@Home Finds a Home
And Some FAQ's

by Paul Larson (TMFParlay@aol.com)

CHICAGO, IL (Dec. 4, 1998) -- The Rule Breaker portfolio, for those who missed it, announced a new buy yesterday. The newest addition to this portfolio is none other than the leading provider of high-speed Internet access via cable TV, @Home (Nasdaq: ATHM). For complete details on the reasoning behind the "At Home" purchase, make sure to check out the buy report. It's nearly 5000-words of Foolish thinking that dwarfs what can be said about the company in this limited format of a nightly recap. Nevertheless, Jeff has a few things he wishes to add about the company that he will chime in with on Monday. We have plenty of "remote" staffers here at the Fool, but make sure to check out Jeff's location next week.

In any case, @Home's stock, not surprisingly, gapped open at the start of trading today. After closing on Thursday at $52 7/8, the stock opened today at $58 for roughly a 9% gap. While we're absolutely flattered that a Foolish announcement can potentially move a stock in such a way, we'd prefer to be a bit less flattered and get the stock at a lower price! At least this 9% gap is much less than the 27% gap seen when the buy for 3Dfx (Nasdaq: TDFX) was first announced. The much larger size of @Home probably had something to do with the lower price gap.

The cash in the portfolio did not sit idle for long as the Rule Breaker Portfolio gave 450 shares of @Home a new home in the portfolio at a cost basis of $56.08 per share including commissions. Proving that we're not market timers, the price paid was nearly $2 higher than the daily low. On the other hand, good fortune has it that the position is already in the black since @Home ended the day at $56 15/16. Daily, weekly, and even monthly moves don't really matter for the long-term investor; it's the large yearly moves that truly interest us.

During this time of great flux for this portfolio I thought I would answer some of the most frequently asked questions we get in both email and on the boards. Without further delay...

Q: "Are you planning on taking taxes out of the portfolio? If no, why not? This is a 'real money' portfolio we are talking about here, and aren't taxes a real-life consideration?"

A: Yes, taxes are a very real consideration for everyone, but we do not subtract taxes from the portfolio's profitable sales nor do we add tax-deductions on our losses in the Rule Breaker Portfolio. The main reason is that taking taxes out of the portfolio, while more realistic, would make it impossible to compare the portfolio's returns to the market. After all, the major market indices, such as the S&P 500, do not account for taxes. We aren't alone in this practice since no other financial sites account for taxes simply because everyone has a different tax rate.

Furthermore, if the Rule Breaker Portfolio were held in an IRA (it's not) then this discussion would end much sooner. Long story short, we (actually, David, since it's his moolah) will end up paying taxes on the capital gains from funds outside the portfolio. There's nothing dishonest about doing so since we are just trying our best to match ourselves against the market. Taking taxes out wouldn't allow us to grade ourselves on an apples to apples basis.

For more information on taxes, make sure to visit our tax area.

Q: "You say in your first book, The Motley Fool Investment Guide, that one should aim to have 20-25% of a portfolio in the Foolish Four. It appears that the Rule Breaker Port has a significantly lower allocation than this. What gives?"

As of today's close, the Rule Breaker's four Foolish Four stocks, AT&T (NYSE: T), DuPont (NYSE: DD), Exxon (NYSE: XON) and International Paper (NYSE: IP), represent roughly 13% of the portfolio's assets. At the beginning of the year the Foolish Four as a group (then a different batch of stocks) represented 26% of the equity. The decreased percentage is thanks to the sheer appreciation of some of the other stocks in the portfolio, namely America Online (NYSE: AOL) and Amazon (Nasdaq: AMZN). The current percentage is below what we would ideally prefer, and we may in the near future look to put excess funds towards the Foolish Four to boost their weighting in the portfolio back up to the 20% level. The decision hasn't been definitively made yet, but reallocating is well within the realm of possibility.

Q: "I don't currently own any of the stocks in the Rule Breaker portfolio, and I see that you guys just bought @Home. You Fools seem honest enough, and that 108% YTD gain sure does look good to me. Think I'll follow y'all and buy @Home for myself. Good idea, right?"

Bad idea. Let me restate what I wrote last Friday when I said that we DO NOT recommend you follow blindly what this (or any) portfolio does. Look at our reasoning, learn a thing or two, and make your own decisions. Only then will you truly own a Foolish portfolio.

Allow me also to borrow some words that David posted on the Rule Breakers message board earlier this week when he said, "Just remember that you should always be making your own decisions. If you need any reminder of our extremely Foolish fallibility, please note that we sold three stocks today that each had a similar amount of anticipation in the minds of many when we announced their purchase in the past. We sold each today at a loss, after holding two years or more.

"We screw up left and right. You will, too, but that won't preclude either of us from beating the market. However, we increase our chances of beating the market when we each learn our OWN lessons from our OWN decisions."

It's also worth citing this famous Fribble where this most frequently asked question is answered in a different way.

Moving to the news of the day, there was an excellent study sponsored by our largest single holding, America Online, released yesterday that shows just how pervasive the Internet is becoming in most people's lives. The story is rather lengthy, but nevertheless an interesting read. My favorite quote came from Bob Pittman, AOL's President, when he said, "What AOL is looking for is, we are trying to make this medium as central to people's lives as the telephone or television. This (survey) says this is happening faster than we expected it.'' Gotta love it.

I want to end this nightly recap with a note about the new Rule Breaker Message Board. It is only a week old and is already one of the busiest boards in Folly. Actually, some rather sharp Fools guessed on the board that @Home was going to be the next Rule Breaker buy even before it was announced. Fools going by the handles of TMainzer, kdewalt, Oslo56 as well as our own Karen Kosoy (TMF Karen) all speculated on the board that @Home was a Rule Breaker, and they were right!

Think you have a stock that fits the bill for being a Rule Breaker? Stop on by the board and tell us how that stock stacks up against the six criteria below:

  1. The top dog and first-mover in an important, emerging industry...
  2. Sustainable advantage gained through business momentum, patents, visionary leadership, and/or inept competition...
  3. Excellent past share appreciation, measured by a relative strength of 90 or higher...
  4. Good management and smart backing...
  5. The greater the consumer brand, the better...
  6. A significant constituent of the financial media is recently on record for calling it overvalued...

There will be more purchase announcements made in the near future, and I wouldn't be surprised if the next Rule Breaker added to this portfolio won't first be put forth on the board, too.

I guess I should say something about the portfolio's performance before I end. On the day the Rule Breaker Portfolio gained 1.67% in value versus stronger moves forward of 2.30% for the S&P and 2.50% for the Nasdaq. During this week of great change for the portfolio, the scorecard looks like this for the past five days:

Nasdaq:   -0.66%
S&P 500:  -1.30%
Fool:     -6.03%

See you on the board, and have a great weekend!

-- Paul Larson

Order your copy of David and Tom Gardner's new book, Rule Breakers, Rule Makers, in advance. This Simon & Schuster beauty doesn't arrive until January, but you can reserve your copy today! The first half of the epic book, on Rule Breakers, elucidates the Fool Port's investment style; the second half, on Rule Makers, further explains Cash-King investing.

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Bookmark Live Fool Port Quotes

12/04/98 Close

Stock Change Bid ---------------- AMZN -1 188.50 AOL +3 5/8 87.63 T +1 1/4 63.44 ATHM + 6/7 56.94 DJT - 3/16 4.56 DD + 3/8 55.13 XON +1 71.50 IP + 1/16 43.50 IOM + 1/8 7.44 LU +7 1/4 95.50 SBUX + 1/8 48.94 TDFX + 5/8 13.75
Day Month Year History Annualized FOOL +1.67% 0.72% 108.53% 599.81% 56.71% S&P: +2.30% 1.11% 21.24% 156.66% 24.31% NASDAQ: +2.50% 2.75% 27.56% 178.15% 26.64% Rec'd # Security In At Now Change 8/5/94 1100 AmOnline 1.82 87.63 4720.65% 9/9/97 440 Amazon.com 19.74 188.50 855.02% 5/17/95 1960 Iomega Cor 1.28 7.44 480.87% 10/1/96 84 LucentTech 23.81 95.50 301.12% 8/12/96 130 AT&T 39.58 63.44 60.29% 4/30/97 -1170*Trump* 8.47 4.56 46.13% 2/20/98 200 Exxon 64.09 71.50 11.56% 12/4/98 450@Home Corp. 56.08 56.94 1.53% 2/20/98 215 DuPont 59.83 55.13 -7.87% 2/20/98 270 Int'l Pape 47.69 43.50 -8.79% 7/2/98 235 Starbucks 55.91 48.94 -12.47% 1/8/98 425 3Dfx 25.67 13.75 -46.43% Rec'd # Security In At Value Change 8/5/94 1100 AmOnline 1999.47 96387.50 $94388.03 9/9/97 440 Amazon.com 8684.60 82940.00 $74255.40 5/17/95 1960 Iomega Cor 2509.60 14577.50 $12067.90 10/1/96 84 LucentTech 1999.88 8022.00 $6022.12 4/30/97 -1170*Trump* -9908.50 -5338.13 $4570.38 8/12/96 130 AT&T 5145.11 8246.88 $3101.77 2/20/98 200 Exxon 12818.00 14300.00 $1482.00 12/4/98 450@Home Corp. 25236.13 25621.88 $385.74 2/20/98 215 DuPont 12864.25 11851.88 -$1012.38 2/20/98 270 Int'l Pape 12876.75 11745.00 -$1131.75 7/2/98 235 Starbucks 13138.63 11500.31 -$1638.31 1/8/98 425 3Dfx 10908.63 5843.75 -$5064.88 CASH $64208.05 TOTAL $349906.61


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