Fund.

Notice that none of the reasons I mentioned for purchasing this stock related to studying its financial statements or understanding its business. I figured I had three good reasons to buy the stock, and the rest of that stuff was too time consuming to really matter.

Micron made it above my purchase price for about 2 days after I bought it. I don't believe that it's ever been back above that level again. It actually fell all the way down to around $15 per share during the time that I held it. I sold it at the end of 1996 at a loss of a little more than 50% of my original purchase price.

This was actually a key event in my investing career. I determined that it would be the last time that I purchased a stock without doing the appropriate due diligence. Right around that time I found the Fool's website, too.

I learned a lot from this experience. One was that just because a stock has fallen from its high doesn't mean it's automatically a bargain or that it will ever get back to that level again. Another was that the fact that someone else is talking up the stock doesn't make it a good buy at all. As has been documented here many times, the Wise often have many reasons for talking up stocks. Oftentimes these reasons are based more upon their own self-interest than anything else.

Most importantly, this experience made me realize that the best way to invest would be to take the book knowledge and practical work experience that I had and put them together in a way that would allow me to make good, solid investment decisions based upon my own analysis. This philosophy would also leave me with no one to blame but myself if I made a mistake. To me, that's actually a good thing. I like having the accountability for my own actions.

I think I've learned a lot from these mistakes. I have made others and will make more, but I know that I've learned from them. They've all helped to make me a better investor and have helped to improve my portfolio's return.

If you're interested in sharing some of your own non-Foolish experiences, you can confess them here on our My Dumbest Investment message board. You can also listen to some more during the second hour of last week's Fool Radio Show, which is available at this link.

Phil Weiss, Fool

06/29/99 Close
Stock Change    Bid
AXP   +2 3/16   127.44
CHV   +4 3/16    93.69
CSCO  +  9/16    62.50
EK    -1         69.44
GM    +  11/16   64.13
GPS   +1 7/8     48.75
INTC  +2 1/4     59.25
KO    +  1/16    61.19
MSFT  +1 1/4     88.00
PFE   +3 13/16  104.81
SGP   +1         49.69
TROW  +  15/16   37.31
XON   +1 3/4     76.94
YHOO  +3 1/2    160.00


                  Day     Month  Year    History
        R-MAKER  +2.18%   5.67%  10.64%  40.00%
        S&P:     +1.51%   3.81%  10.52%  36.70%
        NASDAQ:  +1.52%   6.95%  20.50%  59.85%

Rule Maker Stocks

    Rec'd    #  Security     In At       Now    Change
    2/3/98   48 Microsoft     39.13     88.00   124.87%
   6/23/98   68 Cisco Syst    29.21     62.50   114.00%
    5/1/98 82.5 Gap Inc.      22.91     48.75   112.76%
   2/13/98   44 Intel         42.34     59.25    39.95%
    2/3/98   22 Pfizer        82.30    104.81    27.36%
   2/17/99   16 Yahoo Inc.   126.31    160.00    26.67%
   5/26/98   18 AmExpress    104.07    127.44    22.46%
    2/6/98   56 T. Rowe Pr    33.67     37.31    10.81%
   8/21/98   44 Schering-P    47.99     49.69     3.53%
   2/27/98   27 Coca-Cola     69.11     61.19   -11.46%

Foolish Four Stocks

    Rec'd    #  Security     In At     Value    Change
   3/12/98   20 Exxon         64.34     76.94    19.59%
   3/12/98   15 Chevron       83.34     93.69    12.41%
   3/12/98   20 Eastman Ko    63.15     69.44     9.96%
   3/12/98   17 General Mo    72.41     64.13   -11.44%

Rule Maker Stocks

    Rec'd    #  Security     In At     Value    Change
    2/3/98   48 Microsoft   1878.45   4224.00  $2345.55
   6/23/98   68 Cisco Syst  1985.95   4250.00  $2264.05
    5/1/98 82.5 Gap Inc.    1890.33   4021.88  $2131.55
   2/13/98   44 Intel       1862.83   2607.00   $744.17
   2/17/99   16 Yahoo Inc.  2020.95   2560.00   $539.05
    2/3/98   22 Pfizer      1810.58   2305.88   $495.30
   5/26/98   18 AmExpress   1873.20   2293.88   $420.68
    2/6/98   56 T. Rowe Pr  1885.70   2089.50   $203.80
   8/21/98   44 Schering-P   2111.7   2186.25    $74.55
   2/27/98   27 Coca-Cola   1865.89   1652.06  -$213.83

Foolish Four Stocks

    Rec'd    #  Security     In At     Value    Change
   3/12/98   20 Exxon       1286.70   1538.75   $252.05
   3/12/98   15 Chevron     1250.14   1405.31   $155.17
   3/12/98   20 Eastman Ko  1262.95   1388.75   $125.80
   3/12/98   17 General Mo  1230.89   1090.13  -$140.77

                              CASH     $70.09
                             TOTAL  $33683.47

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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