Rule Maker Portfolio Learning How to Beat the Market

It's unlikely the Rule Maker Portfolio will meet its goal of beating the S&P 500 over its first five-year period, but this doesn't mean we're thinking about moving our money to an index fund. We're learning. We're willing to absorb the risk of owning individual stocks. And we believe, with patience and an interest in improving our approach, that we can beat the market going forward.

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By Tom Gardner
May 29, 2001

It's with disappointment today that we again survey our performance. Our portfolio is down for the year. And it's down since its inception, quite significantly, to the S&P 500. Our aim, "To beat the stock market's average return over five-year periods," is very likely to go unmet. Perhaps the aim itself was mistaken. Maybe our belief-in-self was misplaced.

To comfort our beaten brow, we could make the rather cheap point that Berkshire Hathaway (NYSE: BRK.a) has also underperformed the S&P 500 since spring 1998. In fact, investors on June 30, 1998 purchased shares of Berkshire Hathaway, at its all-time high, for $83,330 a certificate. That investment scored against the S&P 500 comes to:

Berkshire Hathaway: -18%

The S&P 500: +13%

Alas, dear Fool, we know the point's cheap. Berkshire has increased its book value over that time. And over the past five years Berkshire has slightly outperformed the S&P 500. That, again, is a feat we're extremely unlikely to equal. Furthermore, Warren Buffett, Charlie Munger, and their colleagues are more thorough, more insightful, more experienced, more ___________, more___________, and more ___________ (fill in the blanks) investors than we are.

So, we've stumbled upon a crossroads.

We stand less than two years from our fifth birthday. That's a significant date for us. And as we've written here countless times, investors that aren't beating the S&P 500 over five-year periods should ask themselves:

1. Am I learning more about business and investing?

2. Am I enjoying my allocation of time to this subject?

3. Am I willing to absorb the risk of owning individual companies?

4. Do I believe I can beat the market going forward?

Those are the criteria we've lived by. They're the criteria we will (barring airborn virus) apply in early February, 2003 when we blow out five motley candles on the Rule Maker cake. If we're not beating the market's average return, we must be able to confidently say "Aye!" to all of the above.

I am learning. I am happy. I welcome the risk. And I think I can outperform the index fund (after all commissions and taxes are removed... as is the case with this portfolio).

If we cannot say it and write it, then gradually and methodically we ought to move our old and new savings into market-meeting index funds. Advance notice: It's just as unlikely that we'll be beating the market then as it is that we'll move our monies to the index. Even with our ears boxed and our investments in the red, we're enjoying the process today. We're learning. We're willing to absorb the risk. And we believe, with patience and an interest in improving our approach, that we can beat the market going forward.

After all, it was just 15 months ago that our portfolio was beating the S&P. Microsoft and Cisco and Intel and Yahoo! led the charge into this century. The next generation of business was all software and networking and wireless, with high-speed video on demand lighting up flat screens in every hallway.

We were market-beaters back then. And admittedly, we -- along with many -- were carried away by the promises of the extraordinary events that Bill Barker wrote of last week in his very fine article, "Peer-Pressure Investing."

We're hopeful that we've learned important lessons from the past year. And as Matt Richey turns the reins of daily management of this portfolio over to Richard McCaffery, I'm just as committed as ever to putting $500 of savings into this portfolio each month and having a hand in the direction of that money.

However, none of us will promise -- nor have we ever -- that we'll achieve our goals. We will not promise -- nor have we ever -- that the Rule Maker Portfolio will be your ticket or ours to early retirement, white beaches, Ivy-League college funds, seven-figure charitable gifts, and a chicken in every pot. The safer ticket there is: 1) the elimination of credit-card debt, 2) a method of regular savings, and 3) the direction of that savings into index funds.

But if you're interested in continuing to learn about individual companies and intrigued by our logic (flawed as it may be, at times -- e.g. I loved Yahoo! (Nasdaq: YHOO) at $60) -- then read, question, and debate this portfolio. And we'll learn from each other. Onward.

Tom Gardner is co-founder of The Motley Fool and owns shares in all four companies mentioned above. The Fool has a full disclosure policy.


 

Rule Maker Portfolio


5/29/01 as of ~8:30:00 PM EDT

Ticker Company Price
Change
Daily Price
% Change
Price
AXPAMER EXPRESS(0.92)(2.12%)42.41
CSCOCISCO SYSTEMS(1.59)(7.21%)20.46
INTCINTEL CORP(1.25)(4.30%)27.85
JNJJOHNSON & JOHNSON0.190.20%97.44
KOCOCA-COLA CO0.170.35%48.34
MSFTMICROSOFT CORP(0.57)(0.80%)70.34
NOKNOKIA CORP ADS(1.26)(3.99%)30.35
PFEPFIZER, INC1.182.82%43.04
SGPSCHERING-PLOUGH0.601.44%42.25
TROWT.ROWE PRICE GRP INC0.220.60%36.91
YHOOYAHOO INC(2.13)(10.18%)18.79

Overall Return -- total % Gained (Lost)
  Day Week Month Year
To Date
Since
Inception
(1/6/1998)
Rule Maker(2.70%)(2.70%)(0.06%)(19.71%)(15.99%)
Comparable S&P 500n/an/an/an/a14.82%
S&P 500(0.78%)(0.78%)1.48%(3.97%)29.77%
S&P 500 (DA)(0.77%)(0.77%)1.46%(3.91%)31.54%
NASDAQ(3.35%)(3.35%)2.80%(11.94%)36.47%

Internal Rate of Return -- Annualized Rate of % Gained (Lost)
  Since Inception (1/6/1998)
Rule Maker(6.82%)
vs. S&P 5005.93%

Trade Date # Shares Ticker Cost/Share Price Total % Ret
2/3/9866PFE27.4343.0456.89%
2/3/9859MSFT49.3570.3442.53%
5/26/9866AXP36.0042.4117.81%
4/3/015JNJ87.3097.4411.62%
2/3/9875TROW34.1236.918.17%
2/13/98147INTC27.4427.851.51%
8/21/9844SGP47.9942.25(11.97%)
6/23/98182CSCO24.7220.46(17.05%)
2/15/00132NOK40.2130.35(24.52%)
2/27/9827KO69.1148.34(30.05%)
2/17/99106YHOO57.6018.79(67.38%)

Trade Date # Shares Ticker Total Cost Current Value Total Gain
2/3/9859MSFT$2,911.79$4,150.06$1,238.27
2/3/9866PFE$1,810.57$2,840.64$1,030.07
5/26/9866AXP$2,375.95$2,799.06$423.11
2/3/9875TROW$2,559.06$2,768.25$209.19
2/13/98147INTC$4,033.23$4,093.95$60.72
4/3/015JNJ$436.50$487.20$50.70
8/21/9844SGP$2,111.70$1,859.00($252.70)
2/27/9827KO$1,865.89$1,305.18($560.71)
6/23/98182CSCO$4,498.75$3,723.72($772.00)
2/15/00132NOK$5,307.79$4,006.20($1,301.59)
2/17/99106YHOO$6,105.72$1,991.74($4,113.98)
 
Cash: 
Total: 
$30.20
$30,055.20
 


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.