RULE MAKER PORTFOLIO

Fools at the Confessional
The anatomy of mediocrity

By Tom Gardner
May 22, 2000

Once a year -- at least -- your Rule Maker Portfolio managers must wade knee-deep in tears and offer you our apology. We have much to lament, and we must remind ourselves and the world of it. We bought stocks when they should've been sold. We held cash when it should've been invested. We failed to optimize the value of our money.

Here are three examples of our mediocrity:

1. On February 27, 1998, we purchased 27 shares of Coca-Cola (NYSE: KO) at $69.11 per share. We hung red banners out of house. We bathed in corn syrup. We mimicked the sweet, gentle Georgia accent. We fell asleep in history books, envisioning double-digit compounded growth for decades.
   
   What we did not do is fully consider the consequences of evaporating sales growth. Coca-Cola is down 30% since, while the S&P 500 has risen 48%.

2. Two weeks prior to that, we'd somehow come to the conclusion that the mutual fund industry had legs. We set pencil to paper and announced our intention to purchase 56 shares of T. Rowe Price (Nasdaq: TROW) for $33.67 a stub. (Can we say "T. Rowe Price-y"?) We made sport of the ignorance of investors. We prayed for rising expense ratios. We dreamed of 12b-1, and 13b-4, and 27b-11 fees. We pooh-poohed the total-market index fund.
   
   What we did not do is fully consider what havoc the Internet would wreak on pricing in the financial services industry (a havoc that is nowhere near over). T. Rowe Price is up just 12.85% versus S&P 500 growth of 48%.
   
   
3. Six months after buying stakes in brown bubbles and high-priced funds, we finished running the numbers on Schering-Plough (NYSE: SGP) and posted our buy report. We held Joan Lunden's hand in a summer field. We re-enacted the scene of American troops descending on Schering AG headquarters and seizing The Plough for our own at the close of World War II. I slept clutching a gold-rimmed balance sheet.

What we did not do is fully consider the implications of Schering-Plough committing 25% of its business to the patent-threatened Claritin antihistamine. Achoo! Schering Plough lost 7% while the S&P 500 rose more than 29%.

Yea Fools, verily, we have made mistakes. And, far more than just these. We have omitted facts; we have slighted logic; our heads have been rattled by mental lapses; we have slipped and tripped our way to sub-optimal value in this portfolio. What is now a 60% gain on our investments (versus a 48% gain for the S&P 500) could have, with greater care, been a 75% gain, or 80%, or more.

Oh, but if there is one thing we've done right, one truly distinguishing mark, it's that we have considered your counsel throughout. We've listened to you. We've passed days of hours thinking about your ideas.

No, we have not blindly followed yours or anyone's bidding.

Some of you felt we should add Nike (NYSE: NKE) to the portfolio -- a company still trying to clean up inventory problems. Others were exasperated by our decision to buy the outperformer, Yahoo! (Nasdaq: YHOO) -- which first-class Morgan Stanley analyst Mary Meeker recently dubbed "Microsoft of the Internet." We have heard a few of you call Intel (Nasdaq: INTC) dead meat at the hands of Advanced Micro Devices (NYSE: AMD). Some of you said Gap (NYSE: GPS) will fail to distinguish itself from the competition. I even remember gazing skeptically on the strange love for a company named Just For Feet (OTC: FEETQ)... which now trades at less than 3 cents a share.

But, oh, have we gained from your insights.

Without you, we would not own Cisco Systems (Nasdaq: CSCO) -- our best performer -- chosen through public debate and your vote in June of 1998. And, think of all the research you've shared. Without spencersdada's work, we would not know of Adobe's (Nasdaq: ADBE) rising star. Without muenzer's work, we might not be skeptical of the AOL (NYSE: AOL) and Time Warner (NYSE: TWX) merger. Without motleychad's work, gasp, we might own Kellogg (NYSE: K), a pretender to the throne.

Without you, we wouldn't know half what we do, and we wouldn't be having any fun, really. Thank you for being patient with us, for being merciful, and for being self-critical. Let's hope none of us have to work alongside or pass the days with anyone who is not self-critical -- a cruel fate.

To close, I hope you've taken value from the Rule Maker Portfolio experiment and adventure, as I have. Please let us know whether you have or haven't in the poll below...

Has the Rule Maker Portfolio been helpful to you?

1. Thoroughly, yep, and I've enjoyed it.
   
2. Often enough that I check in on occasion.
   
3. Not really, no -- but thanks for trying.
   
4. Never -- you all are an obstacle to success.

Click here to let us know how you feel.