<THE RULE BREAKER PORTFOLIO>
What Happened to Fool Port?
To Boldly Go...
Plus, Contrary Mary and Doubting Mike
By David Gardner (DavidG@fool.com)
Alexandria, VA (Dec. 21, 1998) --
Mary, Mary, quite contrary,
How does your portfolio grow?
With silver bells and cockleshells...
by doing just the opposite
of Doubting Mike Murphy
of the Overpiced Stock Service.
-- Goose Gardner
Today was a dream day -- a DREAM day -- for the Rule Breaker Portfolio, one which will probably be hard ever to outdo. Our money, this portfolio, our investment approach, all continue to explore strange new worlds, seek out new planets and new civilizations, and to boldly go where no simple buy-and-hold strategy we know of has ever gone before.
As the smoke cleared, we found our real-money portfolio's flag higher up the pole once again, up another 7.91% today. That was well ahead of the S&P 500 and Nasdaq returns of 1.25% and 2.49%, respectively. For the year, the Rule Breaker Portfolio has scored an off-the-charts 170% gain, a way's ahead of the S&P 500's 24%. And today marked the first time our total return has crossed 800%, since we started just under 4 1/2 years ago.
OK, we have those numbers out of the way now. We have to print them because that's what we do in this space every day, whether we're doing well or poorly (and we've done both). These numbers remain truly incredible, and they've only been getting more incredible with each passing day. (We know: pinch us. This can't keep up.) But anyway, what really made today such a dream day wasn't so much the numbers, but the turn of events, the confluence, the karma.
After market close on Friday, a few interesting things happened. First up, Amgen won a non-appealable court battle with arch-rival Johnson & Johnson, winning exclusive rights to NESP, its next-generation biopharmaceutical heir apparent to Epogen. Epogen is the company's red-blood-cell stimulant used mostly to treat anemic patients. Amgen has been splitting profits with J&J on this drug since the upstart biotech company and the pharmaceutical behemoth first teamed up to co-develop and co-market Epogen in 1985. Now along comes NESP, which is an improved version of Epogen and is currently in phase III trials (expected to be approved, and on the market by the year 2000). J&J challenged our company's rights to exclusive ownership of NESP's future, saying that it was related to Epogen and thus still subject to the 1985 profit-sharing agreement.
NO, said the courts. NO NO NO NO NO. NESP was developed by Amgen and is its exclusive domain. Kinda makes you wonder if "NESP" doesn't in fact stand for "Not Ever Splitting Profits" with you, Messieurs Johnson. You vultures.
(I admire J&J as much as the next guy. I'm having fun with this. It's in the Drip Portfolio. Humor me.)
That announcement caused Amgen to gap up to a gain of over $20 at market open, before settling down the rest of the day, up $12 3/16 (+14%) to $100 5/16 for this new entrant to the Rule Breaker portfolio. That's a great way to begin our investment. And not a bad way to start a Monday, either!
But that wasn't all. I spoke of confluence, karma. After Friday market close something else happened: Barron's, the most widely circulated financial weekly paper (and frequent purveyor of bearish sentiments), did a cover story on Internet analyst Mary Meeker. Among her favorite stocks? America Online, Amazon.com, and @Home. Each of these gapped open, and though @Home peculiarly dropped in the last 30 minutes of market trading today to post a small loss (after having been up more than 10%), the other two held up. In fact, somewhat amazingly, Amgen's $12 gain actually put it in third place among our portfolio's daily dollar movers: Amazon.com rose $32 1/16 (+11%) and America Online gained $12 1/2 (+12%).
(You'll notice we're using percentages here, as many people lose sight of this key context when they start seeing big numbers.)
But these, too, were not all. You see, before market open today something else happened: Iomega actually received initiation of BUY coverage from Salomon Smith Barney, which put up a 12-month price target of $11. IOM, suddenly finding some new fans on Wall Street (this has taken a loooooong time), responded by also gaining a double-digit percentage, up 11% ($13/16) to $8 3/16. You can read more about this on our popular Iomega message board.
This amazing confluence of events -- this amazing day (even Trump dropped back into the threes) -- had all essentially already occurred before the market even opened today. Our portfolio was up 8% from the get-go, and pretty much just sat on those gains all day long. I may return to make a point about this, at the end of tonight's recap.
But first, I enjoyed the Mary Meeker cover story, though it was mainly old material for anyone who's been following Mary's excellent work or the Internet stocks themselves. I began the recap tonight with "Mary, Mary, Quite Contrary" because anyone who stands up before the media to say that the Internet stocks are a worthwhile investment -- even at these prices -- is extremely contrarian. It is ALL THE RAGE to say that the Internet stocks are insanely overpriced, a "bubble," or at the very least, way ahead of themselves. In fact, that herdlike conventional Wisdom is exactly what enables Rule-Breaking Fools like us to make good money on the markets. Indeed, I hope this collective opinion about "Internet stocks" remains the case for a long time. I don't like to see smart people like Mary Meeker get too much publicity!
As a foil to Meeker, the Barron's article goes and quotes Michael Murphy. And this, I just love. I eat this up, my dear friends, and you should, too. Here's a seemingly harmless quotation from the article:
"Murphy says America Online's success has done an enormous amount to legitimize 'Net stocks because AOL showed that spending heavily to gain the No. 1 spot can eventually prove profitable. At long last, AOL is now capitalizing on its 14 million subscribers after spending more than $1 billion to build that base. Yet Murphy feels that other Internet companies lack the advantages of AOL, which gets to collect monthly membership fees from its 14 million users."
The lack of accountability at play here is simply incredible. If you're not aware of this, please read the next couple of paragraphs very carefully, and tell them to your children, or your co-workers, or heck, even your enemies. Everyone must know about this, so spread the word loud and clear. If we succeed, many of us can for once and for all STOP listening to Wise so-called "experts," and the low state of financial journalism will forever be improved.
You see, Barron's has obtained this bearish quote from THE GREAT CONTRARY TECHNOLOGY INDICATOR OF OUR TIME: Michael Murphy. What we mean by that is that wherever Murphy feels one way about a Rule Breaker stock, you should recognize it as an incredibly supportive and confirming statement for the exact opposite viewpoint.
Go ahead and do a text search of "Michael Murphy" right on our site search screen, also located midway down the left panel of our www.fool.com main page. Go on and do it! Now read through Fooldom's history of Michael Murphy and you will discover that years ago, YEARS ago, Murphy repeatedly pounded the table about shorting AOL outright, essentially calling it overvalued, worthless, and weak. Murphy was stating that the Microsoft Network would render AOL obsolete -- right about the time, in fact, that he took one of his newsletters online with MSN. But this wasn't a conflict-of-interest thing. This was his own tightly held belief. He was convinced that AOL would be buried by price competition from all the Internet service providers, from MSN down to MomNPop.com.
And so he TOTALLY MISSED THE BOAT. Revered "technology commentator" that he is, he constantly scorned what ended up the best technology investment of this decade.
So to find him now baldfacedly holding up AOL's success as a reason to doubt the prospects of Amazon.com and others couldn't be a funnier -- or more bullish -- prediction. Unfortunately, Barron's fails to note any irony here, though this is probably not surprising. (Barron's has contributed to Doubting Mike's celebrity through constantly quoting him as an "expert" with no accountability.)
This isn't just about AOL, or Amazon, or what have you. Dip back into the Fool Archives for a minute to read what our Fool News staff penned on September 9, 1995: "Not too long ago, The New York Times ran a story which actually examined Murphy's record rather than his image. By now you may not be surprised to learn that his record over the last five years, according to the Times, boasts an 88% LOSS! In other words, a $100,000 investment placed in Murphy's care five years ago would now be worth $12,000 (excluding commissions and spreads). The amazing thing is that he continues to be invited to speak as an investment 'expert' and continues to be quoted in all of the major financial sources."
The key is apparently to become well-known for being well-known.
When you consider how much AOL is up in value since September 9, 1995, you can see the value of quoting wrong-headed "experts." The shame of it is that neither Murphy nor Barron's apparently has ANY shame, as the alliance-reliance dynamic continues through to this weekend...
Anyway, that's all a long way of saying, "Pay no mind to the Wise." I'm so glad that all the way through I had parents and schools that taught me to listen to my own instincts, in Life as well as in investing, and I know so many of you are, too. For years we Fools have been saying that if you take control of your own money, you'll not only learn more, enjoy it more, and sleep better, but also YOU'LL DO BETTER. Scary to think of people who would entrust their money to hedge-fund managers with no accountability, or newsletter writers whose astoundingly poor records are not reported on by the financial media.
Meantime, dear friends, The Motley Fool remains free.
I want to close up this amazing day with three things. One is that I am looking forward to contributing to our Fool Charity Fund campaign this week, and I hope you will, too. With the performance of our stocks, I can now afford to give even more because I am giving in the most Foolish way of all, giving in stock. (No taxes, so that 100% of one's money goes to the charity.) I hope you will join me so we can set a new record this year!
And second, I am under no illusion that we are as good as our numbers look, and I hope you are not under that illusion either. We could lose 40% of our money next year. The nature of our approach is smart risk for smart gains. Not smart "avoidance of risk," which is what so much of the rest of the world seems to want. Any who would root against us (take all of Wall Street, for starters!) will have the pleasure of watching us with blood on our shirts some day. That'll happen again and again, though we'll aim to continue to prove that you can't keep a good Fool down!
And third, I had said earlier that I wanted to close by reflecting on the gains our portfolio made prior to the market even opening today. All I wish to say here is that this is the stuff of buy-and-hold investors. I couldn't possibly have anticipated that Amgen would win its case last Friday. I couldn't have known about Barron's story, nor would I have guessed that Smith Barney would suddenly decide that it liked Iomega. The beauty of Foolish investing is that we simply don't concern ourselves with guessing at such things -- this is not the way we invest because it's a game we can't win. All we do is we pays our money and we takes our chances... but where are we paying our money? Into the shares of good, strong companies. And what chances are we taking? Risky ones, in the Rule Breaker Portfolio.
But that's exactly the point, isn't it? We mitigate that risk somewhat when we buy what we know. And we further massage the risk out of the equation by holding our shares for the long term. In so doing, we allow the market its bizarre timing, its confluences and its sometimes rending shocks. These can occur on the MARKET's time, not our own -- fine with us. Invest this way and in the end, you paradoxically do less and you earn more. And Rule-Breaking investors have lots more fun than most of the others out there, who are generally convinced into doing JUST the OPPOSITE -- doing more and earning less -- by the institutions, the brokers, and the media.
Michael Murphy, I suppose there's something we should all love about you, though it's something less than straightforward.
David Gardner, December 21, 1998
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Day Month Year History Annualized R-BREAKER +7.91% 30.39% 169.96% 805.99% 65.44% S&P: +1.25% 3.37% 23.95% 162.40% 24.65% NASDAQ: +2.49% 9.67% 36.15% 196.87% 28.22% Rec'd # Security In At Now Change 8/5/94 1100 AmOnline 1.82 116.75 6322.95% 9/9/97 440 Amazon.com 19.74 318.75 1514.93% 5/17/95 1960 Iomega Cor 1.28 8.25 544.33% 10/1/96 84 LucentTech 23.81 103.88 336.30% 8/12/96 130 AT&T 39.58 74.31 87.76% 4/30/97 -1170*Trump* 8.47 3.94 53.51% 12/4/98 450@Home Corp. 56.08 67.00 19.47% 12/16/98 290 Amgen 85.75 100.31 16.98% 2/20/98 200 Exxon 64.09 74.81 16.73% 7/2/98 235 Starbucks 55.91 52.75 -5.65% 2/20/98 215 DuPont 59.83 54.63 -8.71% 2/20/98 270 Int'l Pape 47.69 42.94 -9.97% 1/8/98 425 3Dfx 25.67 12.00 -53.25% Rec'd # Security In At Value Change 9/9/97 440 Amazon.com 8684.60 140250.00 $131565.40 8/5/94 1100 AmOnline 1999.47 128425.00 $126425.53 5/17/95 1960 Iomega Cor 2509.60 16170.00 $13660.40 10/1/96 84 LucentTech 1999.88 8725.50 $6725.62 4/30/97 -1170*Trump* -9908.50 -4606.88 $5301.63 12/4/98 450@Home Corp. 25236.13 30150.00 $4913.87 8/12/96 130 AT&T 5145.11 9660.63 $4515.52 12/16/98 290 Amgen 24867.50 29090.63 $4223.13 2/20/98 200 Exxon 12818.00 14962.50 $2144.50 7/2/98 235 Starbucks 13138.63 12396.25 -$742.38 2/20/98 215 DuPont 12864.25 11744.38 -$1119.88 2/20/98 270 Int'l Pape 12876.75 11593.13 -$1283.63 1/8/98 425 3Dfx 10908.63 5100.00 -$5808.63 CASH $39332.55 TOTAL $452993.68
</THE RULE BREAKER PORTFOLIO>