RULE MAKER PORTFOLIO
The Art of Foolish War

By Rob Landley (TMF Oak) (TMF Oak)

[Editor's Note: Tonight's report is an oldie but goodie -- originally published on March 24, 1998 -- that encapsulates much of what Rule Maker investing is all about. Enjoy!]

GAITHERSBURG, MD (December 1, 1999) -- The Art of War by Sun Tzu, styled now as a management handbook for the 1990s, has an interesting quote: "Victory can be discerned, but not manufactured." Warren Buffett presents a relevant analogy. He compares investing to a different sort of baseball game where there's no penalty for not swinging. On Buffett's baseball diamond, you can sit and wait -- as long as you want -- for the good pitches.

How are these ideas connected?

The trick to investing is finding good companies, yes; you've heard that before, and you'll hear it again. But stop for a second and think about what it means. Return to Sun Tzu who presents this major theme in The Art of War: In most endeavors understanding the big picture and being properly prepared is more important than performance during the actual event. Preparation and perspective determine the end.

This is especially true when it comes to investing. There's remarkably little that we, as individuals, can do to make any given stock go up or down once we've bought it. Unless you're a Wall Street analyst, regularly issuing Strong Buy, Hold, or Market-Perform ratings, you're not going to have any meaningful effect on the businesses that you invest in. Even though the Internet is giving us all more say about how our public corporations act in society, we are positioned primarily as observers when we invest. And that's good. The business has managers. We're charged with assessing their performance.

The important part, the part where we make the decision, the part where we directly control the performance of our portfolio, is during the process of selecting which stocks to buy, when to buy them, and how much cash to allocate to each one. To ascend to that level of mastery, we have to tighten our controls, narrow our filters, and understand what we're measuring when we buy stocks. But then, as generals, we've given our orders. The troops head out into the field, and all we can do if things go badly is to sound the horn, beat a hasty retreat, and sell our shares.

What we're trying to do here in the Rule Maker Portfolio (and on the RM message boards) is to find the best long-term investments we can make. We try to figure out what makes them so great. Then after buying some businesses, we try to determine if they're continuing to be as great (or greater) than when we bought them. And as time goes forward, we'll be assessing how great they are relative to our other finds. After all, as we're adding $500 each month to this diversified portfolio, we'll just be looking for the best places to put our money at each different point in time.

Put another way: We're looking for the best of the best. Hey, it's pretty easy to find a business that has profits... because companies that aren't profitable tend not to survive very long. But simply being profitable isn't enough. Flat-line profitability for a business in the public markets is bad news, and even slight growth is unacceptable. Heck, in those instances, we'd prefer to just invest in government bonds and be guaranteed a profit. But a guaranteed profit -- tiny relative to inflation -- is not our aim. We'll leave that up to bearish financial journalists who don't think middle-class investors should be managing their own money.

For us, the minimum standard for comparison is an S&P 500 index fund or S&P Depositary Receipts trading on the American Stock Exchange, ticker symbol SPY. The historical annual returns from the S&P 500 have been 11%. We're trying to beat that long-term average, while we compare our results (in terms of the overall portfolio and individual investments) to the market each day, week, month, year, and decade (as reported directly below this report each night).

Now, ideally we want to beat the Foolish Four, which has trounced the market over the past three decades. And that's part of the reason we added this component to the Rule Maker Portfolio as well. Finding companies that consistently outperform the market averages is hard enough; finding any that compete with a logical market-beating mechanical strategy is even more difficult. But we love to aim high. We love to search for phenomenal companies. And, in truth, the group of the best 1% of publicly traded stocks still leaves us with a hundred different public companies to choose from. And finding the best 10% of that best 1% is an exercise in pickiness of the highest order.

So far, we've only found a couple dozen companies that consistently execute on superior business models, with little or no debt and a clear focus on creating value for shareholders. It's not easy, and we'll always be looking. But the fact that we've found a screen of a few dozen may mean that we aren't being picky enough. We'll debate that in future reports, and on the message boards.

So... we're waiting for the good pitches. We're improving our perspective and focusing on preparation. We do feel that we're ultimately headed towards victory.

Elsewhere in Fooldom today, Fools are dueling on Yahoo! (Nasdaq: YHOO). Also of note, our annual Industry Focus 2000 publication, covering 16 investment ideas for the coming year, is now available in Foolmart. And finally, we're looking for a few good Fools to be on The Motley Fool Radio Show this week. Interested? Drop an e-mail to Macg@fool.com with a question or comment on investing and a daytime phone number.

Fool on,

-Oak


 




Rule Maker Portfolio

12/1/99 Closing Numbers
Ticker Company Dly Pr Chg Price
AXPAMER EXPRESS21/32$152.75
CHVCHEVRON CORP1/2$90.06
CSCOCISCO SYSTEMS1/4$91.44
DPHDELPHI AUTOMOTIVE SYSTEMS-3/32$15.88
EKEASTMAN KODAK5/8$62.50
GMGENL MOTORS-1 11/32$72.44
GPSGAP INC7/16$44.00
INTCINTEL CORP-3/8$76.31
KOCOCA-COLA CO7/8$68.19
MSFTMICROSOFT CORP5/32$93.19
PFEPFIZER, INC-3/4$35.88
SGPSCHERING-PLOUGH-2 1/2$48.63
TROWT.ROWE PRICE ASSOC-3/8$35.63
XONExxon CorpUnch.$79.31
YHOOYAHOO INC16 1/8$228.88

  Day Week Month Year
To Date
Since
2/2/98
Annualized
Rule Maker 1.73% .15% 1.73% 24.11% 54.53% 26.87%
S&P 500 .62% -1.33% .62% 13.71% 42.58% 21.41%
S&P 500(DA) .62% -1.33% .62% 14.29% 44.35% 22.23%
S&P 500(DCA) n/a n/a n/a n/a 27.92% 14.41%
NASDAQ .53% -2.73% .53% 52.95% 107.10% 48.90%

Trade Date # Shares Ticker Cost/Share Price LT % Val Chg
6/23/9875CSCO32.865$91.44178.22%
5/1/9882GPS22.708$44.0093.76%
2/3/9859MSFT49.352$93.1988.82%
2/17/9916YHOO126.309$228.8881.20%
2/13/9859INTC50.624$76.3150.75%
5/26/9818AXP104.067$152.7546.78%
2/3/9866PFE27.433$35.8830.77%
3/12/9820XON64.335$79.3123.28%
3/12/9817GM60.399$72.4419.93%
3/12/9815CHV83.343$90.068.06%
2/3/9856TROW33.673$35.635.80%
8/21/9844SGP47.993$48.631.32%
3/12/9820EK63.148$62.50-1.03%
2/27/9827KO69.107$68.19-1.33%
3/12/9811DPH17.202$15.88-7.71%

Trade Date # Shares Ticker Cost Value LT $ Val Ch
6/23/9875CSCO$2,464.86$6,857.81$4,392.95
2/3/9859MSFT$2,911.79$5,498.06$2,586.27
5/1/9882GPS$1,862.06$3,608.00$1,745.94
2/17/9916YHOO$2,020.95$3,662.00$1,641.05
2/13/9859INTC$2,986.79$4,502.44$1,515.65
5/26/9818AXP$1,873.20$2,749.50$876.30
2/3/9866PFE$1,810.58$2,367.75$557.18
3/12/9820XON$1,286.70$1,586.25$299.55
3/12/9817GM$1,026.78$1,231.44$204.66
2/3/9856TROW$1,885.70$1,995.00$109.30
3/12/9815CHV$1,250.14$1,350.94$100.80
8/21/9844SGP$2,111.70$2,139.50$27.80
3/12/9820EK$1,262.95$1,250.00($12.95)
3/12/9811DPH$189.22$174.63($14.59)
2/27/9827KO$1,865.89$1,841.06($24.82)
  Cash: $135.63  
  Total: $40,950.00  


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.