RULE MAKER PORTFOLIO

<THE RULE MAKER PORTFOLIO>

In Defense of Full Service Brokers

By Al Levit (alanl@ix.netcom.com)

New Orleans, LA (Feb. 8, 1999) -- Yes, you read that headline right. This column is about the good points behind full service stockbrokers, or financial consultants, or whatever is it they call themselves these days. Don't worry, this isn't my last Foolish column (at least I hope not). After all, I still have a Buy report to publish about our next pick!

It's just that this week I'm going to be doing a lot of writing about applying the new Rule Maker principles that Tom laid out in Rule Breakers, Rule Makers (a.k.a. the RuleBook). I read most of those for the first time during a Foolish family weekend that I spent last month in the mountains with my son Alex and some good friends and their kids. Much to my surprise, I started that weekend learning about some values of full-service brokers that I'd really never considered and I want to share with you.

First, though, I need to bring you up to speed on how the Rule Maker portfolio did over the past week. The market didn't do very well, and neither did our portfolio:


Rule-Maker     Last      This    Change
Pfizer         $128.50  $130.88   1.9%      
S Plough        $54.50   $53.88  -1.1%      
Gap Inc.        $64.19   $62.00  -3.4%      
American Exp.  $102.88   $98.13  -4.6%      
Coca-Cola       $65.25   $62.06  -4.9%      
T. Rowe Price   $36.56   $33.81  -7.5%      
Microsoft      $175.00  $160.00  -8.6%      
Cisco          $111.06  $101.25  -8.8%      
Intel          $140.88  $127.56  -9.5%      

Fool Four       Last     This    Change      
Chevron         $74.75   $78.88   5.5%      
Kodak           $65.50   $68.75   5.0%      
Exxon           $70.44   $71.81   1.9%      
GM              $89.75   $85.94  -4.2%      
            
S&P 500          1,280    1,239  -3.2%
Total R-M      $33,010* $31,745  -3.8%      
               
RM History through 2/5/99:    31.94%         
S&P History through 2/5/99:   25.19%         
               
*Includes $2,000 deposited on 2/4/99

The biggest news on the individual company front last week was the earnings release by Cisco Systems (Nasdaq: CSCO). I'll cover that tomorrow, including some of the new metrics from the RuleBook. Today, I want to talk about the trip.

I think that a family weekend is always Foolish, because doing things with the family is part of what Fooldom is all about. However, in my case, this weekend was much more directly Foolish. My friend Craig, the stockbroker, had told me to bring "reading materials" along. The RuleBook had just come out and this sounded like the perfect opportunity to read it.

I did feel I should warn Craig about what I planned to read, since The Motley Fool is not known to be terribly popular with brokers. Craig assured me that I had him all wrong, which made me feel better about taking the book along.

Our weekend started with a six-hour drive up into the mountains. I was riding with my friend Jim and somehow the topic of investments came up. Jim has used Craig to manage his family's investments for a long time. As you might guess, I have basically managed my family's investments myself (my wife has a small portion of our assets managed by someone else, but that's another story).

The question we were discussing was not who was the better money manager for me, but who was the better money manager for Jim. Jim was fairly adamant in his position that he did not have the time, interest, or expertise to manage his own investments.

I could have explained to Jim that these days the information was available to allow us small investors to successfully make our own investments. Jim might not have the expertise right now, but it could be developed. As most Fools know, it's not that hard, and Jim is no dummy.

On the other hand, lack of interest is harder to argue with. There is no reason why Jim should have to do something in which he has no interest. Jim is a lawyer. When I need legal work done, I don't do it myself, I go to Jim. When Jim needs family investments managed, he doesn't want to do it himself; he wants to go to Craig.

Moreover, it's important to understand that the brokerage industry is eliminating many of its traditional problems. For example, we often write about the commission fee structure and how that encourages trading. However, that's not how it works anymore for Craig. When he manages your investments you pay a percentage of assets regardless of the amount of trades that are made. That doesn't necessarily make his service cheap, but it does remove Craig's incentive to suggest trading over a buy-and-hold strategy.

For those of us who are interested in managing our own investments, it's very hard to justify using a full-service broker for most of our investments. I don't want anyone coming away with the impression that I believe that running a portfolio is as difficult as practicing law. On the other hand, there are all kinds of things that I could learn to do but I prefer to pay to have someone else do for me. Stockbrokers make sense for people who feel that way about managing their own investments if the stockbrokers can justify their fees.

How can stockbrokers justify their fees? Simple. They can show how their client's investments have performed (net of fees, of course) and how an index fund would have performed during the same period. The index fund need not be the S&P 500; it can be selected based on the client's risk tolerance. In fact, selecting the performance benchmark can and should be one of the key services provided by the broker. Then every statement the client receives can show net performance measured against the index benchmark.

Moreover, even us Fools who enjoy making our decisions need full-service brokers from time to time. For example, I've needed to buy municipal bonds on occasion and deep discount brokers don't do that very well (at least mine didn't). Craig didn't have any problem getting municipal bonds for me at all.

The bottom line for me is that I think that full-service brokers will find things tougher over the next few years than they have been in the past because many potential clients, including me and probably you, are doing things for ourselves. At the same time, there are still plenty of people like Jim who will see value from the service that full-service brokers and other financial professionals provide. This is especially true if the professionals have adapted to the way that the world is today, like Craig has.

That's it for today. Tomorrow, I'll take a trip through the RuleBook and look at Cisco. Until then, Fool on.

Al

02/08/99 Close
Stock  Change    Bid
AXP   -1 1/16  97.06
CHV   +2 7/8   81.75
CSCO  +  11/16 101.94
KO    -  5/8   61.44
GPS   +2 1/4   64.25
EK    -1 3/8   67.38
XON   +  7/8   72.69
GM      ---    85.94
INTC  +4 7/16  132.00
MSFT  +5 1/4   165.25
PFE   +  5/8   131.50
SGP   -  11/16 53.19
TROW  -  7/16  33.38

                   Day   Month    Year  History
        R-MAKER  +1.03%  -2.84%   5.35%  33.30%
        S&P:     +0.35%  -2.80%   1.50%  25.63%
        NASDAQ:  +1.32%  -4.03%   9.68%  45.50%

Rule Maker Stocks

    Rec'd    #  Security     In At       Now    Change
    2/3/98   24 Microsoft     78.27    165.25   111.13%
    5/1/98   55 Gap Inc.      34.37     64.25    86.94%
   6/23/98   34 Cisco Syst    58.41    101.94    74.52%
    2/3/98   22 Pfizer        82.30    131.50    59.78%
   2/13/98   22 Intel         84.67    132.00    55.89%
   8/21/98   44 Schering-P    47.99     53.19    10.82%
    2/6/98   56 T. Rowe Pr    33.67     33.38    -0.89%
   5/26/98   18 AmExpress    104.07     97.06    -6.73%
   2/27/98   27 Coca-Cola     69.11     61.44   -11.10%

Foolish Four Stocks

    Rec'd    #  Security     In At     Value    Change
   3/12/98   17 General Mo    72.41     85.94    18.69%
   3/12/98   20 Exxon         64.34     72.69    12.98%
   3/12/98   20 Eastman Ko    63.15     67.38     6.69%
   3/12/98   15 Chevron       83.34     81.75    -1.91%

Rule Maker Stocks

    Rec'd    #  Security     In At     Value    Change
    2/3/98   24 Microsoft   1878.45   3966.00  $2087.55
    5/1/98   55 Gap Inc.    1890.33   3533.75  $1643.42
   6/23/98   34 Cisco Syst  1985.95   3465.88  $1479.93
    2/3/98   22 Pfizer      1810.58   2893.00  $1082.42
   2/13/98   22 Intel       1862.83   2904.00  $1041.17
   8/21/98   44 Schering-P   2111.7   2340.25   $228.55
    2/6/98   56 T. Rowe Pr  1885.70   1869.00   -$16.70
   5/26/98   18 AmExpress   1873.20   1747.13  -$126.08
   2/27/98   27 Coca-Cola   1865.89   1658.81  -$207.08

Foolish Four Stocks

    Rec'd    #  Security     In At     Value    Change
   3/12/98   17 General Mo  1230.89   1460.94   $230.05
   3/12/98   20 Exxon       1286.70   1453.75   $167.05
   3/12/98   20 Eastman Ko  1262.95   1347.50    $84.55
   3/12/98   15 Chevron     1250.14   1226.25   -$23.89

                              CASH   $2205.98
                             TOTAL  $32072.23

Added $ 2,000 on August 4, 1998 to the portfolio; this will show in the numbers at a later date.

Note: The Rule Maker Portfolio began with $20,000 on February 2, 1998, and it adds $2,000 in cash (which is soon invested in stocks) every six months.

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