RULE MAKER PORTFOLIO

<THE RULE MAKER PORTFOLIO>

Adding to Intel
And Other Thoughts

By Matt Richey (TMF Verve)

ALEXANDRIA, VA (August 2, 1999) -- August has arrived, and that means the Rule Maker Portfolio has $500 of fresh savings awaiting an investment decision. After kicking the decision around last week, your Rule Maker managers have settled on purchasing additional shares of Intel (Nasdaq: INTC).

In last week's reports, both Phil and Rob made strong cases for the king of all things silicon. On Wednesday, Phil pointed out that the company is showing operational momentum in every key financial metric: gross and net margins are rising, sales growth is robust, cash is outgrowing debt -- and that cash is being managed more efficiently, as can be seen in the declining Flow Ratio. And, as the company moves from 0.18 micron to 0.13 micron technology, production costs will continue to decline, thereby making room for further operational improvements. On Friday, Rob chimed in with his thoughts on the company, pointing out that Intel has deftly managed to eliminate its competition without suffering more than a slap on the wrist from the trustbusters.

In short, Intel is crushing the competition and reaping the financial rewards. For those reasons, we'll be adding to our Intel position within the next five trading days, according to normal Fool trading guidelines.

With no credit card debt and no impending financial obligations, we feel quite comfortable putting our $500 of fresh dough directly to work in the stock market -- history's greatest wealth building machine. By "history," I don't just mean the last 4 years, or 10 or 20. I'm referring to the bull market of the last 197 years. Since 1802, stocks have on average doubled an investor's purchasing power every decade. The same is true over each of the major 65-year sub-periods since 1802. No other investment -- bonds, gold, real-estate, lotto tickets (yeah, right!) -- come close to the returns provided by taking an ownership position in the publicly traded companies of the United States. Admittedly, we have but one sample of history from which to draw conclusions, but I think the last 200 years yield sufficient evidence that an investor can reasonably expect to double her purchasing power every 10 years. (This information comes from the work of Jeremy Siegel, in Stocks for the Long Run.)

In terms of televisions, that means the Rule Maker managers could take today's $500 and -- instead of buying shares of Intel -- buy a nice 27" Toshiba (including shipping). But instead, by letting our savings compound in the stock market for 10 years -- assuming just the market's historical 11% average annual rate of return -- we'll be able to buy a $1,400 model. By 2009, that will probably provide sufficient purchasing power to buy one of those fancy 60" HDTV wide-screens (something like this).

The economic principle is simple. By foregoing consumption today and putting our savings in the stock market, we can obtain substantially more consumption in the future. That's what investing in stocks is all about. Investing, as opposed to trading, is a wealth-building exercise with results measured in decades, not the most recent 3-month quarter.

These days, most everybody has heard about the stock market's strong run over the past four years. Investors in the S&P 500 Index have nearly tripled their money since the beginning of 1995. But unfortunately, most individuals still consider the stock market to be nothing more than a glorified gambling machine, the Las Vegas of the 90s, a place where the rich get richer. Common thinking has it that after the last several years of unprecedented returns, the market must be on the verge of a major setback.

And hey, maybe the market is on the brink of disaster. This week, as we prepare to invest our next $500 of real, green U.S. Federal Reserve notes, I and the other Rule Maker managers are prepared to see that money cut in half over the next six months. Intel has been on somewhat of a roll of late, racking up a 37% return over the past two months alone. But there are no guarantees what Intel or any other stock will do for the next two months. In fact, over periods of less than five years, stocks are not a sure thing -- far from it. Strangely enough, we like it that way. The stock market's "risk" -- defined as a stock's volatility over any particular day, week, or month -- is what allows for superior long-term returns.

That's why it all comes back to having a long-term outlook. As I ponder the past, present, and future of the Rule Maker Portfolio, three goals stand out in my mind:

1) Accumulate savings for the long-term -- This is the principle we're trying to demonstrate with our monthly $500 investments. Compounding returns will go a long way towards building wealth, but the effect is dramatically enhanced by adding regular savings.

2) Study interesting large-cap businesses -- Last week, your Rule Maker managers presented three ideas for this month's investment: Yahoo!, American Express, and the aforementioned aricles on this month's winner, Intel. The main reason we consider companies in this format is because it's educational and -- get this -- fun! By learning more and more about each of our companies, we'll be better prepared to make informed investment decisions with each passing month.

3) Beat the S&P 500 index over the long run -- The performance goal of this portfolio is to beat the returns of the S&P 500 index. To achieve this goal -- a goal which nearly 90% of professionally managed money has failed to achieve during the 90s -- the key will be to minimize commissions and capital-gains taxes, and focus our portfolio on only the best companies. With each month's $500 contribution, we'll be adding money to what we know are a select group of outstanding companies. As we go through the selection process each month, keep in mind that our goal is not only to pick the best company, but to educate and amuse, as well.

Have a great night!

[If you know of some friends who might like to learn more about Rule Maker investing, scroll up and click on the "E-mail this to a friend" link in the upper-right-hand corner.]

08/02/99 Close
Stock Change    Bid
AXP   -1 11/16  130.06
CHV     ---      91.25
CSCO  -  5/16    61.81
DPH   +  1/8     18.13
EK    +  3/4     69.88
GM    +  3/4     61.88
GPS   +  3/8     47.13
INTC  +2 5/16    71.31
KO    -  1/2     60.06
MSFT  -1         84.81
PFE   +  11/16   34.56
SGP   +  1/4     49.25
TROW  -  25/32   34.22
XON   -1 1/2     77.88
YHOO  -4 1/8    132.31


                  Day     Month  Year    History
        R-MAKER  -0.12%  -0.12%   9.86%  38.35%
        S&P:     -0.05%  -0.05%   8.62%  34.37%
        NASDAQ:  -0.56%  -0.56%  19.65%  58.73%

Rule Maker Stocks

    Rec'd    #  Security     In At       Now    Change
   6/23/98   68 Cisco Syst    29.21     61.81   111.65%
    5/1/98   82 Gap Inc.      23.05     47.13   104.42%
    2/3/98   54 Microsoft     45.13     84.81    87.91%
   2/13/98   44 Intel         42.34     71.31    68.44%
    2/3/98   66 Pfizer        27.43     34.56    25.99%
   5/26/98   18 AmExpress    104.07    130.06    24.98%
    6/3/99   11 *Delphi Au    17.19     18.13     5.44%
   8/21/98   44 Schering-P    47.99     49.25     2.62%
    2/6/98   56 T. Rowe Pr    33.67     34.22     1.62%
   2/27/98   27 Coca-Cola     69.11     60.06   -13.09%
   2/17/99   16 Yahoo Inc.   126.31    132.31     4.75%

Foolish Four Stocks

    Rec'd    #  Security     In At     Value    Change
   3/12/98   20 Exxon         64.34     77.88    21.05%
   3/12/98   20 Eastman Ko    63.15     69.88    10.65%
   3/12/98   15 Chevron       83.34     91.25     9.49%
   3/12/98   17 *General M    61.28     61.88     0.97%

Rule Maker Stocks

    Rec'd    #  Security     In At     Value    Change
   6/23/98   68 Cisco Syst  1985.95   4203.25  $2217.30
    2/3/98   54 Microsoft   2437.28   4579.88  $2142.60
    5/1/98   82 Gap Inc.    1890.33   3864.25  $1973.92
   2/13/98   44 Intel       1862.83   3137.75  $1274.92
    2/3/98   66 Pfizer      1810.58   2281.13   $470.55
   5/26/98   18 AmExpress   1873.20   2341.13   $467.93
   8/21/98   44 Schering-P   2111.7   2167.00    $55.30
    6/3/99   11 *Delphi Au   189.09    199.38    $10.29
   2/27/98   27 Coca-Cola   1865.89   1621.69  -$244.20
    2/6/98   56 T. Rowe Pr  1885.70   1916.25    $30.55
   2/17/99   16 Yahoo Inc.  2020.95   2117.00    $96.05

Foolish Four Stocks
    Rec'd    #  Security     In At     Value    Change
   3/12/98   20 Eastman Ko  1262.95   1397.50   $134.55
   3/12/98   15 Chevron     1250.14   1368.75   $118.61
   3/12/98   20 Exxon       1286.70   1557.50   $270.80
   3/12/98   17 *General M  1041.80   1051.88    $10.08

                              CASH    $255.59
                             TOTAL  $34059.90


Notes: 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.

*Although DPH is not a Foolish Four stock, it was spun-off from GM on June 3, 1999

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