More On Rule Breaking
Russell 2000 instead of Nasdaq?

by David Gardner (DavidG@fool.com)

ALEXANDRIA, VA (Oct. 28, 1998) -- The Fool Portfolio had another pretty good day, Wednesday, rising 1.05%. The Nasdaq actually topped us, up 1.15%, but the S&P 500 rose only 0.26% today. Our lead for the year remains 43 percentage points over both indices. This portfolio, in its fifth year, is currently enjoying its best run yet.

Looking over the numbers for the year now, the S&P and Nasdaq are running almost together once again, after a significant divergence several weeks ago. Here they are:

 
            1998    History  
 S&P 500    10.07%  133.01% 
 Nasdaq     10.63%  141.24% 
 

The more you follow these indices, the more similar they look. I'm actually thinking of breaking some of our own past rules and replacing the Nasdaq with a more interesting index, like the Russell 2000. The Russell measures small stocks -- kinda what the Nasdaq used to do before it grew up. Methinks the Russell 2000 provides a far more interesting read alongside the S&P 500, rather than the redundant Nasdaq. If you have strong feelings either way, or a suggestion for another index altogether, just take a sec to click this link and let us know on our hoppin' Improve The Fool message board. It's the first thing I read every day.

Speaking of breaking rules, I mentioned a week ago that we would be making some changes in the good ol' Fool Port in keeping with making sure it's aligned with our investment approach and perspective. We're not talking about anything dramatic here. It's just that we're currently sitting on a few stocks that really don't fit in very much with what our portfolio is trying to achieve. Our goal is to maximize our returns, beating the market by holding stocks that we really know, companies we understand because we use and appreciate their products.

We also have a real bias toward the so-called "Rule Breakers," which is the subject of the first half of our upcoming book, Rule Breakers, Rule Makers. These are the stocks that are breaking the rules of business in their industries, upstarts that have just shown up on the chessboard and suddenly (and outrageously) put the King in check. Traditionally, these have been our best stocks, and for good reason -- this form of investing, which is highly risky and only for those who can take such risks and really know what they're buying, works.

I got a bunch of mail following my last writeup about Rule Breakers, and I wanted to respond to one of the most straightforward of those, here tonight.

Long-time Fool Jeff Bjorck wrote, "A Rule Breaker portfolio sounds great! But are you abandoning a 'traditional Foolish' portfolio? If 'rule breaking' is the 'true aim' of the Fool Port, does your first book describe the 'false aim'? What about all those people who are still getting your FIRST book (a great place to start!). Will one of the other portfolios (e.g. Foolish Four) expand to replace the Fool Port? Otherwise, it seems that you might be giving the message that the approach of your first book is out of date, wrong, or at least inferior. Here is one vote for ADDING a Rule Breaker vs. subtracting the Fool Port!"

Thanks for writing, Jeff. I realize I wasn't quite clear enough in my first writeup. But this change is a gradual one, a process that we're going to take our time with, and explain as we go. So my writeup tonight is just one car in a long train of effort (a long train brought to you by AMTRAK -- helping you to see America in the 20th century the way they saw it in the 19th!).*

* This is not a paid promotional arrangement. This is merely a self-initiated blatant product placement done in hopes that someone at Amtrak might be sufficiently moved to send us some gratuitous advertising money. We are an advertising-based Internet company, and as you can see, we're now selling out, starting tonight.

Getting back to Jeff's queries, first off we are not abandoning our traditional model for a good growth portfolio. We will base it on the Foolish Four, add dynamic growth stocks over top of it, along with one or more shorts. Same deal. What is going to change is that we're going to state our Rule Breaker principles in a much more explicit way, and make sure each of our stocks clearly fits within that context. (Our aim is to have these principles fully written up and published here by late November.)

One thing my brother Tom has done pretty well recently is laying out his steps to Cash-King investing, which provide a philosophy behind his portfolio. That's something we have never done. Anyone who's a regular reader of The Fool Portfolio -- our oldest and most popular feature here in Fooldom -- already knows many of these principles, because we write about them day in and day out. But nowhere have we codified them. In no place, at present, do we fully explain the philosophical underpinnings that govern our decisions. Consequently, we've been criticized in the past -- rightly, I think -- for seeming to go against the rules that we've set up in our previous books. (Though we explain why we do so in our buy reports, not everybody seems to read those.)

What we have to make clear is that we believe fundamentally that the breaking of such rules -- on its own -- is often what makes for good investing. People wonder why we would ever have bought Amazon.com, based on what they've read in The Motley Fool Investment Guide. It was largely to answer that question that I wrote my half of our next book. I've identified six attributes shared by all true "Rule Breakers," which I lay out in the book and which we'll make explicit online. In each of our buy reports in the future, we'll probably organize those reports in that exact Rule Breaker format. So you can see how we're changing our format, more than our philosophy; we'll be laying out more material to help shape our readers' thinking about just exactly what we're doing, and why we're doing it. Many of the investment selections will remain just the same.

Indeed, to finish up answering Jeff's query, several of our Rule Breaker attributes are rooted in our first book. Thus, we're not talking about this new book rendering obsolete the old work. Far from it. The new book is mainly new material, though it does include a few dramatic statements that in some cases either supplement or contradict past Fool teachings. That's a healthy process; I hope every writer or thinker is able to do that. But in the end, Rule Breakers are only one class of stock -- this new book, or my half of it anyway, really doesn't speak to the Fool Four, small caps, etc. from past works. Those all remain in play, part of our basic approach. The book provides a new definition for a new class of winning stocks.

Speaking of my brother Tom, he tells me he has some misgivings about Amazon.com and is writing about them in his Cash-King portfolio report tonight. So you may wanna click on over, if you're interested. Meantime, I'm going to click back into the main screen at www.fool.com, because it has indeed taken on a ghoulish look!

Fool on.

-- David Gardner, October 28, 1998

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Bookmark Live Fool Port Quotes

10/28/98 Close

Stock Change Bid ---------------- AMZN + 3/4 117.06 AOL +3 3/8 124.25 T + 1/4 63.69 DJT --- 5.00 DD -2 11/16 56.88 XON + 11/16 70.25 INVX - 1/4 13.56 IP - 3/16 44.50 IOM - 1/4 5.44 KLAC +1 31/32 34.97 LU + 1/4 79.75 SBUX + 11/16 39.50 COMS +1 3/32 33.78 TDFX + 3/8 11.25
Day Month Year History Annualized FOOL +1.05% 7.66% 53.55% 415.32% 47.35% S&P: +0.26% 5.03% 10.07% 133.01% 22.14% NASDAQ: +1.15% 2.57% 10.63% 141.24% 23.14% Rec'd # Security In At Now Change 8/5/94 710 AmOnline 3.64 124.25 3316.81% 9/9/97 580 Amazon.com 19.11 117.06 512.55% 5/17/95 1960 Iomega Cor 1.28 5.44 324.67% 10/1/96 84 LucentTech 23.81 79.75 234.97% 8/12/96 130 AT&T 39.58 63.69 60.92% 4/30/97 -1170*Trump* 8.47 5.00 40.96% 2/20/98 200 Exxon 64.09 70.25 9.61% 2/20/98 215 DuPont 59.83 56.88 -4.94% 2/20/98 270 Int'l Pape 47.69 44.50 -6.69% 8/24/95 130 KLA-Tencor 44.71 34.97 -21.79% 8/13/96 250 3Com Corp. 46.86 33.78 -27.92% 7/2/98 235 Starbucks 55.91 39.50 -29.35% 6/26/97 325 Innovex 27.71 13.56 -51.05% 1/8/98 425 3Dfx 25.67 11.25 -56.17% Rec'd # Security In At Value Change 8/5/94 710 AmOnline 2581.87 88217.50 $85635.63 9/9/97 580 Amazon.com 11084.24 67896.25 $56812.01 5/17/95 1960 Iomega Cor 2509.60 10657.50 $8147.90 10/1/96 84 LucentTech 1999.88 6699.00 $4699.12 4/30/97 -1170*Trump* -9908.50 -5850.00 $4058.50 8/12/96 130 AT&T 5145.11 8279.38 $3134.27 2/20/98 200 Exxon 12818.00 14050.00 $1232.00 2/20/98 215 DuPont 12864.25 12228.13 -$636.13 2/20/98 270 Int'l Pape 12876.75 12015.00 -$861.75 8/24/95 130 KLA-Tencor 5812.49 4545.94 -$1266.55 8/13/96 250 3Com Corp. 11715.99 8445.31 -$3270.68 7/2/98 235 Starbucks 13138.63 9282.50 -$3856.13 6/26/97 325 Innovex 9005.62 4407.81 -$4597.81 1/8/98 425 3Dfx 10908.63 4781.25 -$6127.38 CASH $12005.75 TOTAL $257661.31

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