FORTY-SIX BUCKS! (Rule Breaker Portfolio) December 16, 1998

<THE RULE BREAKER PORTFOLIO>
What Happened to Fool Port?

FORTY-SIX BUCKS!
Percentages, not points

by David Gardner ([email protected])

ALEXANDRIA, VA (Dec. 16, 1998) -- The Rule Breaker Portfolio continued its majestic performance Wednesday, absolutely zooming its way through the month of December (up 18% this month, versus a red-ink S&P 500). On an otherwise uninteresting market day in which the indices barely budged, our portfolio appreciated 6.33%. Today will be remembered both as the day that Amazon.com rose forty-six bucks, and the day that Amgen became a Rule Breaker -- or a Rule Breaker Portfolio investment, anyway. And --

HEY!

WAIT!

Listen, Gardner, you can't just blithely run on about what happened to the portfolio today. Stop there a moment! You said Amazon.com -- the unprofitable online retailer -- went up FORTY-SIX (46) BUCKS? Today? Just today? In one day... forty-some bucks?

Yes. And why? What did it? Well, ostensibly it was triggered by an Oppenheimer & Co. brokerage report that put out a $400 price target for this stock. In the face of that, 17 million shares changed hands and Amazon rose $46 1/4 to close at $289.

Now let's give you a contrary take. Why? Because I can tell you that virtually every media establishment -- and virtually everyone on our own message boards -- will tell you this is insanity -- the ULTIMATE example of out-of-control speculation gone wild over an unprofitable company, etc., etc., etc. You've heard it before. In fact, we heard the same arguments when we paid $20 a share for this stock more than a year ago. And you don't have to look much further than the supposedly neutral Reuters recap story, whose first sentence ran, "Shares of Internet bookseller Amazon.com Inc. surged early Wednesday after one Wall Street analyst set an astronomic $400 target price on the shares" (Italics mine).

Y'know, in our next book, I actually entitle a chapter "Percentages, Not Points" in which I address this very inability that the media has to put numbers in context. And this was yet another perfect demonstration, even before our book has been printed!

On a percentage basis, that $46 jump was just 19%. Now, 19% isn't anything to shake a stick at. That's a great move for any stock in one day. But is it the biggest move we've ever seen? Nothing like it. Pretend -- as the Reuters reporter should have done -- that the stock was at $24, rather than $240. Sticking with the same percentages, the Oppenheimer analyst comes out with an equivalent price target of $40, and the stock jumps from $24 to $28 1/2 today on that news.

That's all that happened.

"Astronomical," to put out a 12-month price target on a stock that is 60% higher than the current price? Not at all. Happens all the time, and sometimes these price targets are not only hit, but even exceeded. (Other times, they're never hit -- right, Merrill Lynch and Boston Chicken?) It happens all the time, and you and I should know that, even if an inexperienced journalist who doesn't really understand investing or numbers doesn't. I guess "400" just sounds like a big number, "too big" a number to him or her.

Anyway, we want to hear what you think of Amazon.com's $400 price target, which we're asking directly in our Polling All Fools feature today -- click in and vote.

It is said often, in this space, that great stocks -- RULE-BREAKING stocks -- climb a "Wall of Worry" over time. That's exactly what is happening with Amazon. As the company works to create a highly branded, user-friendly global e-commerce superstore that does billions in annual revenues, there will be many, many people who think it's crazy, outrageous, won't ever work, can't be profitable, overvalued, overvalued, overvalued, etc. Supposedly objective news organizations will instinctively -- they can't help it! -- use words like "astronomical" to describe price targets. These are good signs, my friends... yes, good signs. Happened all the way up with AOL, too. And Microsoft, once, too. And Wal-Mart, way back when. So long as the media -- let alone the people listening to them -- have a narrower conviction about the world than will actually come to pass, so long as the media can't put numbers into context ("Percentages, Not Points"), we will make money.

We have gotten many interesting notes in the Amazon message board, as you'd expect. The single best came from Toromi, and is worth your click tonight, if you're interested in making more sense of the world. Click here to read it. And that was written just prior to today's 19% gain...

I'll say it again, because I suppose it bears repeating. The stock could go to $400 tomorrow, or it could go to $100 tomorrow. We don't care about tomorrow, or next month. We've already made far more money than we expected with these shares, which is always true of our best stocks (they exceed our expectations). We have sold out more than our original investment, and are only playing with profits. Anyway, we care about the long-term success of the business, and we remain invested based on our expectation that our company (we're part owners) will thrive over the long term. Just buying and holding isn't sexy, I know. No daytrading here, sorry. We always have to apologize for trying to look beyond the here and now.

Anyway.

Oh, yeah, and we bought Amgen (Nasdaq: AMGN) today. It gapped up as expected, and didn't come back down. That's OK. Anyway, we paid $85 3/4 for 290 shares. So let us tonight break the proverbial bottle of champagne over our computer monitor. (Our keyboard is now a mess.) Amgen closed unchanged from our purchase price.

I'm looking for more biotechnology stocks. I love this industry (I look forward to writing more about why, in future installments.) I think anyone who is a Rule-Breaking investor should, too. If you know our six attributes and would like to show how the biotech company you follow fulfills them all, please do click into our Rule Breaker Portfolio message board and help our search.

Oh, yeah. Finally, tonight, our buy-and-hold portfolio crossed the $400,000 and 700% historical return marks, now up 719% vs. 153% for the 90%-of-funds-beating S&P 500 over the past four and a half years. Anyway, I almost didn't notice this. And I think I'll stop counting these 100-percent-increment landmarks.

I know, all this constant mentioning of the numbers is probably boring. But if you've been a long-time follower of this portfolio, you know the volatility we've seen and will see in the future -- we weren't always up 700%! Given that, I hope you'll celebrate the Rule Breaker's success with us. Sometimes we do have to keep pinching ourselves to remind us where we were when we got started -- we'll try to stop pinching you in the process! And we'll try to make less of a habit of it, though I do hope you'll indulge us, and indulge yourself as a participant with us, once in a while.

Fool on!

-- David Gardner

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12/16/98 Close

Stock  Change    Bid 
 ---------------- 
AMZN  +46 1/4 289.00
AMGN  +1 13/16 85.75
AOL   +3 1/2   96.25
T     +  3/8   69.63
ATHM  -  1/16  68.63
DJT   -  1/8    4.06
DD    -2 1/8   51.75
XON   +1 3/4   75.75
IP    -  13/16 41.38
IOM   +  9/16   7.56
LU    -1 3/8   94.69
SBUX  -1 3/16  50.00
TDFX  -  13/16 12.19

 
                   Day   Month    Year  History  Annualized 
      R-Breaker  +6.33%  17.89% 144.08%  719.14%   61.91%
        S&P:     -0.08%  -0.14%  19.74%  153.48%   23.75%
        NASDAQ:  -0.16%   3.07%  27.96%  179.01%   26.51%


    Rec'd    #  Security     In At       Now      Change
   8/5/94  1100 AmOnline       1.82     96.25    5195.15%
   9/9/97   440 Amazon.com    19.74    289.00    1364.20%
  5/17/95  1960 Iomega Cor     1.28      7.56     490.63%
  10/1/96    84 LucentTech    23.81     94.69     297.71%
  8/12/96   130 AT&T          39.58     69.63      75.92%
  4/30/97 -1170*Trump*         8.47      4.06      52.03%
  12/4/98   450@Home Corp.    56.08     68.63      22.37%
  2/20/98   200 Exxon         64.09     75.75      18.19%
 12/16/98   290 Amgen         85.75     85.75       0.00%
   7/2/98   235 Starbucks     55.91     50.00     -10.57%
  2/20/98   270 Int'l Pape    47.69     41.38     -13.24%
  2/20/98   215 DuPont        59.83     51.75     -13.51%
   1/8/98   425 3Dfx          25.67     12.19     -52.52%

    Rec'd    #  Security     In At     Value      Change
   9/9/97   440 Amazon.com  8684.60 127160.00  $118475.40
   8/5/94  1100 AmOnline    1999.47 105875.00  $103875.53
  5/17/95  1960 Iomega Cor  2509.60  14822.50   $12312.90
  10/1/96    84 LucentTech  1999.88   7953.75    $5953.87
  12/4/98   450@Home Corp. 25236.13  30881.25    $5645.12
  4/30/97 -1170*Trump*     -9908.50  -4753.13    $5155.38
  8/12/96   130 AT&T        5145.11   9051.25    $3906.14
  2/20/98   200 Exxon      12818.00  15150.00    $2332.00
 12/16/98   290 Amgen      24867.50  24867.50       $0.00
   7/2/98   235 Starbucks  13138.63  11750.00   -$1388.63
  2/20/98   270 Int'l Pape 12876.75  11171.25   -$1705.50
  2/20/98   215 DuPont     12864.25  11126.25   -$1738.00
   1/8/98   425 3Dfx       10908.63   5179.69   -$5728.94

                              CASH  $39332.55
                             TOTAL $409567.86

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