RULE MAKER PORTFOLIO
Tough Love
Why do we complain about our Makers?

By Bill Mann (TMF Otter)

ALEXANDRIA, VA (Nov. 29, 1999) -- Last week I saw a detailed and thoughtful post on the Rule Maker Strategy board from dswhite, a Fool whose opinions I've really come to appreciate. He asked a fairly simple question: The Rule Maker portfolio managers spend an awful lot of time criticizing several of the component companies. Is the Rule Maker strategy not all it's cracked up to be?

I thought about responding to this message on the boards, but then stepped back and decided that this is a topic that deserves a wider audience. Reason being, there are now in excess of 200,000 Fools who receive the daily Rule Maker update (available via e-mail for free), and this is bound to be a question that has come up to more of you than just Mr. White.

So why is it that we complain so bitterly about the Rule Makers? Why have we so fiercely dogged Pfizer (NYSE: PFE) for its unkempt balance sheet? Why does Coca-Cola Company's (NYSE: KO) bottler system receive our wrath? Why did we spend such time (OK, one article, but work with me here) discussing the rich stock option program at T. Rowe Price (NYSE: TROW)? By doing this, are we trying to sabotage the companies in the Rule Maker portfolio?

Not at all. We're just engaging in some tough love.

The Rule Maker portfolio is by definition comprised of companies that we are willing to purchase and then forget about for a period of decades. So why spend so much time fretting about the ebb and flow of these companies once they have been purchased? Well, for several reasons, not the least of which is that Rule Maker articles would not be all that exciting if we just came out each day and said "Yep, still got 'em." Though that would be a very Foolish thing to do.

But what are we suggesting that the Fool on the Street do when a Rule Maker company such as Coca-Cola suddenly, in Matt Richey's (TMF Verve) opinion, drops to a 33 on the ranker? Well, several things, but the last of which would be to run out and sell KO in a panic. No, for each complaint we have about these companies (and with six HIGHLY opinionated people running the portfolio, rest assured there are many) there are many other things that we appreciate about the stock. If we did not, we would sell, no further questions asked.

But healthy skepticism still should play a powerful role in the Foolish investor's learning process, even with... make that especially with... the companies we love. For love is blind, and this blindness can cause the ultimate insult to the long-term appreciation for an investor: for a long-performing asset to depreciate without our seeing signs that were obvious if we had bothered to look.

This is a healthy exercise for any investor on any company. I constantly try to pick apart the weaknesses of every company I own. If you understand the weaknesses, you inherently understand where a company -- and therefore your investment therein -- is vulnerable.

For example, I elected two months ago to recommend our $500 to be put into Coca- Cola (and how right I turned out to be, 30% gain in the interim!). At the same time I have written several scathing articles on Coke, its treatment of bottler accounting, its pricing strategies, and the dilution of its trademark value. But do I really think that Coke is going to lose its Rule Maker standing? Not a chance.

Nor do I expect a company with the management depth of Coca-Cola to allow itself to fade into the sunset. Coke has a superior culture of success. Coke has the most valuable trademark on the planet. Coke has retained or increased its market share in nearly every country in which it operates. In other words, even with the bad year Coca-Cola has had in 1999, its prospects of remaining the top dog in the next five years (the Rule Maker definition of "short-term") are still excellent.

Still, difficulties should never be ignored, not even in the biggest companies in the world. After all, once Wang Computer was in a position to rule the personal computer realm. But the company blew it, and its shareholders paid the price.

I can imagine that if message boards were in existence during the demise of Wang that the conversations would look quite similar as some of the Rule Maker companies' boards do now. The doomsayers attract the ire of the true believers with their talk of trouble at Wang. The fence-sitters put in their two cents in with point-counterpoint efficiency.

And all the while, the company was making its death rattle. Were the people who foresaw it geniuses? Were the ones who missed it idiots? No, it's just that one set caught the signs of a death rattle, and the other did not. But these (or similar signs) will eventually be found in companies that are fixtures in today's marketplace, including some Rule Makers. In fact, by definition Rule Makers are constantly being threatened by emerging Rule Breakers.

Microsoft (Nasdaq: MSFT) has big legal problems. Intel (Nasdaq: INTC) has a renewed threat from AMD (NYSE: AMD) and its powerful Athlon chip. Cisco's (Nasdaq: CSCO) marketplace is fraught with danger as Internet, data, and voice bring it ever closer in competition with powerful Lucent (NYSE: LU) and Nortel (NYSE: NT). Pfizer (NYSE: PFE) has seen its co-marketing agreement with Warner-Lambert (NYSE: WLA) come under threat and is involved with what could be a messy and expensive takeover battle. All of these events bear watching. Close watching.

But selling? Not without a significant signal that a company has lost Rule Maker status and has no chance to regain it. Rule Makers have a moat around their businesses that is not easily forded. These are not small cap growth stocks that will plunge into the depths of obscurity at the slightest change in the market. That's what made them Rule Makers in the first place. They have successfully beaten their competition. Their job is to keep from being shoved off the mountain. Our job is to keep close vigil and react decisively when and if any of our holdings does get shoved off the top of the heap. And that requires the eye of the skeptic, for the cheerleader is guaranteed to miss the signs.

We point out the deficiencies just because we like these companies so much. They are large and in charge, and the lead in their industries are theirs to lose. By investing our money and our faith with the Rule Makers (or any other company, for that matter), we have the right to demand perfection. Not that we will ever get it, but the company that has the lead and yet strives to improve itself is much better than the one that rests upon its laurels.

Fool on!

Bill Mann


 




Rule Maker Portfolio

11/29/99 Closing Numbers
Ticker Company Dly Pr Chg Price
AXPAMER EXPRESS-4 13/16$147.81
CHVCHEVRON CORP-7/16$88.56
CSCOCISCO SYSTEMS-7/16$92.75
DPHDELPHI AUTOMOTIVE SYSTEMSUnch.$15.88
EKEASTMAN KODAK-1 11/16$62.81
GMGENL MOTORS15/16$74.31
GPSGAP INC7/16$41.38
INTCINTEL CORP-1 5/16$78.94
KOCOCA-COLA CO7/16$67.00
MSFTMICROSOFT CORP-15/16$90.19
PFEPFIZER, INC7/16$37.44
SGPSCHERING-PLOUGH5/8$53.25
TROWT.ROWE PRICE ASSOC-1 1/2$35.38
XONEXXON CORP3/8$79.38
YHOOYAHOO INC-3/4$226.13

  Day Week Month Year
To Date
Since
2/2/98
Annualized
Rule Maker .16% .16% 6.65% 24.12% 54.55% 26.97%
S&P 500 -.62% -.62% 3.29% 14.53% 43.62% 21.96%
S&P 500(DA) -.62% -.62% 3.29% 15.11% 45.39% 22.78%
S&P 500(DCA) n/a n/a n/a n/a 28.85% 14.91%
NASDAQ -.77% -.77% 15.34% 56.04% 111.28% 50.72%

Trade Date # Shares Ticker Cost/Share Price LT % Val Chg
6/23/9875CSCO32.865$92.75182.22%
2/3/9859MSFT49.352$90.1982.74%
5/1/9882GPS22.708$41.3882.20%
2/17/9916YHOO126.309$226.1379.02%
2/13/9859INTC50.624$78.9455.93%
5/26/9818AXP104.067$147.8142.04%
2/3/9866PFE27.433$37.4436.47%
3/12/9820XON64.335$79.3823.38%
3/12/9817GM60.399$74.3123.04%
8/21/9844SGP47.993$53.2510.95%
3/12/9815CHV83.343$88.566.26%
2/3/9856TROW33.673$35.385.05%
3/12/9820EK63.148$62.81-0.53%
2/27/9827KO69.107$67.00-3.05%
3/12/9811DPH17.202$15.88-7.71%

Trade Date # Shares Ticker Cost Value LT $ Val Ch
6/23/9875CSCO$2,464.86$6,956.25$4,491.39
2/3/9859MSFT$2,911.79$5,321.06$2,409.27
2/13/9859INTC$2,986.79$4,657.31$1,670.52
2/17/9916YHOO$2,020.95$3,618.00$1,597.05
5/1/9882GPS$1,862.06$3,392.75$1,530.69
5/26/9818AXP$1,873.20$2,660.63$787.43
2/3/9866PFE$1,810.58$2,470.88$660.30
3/12/9820XON$1,286.70$1,587.50$300.80
3/12/9817GM$1,026.78$1,263.31$236.54
8/21/9844SGP$2,111.70$2,343.00$231.30
2/3/9856TROW$1,885.70$1,981.00$95.30
3/12/9815CHV$1,250.14$1,328.44$78.30
3/12/9820EK$1,262.95$1,256.25($6.70)
3/12/9811DPH$189.22$174.63($14.59)
2/27/9827KO$1,865.89$1,809.00($56.89)
  Cash: $135.63  
  Total: $40,955.63  


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.