Rule Maker Portfolio Rule Maker's Final Cut

After five years, the Rule Maker Portfolio comes to a close. Like every brave experiment, this one requires a send-off. Bill Mann attempts to calculate the total return of all Fool portfolios and finds some land mines along the way in the form of tax treatment and lost data. His conclusion: Over the life of the ports, they did just fine.

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By Bill Mann (TMF Otter)
February 26, 2003

You know, Pink Floyd's The Final Cut is pretty underrated, overshadowed by the band's three masterpieces: The Wall, Wish You Were Here, and Dark Side of the Moon. When I was in college, the guy across the hall from me would play "Get Your Filthy Hands Off My Desert" at full volume (at "11", if you will). Heh-heh. Good times, man.

There was a thing about The Final Cut. Similar to the Beatles' Abbey Road, it was conceived and executed as the swan song for those bands. Yeah, yeah -- Let It Be, Delicate Sounds of Thunder, and all that. Some things don't really end exactly when they should. But it was quite clear to the bands, to the producers, and to the listeners that the era, the way things had been, was over. When the Fool started its real-money portfolios in 1994, nothing like it had been done before. A couple of ordinary guys came online and said, "Let's learn together, and when stuff goes bad and stuff goes well, we'll figure out what it was." But no matter what we had done with the ports in the last few years, there was almost no way they could live up to this promise.

The Motley Fool portfolios end today. Well, not exactly today since we've got the Drip report tomorrow, but then that's it. This means I've got some loose ends to finish up today for the Rule Maker Portfolio. Things like, "What happens to the money?" I'm also going to try to do something that should have been done a long time ago: provide a blended total return for all the Fool real-money portfolios, from 1994 to today.

So, this is the Final Cut for the Fool portfolios. Well, except it's not like we're breaking up the band or anything. But this portion of what we do, what we're about... well, it's just tired. It's spent. It's time to do new things.

Where you goin' with that money?
As most people who have followed the Rule Maker Portfolio know, the money that has been invested in the port is Fool co-founder Tom Gardner's. For about the last year, management thereof has been entrusted to me, but the dinero remains his. From Tom it came, and to Tom it will go. He'll also get back the undeployed money in the account, close to $13,000. If I were him, I'd think about plowing some of that money into our existing Rule Makers, maybe add Home Depot (NYSE: HD) and McDonald's (NYSE: MCD) into the mix, and just letting it ride.

For the most part, though, it occurs to me that shutting down the ports could force us to carry out Rule Maker's premise in the first place: Buy companies and hold them for a decade through thick and thin. I don't think that "buy and forget" investing is the world's most intelligent strategy when you're dealing with individual equities -- you could too easily be saddled with a Gap (NYSE: GPS) or a McDonald's, where the company's performance goes into decline. But we could circle back here in a few years and see how the portfolio as it is constituted today stacks up. Certainly having no weekly need to revisit the port takes away the temptation to be fiddling with the thing.

Still, that's wishful thinking. The portfolio is closing. Of the existing portfolio companies, I least trust T. Rowe Price (Nasdaq: TROW) and Schering-Plough (NYSE: SGP), although I can't pose any real arguments that these companies are in any way overvalued at this point. As for the others, I'm comfortable stating that current prices offer safety against long-term capital loss -- being careful with General Dynamics (NYSE: GD), which is facing the potential of war shifting needs to, or away from, its weaponry. File these three under "heightened potential for turmoil" -- nothing more, nothing less. All in all, it might be plenty interesting to come back here in a few years to see how these companies stand -- as companies and as investments.

So, how'd ya do?
It's not been done before. I'm not sure why, actually. What happens when you take every penny ever invested into the real-money portfolios at The Motley Fool? What are the total blended returns of all the ports, from 1994 to today? Well, I've tried to figure it out.

While this is simply an exercise in "What ifs," there are other practical considerations. We at the Fool have demanded that mutual fund companies be exposed for cherry-picking their returns to make them look as good as possible, using survivorship bias to hide the miserable performance of discontinued funds. The real-money portfolios were never meant to be calculated as a single port -- there was absolutely no coordination between them -- but if mutual fund companies should have to provide blended averages, the Fool should, too.

The Association for Investment Management & Research (AIMR) provides a set of guidelines for portfolio reporting called the Performance Presentation Standards, which I intend for this presentation to meet, save a few marks. First, the PPS recommends that returns be audited by a third party and that they be periodic in nature. The ones I provide here are unaudited. Similarly, as we're discussing portfolios that are shutting down, there will be no ongoing calculations -- these are terminal. If there are math errors, they are mine.

Second, we owned another real-money portfolio from September 1995 to January 1996 called Running With the Market, which was a short-lived, technical analysis-based approach (yikes!). Though real money was invested, I have no documentation on how much, when, or what was bought because the portfolio existed way back when the Fool was only available on AOL. Similarly, the Retiree Portfolios, which ran from December 1999 to December 2000, are not included because withdrawals and purchases were poorly documented. If I can get either of these components sewn up, I'll republish the information at a later date.

So the ports included in the blended return are as follows:

  • Boring (1/96-11/00)
  • Drip (7/97-2/03)
  • Foolish 4 (12/98-12/00)
  • Foolish Workshop (1/01-5/01)
  • Harry Jones (1/99-8/99)
  • Rule Breaker (9/94-2/03)
  • Rule Maker (9/94-2/03)

When a port closed, I assumed that its money was immediately withdrawn. I'm allocating taxes at the appropriate rate in each period when a taxable event occurred, which means that any appreciated stock still being held has not been taxed. Each closed port is treated as a taxable event -- the actual taxes paid for the trades within each port would have generated a different (and ostensibly higher) tax drag. All trading costs, on the other hand, are reflected in the totals.

Adding all of these portfolios together, from the first allocation in 1994, I calculate a total real-money investment of $226,642. Adding the total investment returns from these ports, the final balance is $342,263.85. This equals a total Internal Rate of Return of 14.6%. A back-of-the-envelope calculation of taxes generated from actual trading places the total IRR at about 13.6%, with a total value of the ports at about $321,000.

With the old faithful S&P 500 as the benchmark, the results are:

Compound Annual Growth Rate  (unaudited)
Blended Fool Ports                13.6%
S&P 500                            7.1%
S&P 500 w/ dividends reinvested    8.8%

Foolish best!
Bill Mann, TMFOtter on the Fool Discussion Boards

Bill Mann is senior editor of The Motley Fool Select, where you can find his best Foolish stock ideas that you won't find anywhere else. He owns shares of McDonald's and General Dynamics. The Fool is investors writing for investors.


 

Rule Maker Portfolio

  Ticker Company Price
 Change
 Daily Price
 % Change
 Price 
  AXP AMERICAN EXPRESS COMPANY (0.33) (1%) 32.73 
  KO THE COCA-COLA COMPANY (0.66) (1.63%) 39.72 
  NOK NOKIA CORP. (0.54) (4.07%) 12.74 
  JNJ JOHNSON & JOHNSON (0.94) (1.78%) 51.82 
  PFE PFIZER INC 0.21 0.73% 28.90 
  GD GENERAL DYNAMICS CORPORATION (0.8) (1.31%) 60.35 
  TROW PRICE T ROWE GROUP INC (0.54) (2.11%) 25.02 
  SGP SCHERING-PLOUGH CORPORATION (0.36) (2.05%) 17.22 
  COST COSTCO WHSL CORP NEW (0.04) (0.13%) 30.00 
      
  Trade Date # Shares Ticker Cost/Share Price  Total % Ret  
 05/26/98 95 AXP 35.38 32.73  -7.49%
 02/27/98 27 KO 69.11 39.72  -42.52%
 02/15/00 250 NOK 27.21 12.74  -53.18%
 04/03/01 30 JNJ 47.28 51.82  9.59%
 02/03/98 66 PFE 27.43 28.90  5.35%
 10/24/02 25 GD 79.98 60.35  -24.54%
 02/06/98 75 TROW 34.12 25.02  -26.67%
 08/21/98 44 SGP 47.99 17.22  -64.12%
 07/24/02 41 COST 35.89 30.00  -16.41%
      
  Trade Date # Shares Ticker Total Cost Current Value  Total Gain  
 05/26/98 95 AXP 3,360.87 3,109.35  -251.52 
 02/27/98 27 KO 1,865.89 1,072.44  -793.45 
 02/15/00 250 NOK 6,802.85 3,185.00  -3,617.85 
 04/03/01 30 JNJ 1,418.50 1,554.60  136.10 
 02/03/98 66 PFE 1,810.58 1,907.40  96.82 
 10/24/02 25 GD 1,999.50 1,508.75  -490.75 
 02/06/98 75 TROW 2,559.06 1,876.50  -682.56 
 08/21/98 44 SGP 2,111.70 757.68  -1,354.02 
 07/24/02 41 COST 1,471.49 1,230.00  -241.49 
Cash:11,132.36 
Total:27,334.08 


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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.