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

Holiday Cheer
...for buy-and-hold investors

By Louis Corrigan (TMFSeymor@aol.com)

Atlanta, GA (Dec. 23, 1998) -- Wall Street's underperforming money managers are apparently racing to load up their portfolios with some of this year's winners before 1998 is wrapped up in Ho Ho Hos. Tech stocks soared again today, taking the mighty Naz up 2.43% and the S&P 500 up another 2.07%. This Santa Claus rally pumped the Rule Breaker portfolio to yet another all-time high.

The Rule Breaker's Internet holdings benefited from Wall Street's holiday shopping, with @Home (Nasdaq: ATHM) leaping $3 15/16 to $72, Amazon.com (Nasdaq: AMZN) inching ahead $2 5/8 to $325 on a quiet day, and Lucent (NYSE: LU) spiking $7 5/8 to $109 15/16. The only meaningful news here was Lucent's annual proxy statement, which was filed yesterday with the SEC. It indicated Lucent will ask shareowners to authorize the issuance of a total of 6 billion shares. That will allow the company, which currently has 1.3 billion shares outstanding, to split its stock and maybe make some long-rumored acquisitions. We'll see.

The real news today was what Jeff reported last night: That quintessential Rule Breaker America Online (NYSE: AOL) is venturing where no brand-name Internet player has gone before -- into the S&P 500 index. AOL won't officially replace the hapless Venator Group (NYSE: Z), the underperformer previously known as Woolworth, until the new year. Just the announcement of this long-anticipated move, though, sent AOL's stock soaring to $138, up $15 1/4 from yesterday's New York close of $122 3/4.

Long-time holders of AOL, like this very same Rule Breaker port, cheered the news. And why shouldn't we? Recent history to the contrary, it's just not every day that a completely nonmaterial piece of news about one of the companies you own sends your portfolio flying 4.57% higher to a sublime 187.11% gain for the year. In fact, such a happy confluence of events is so rare that it would be fascinating to produce an omniscient narrator right about here to tell us exactly how many times in history a comparable scenario has played out for any investor, whether he be a mighty hedge-fund maverick, a stock market gooroo, an auto parts salesman, or a candlestick maker.

That's anything but a "don't try this at home" disclaimer. Indeed, this portfolio is testimony to the Foolish conceit that do-it-yourself investing pays. You just have to remember that the best way to produce a one-day return of 738% on what you originally shelled out for a stock is not to chase some shooting star Internet wannabe or the tip delivered over hot rum punch by an unknown party guest.

Nope, what you need is some thoughtful stock selection plus some boring old patience. True, you definitely need some smarts and vision for the stock selection, but no special talents that a mere Fool can't develop. The real key here is what seems so simple: just holding pat when you know you've got a good hand. The Rule Breaker purchased AOL at $1.82 per share less than 4 1/2 years ago. It's delivered a 7492% return since then. Not bad.

Though it annoys many well-paid professionals to hear this preached over and over from this bully pulpit, long-term buy-and hold investing is simply the way real people whup the market over the long haul. The average mutual fund's now nearly habitual underperformance of the S&P 500 just may have something to do with the incredible 77% annual portfolio turnover by those jittery fund managers. Imagine turning over 77% of your family and friends every year!

So on a day like this, we really need to celebrate the fruits of long-term investing. While the market may taketh away tomorrow, the Rule Breaker will still be a happy owner of AOL -- and much, much richer for adopting an owner's mentality rather than a trader's perspective.

While on the subject of AOL, it's worth doing an accountability look-back. Though I can't match David's artful reminder on Monday about tech-stock gooroo Michael Murphy's dismal track record on AOL, I can produce some gems from Jonathan Cohen, an analyst now with Merrill Lynch. Cohen is of interest because he made the news last week when he rebutted CIBC Oppenheimer analyst Henry Blodget's call for Amazon $400 with his own call for Amazon $50. As I suggested last week, any reasoned investor might feel her mouth gape open at some of Blodget's more optimistic assumptions. Yet, the flip side of the duet performed last week by these dueling analysts is that Cohen's record suggests that he's no oracle when it comes to Internet companies.

Back in 1996, Cohen was working for Salomon Smith Barney. His take in April of '96 was that AOL was "well-positioned" to maintain its leadership role "within the dedicated online service segment as that market becomes very much larger." However, he said he also believed that "the market has failed to apply an appropriate discount rate (one which adequately accounts for the significant risk to the company's franchise) to the future value of that opportunity." In other words, the stock price, then in the mid-teens (adjusted for splits), didn't factor in the challenges facing AOL.

One of the risks Cohen mentioned was "whether a dedicated online service provider will be able to compete in an environment of ubiquitous and essentially zero-cost Internet access." As a result, he rated the stock "neutral-speculative," reflecting his "considerable ambivalence with regard to the company's prospects."

Needless to say, AOL's brand, service, ease of use, and focus on online communication rather than simply access has made Cohen's concerns look misguided. The point is not to make Cohen look bad. Heck, most of Wall Street was repeatedly wrong about AOL. It's just important to know what a guy's track record is when you're evaluating his opinion. Since the mainstream media continues to have little memory about such things, well, sometimes we have to play the elephant. Maybe that's natural given our long-term perspective.

If you haven't joined us in supporting Share Our Strength in its efforts to fight hunger in America, please go forth and giveth! And Happy Holidays to you and yours.


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Bookmark Live Rule Breaker Port Quotes

12/23/98 Close
Stock  Change    Bid 
 ---------------- 
AMZN  +2 5/8  325.00
AMGN  -  3/4  102.25
AOL   +15 1/4 138.00
T     +1 9/16  74.88
ATHM  +3 15/16 72.00
DJT     ---     4.00
DD    +  3/4   54.94
XON   +  1/16  75.00
IP    +  5/16  43.06
IOM   +  1/8    7.94
LU    +7 5/8  109.94
SBUX  +  5/16  51.25
TDFX  +  3/8   12.38
 
                   Day   Month    Year  History  Annualized 
      R-BREAKER  +4.57%  38.68% 187.11%  863.55%   67.67%
        S&P:     +2.07%   5.58%  26.60%  168.01%   25.22%
        NASDAQ:  +2.43%  11.44%  38.35%  201.67%   28.65%


    Rec'd    #  Security     In At       Now      Change
   8/5/94  1100 AmOnline       1.82    138.00    7492.01%
   9/9/97   440 Amazon.com    19.74    325.00    1546.59%
  5/17/95  1960 Iomega Cor     1.28      7.94     519.92%
  10/1/96    84 LucentTech    23.81    109.94     361.77%
  8/12/96   130 AT&T          39.58     74.88      89.18%
  4/30/97 -1170*Trump*         8.47      4.00      52.77%
  12/4/98   450@Home Corp.    56.08     72.00      28.39%
 12/16/98   290 Amgen         85.75    102.25      19.24%
  2/20/98   200 Exxon         64.09     75.00      17.02%
  2/20/98   215 DuPont        59.83     54.94      -8.18%
   7/2/98   235 Starbucks     55.91     51.25      -8.33%
  2/20/98   270 Int'l Pape    47.69     43.06      -9.71%
   1/8/98   425 3Dfx          25.67     12.38     -51.79%

    Rec'd    #  Security     In At     Value      Change
   9/9/97   440 Amazon.com  8684.60 143000.00  $134315.40
   8/5/94  1100 AmOnline    1999.47 151800.00  $149800.53
  5/17/95  1960 Iomega Cor  2509.60  15557.50   $13047.90
  10/1/96    84 LucentTech  1999.88   9234.75    $7234.87
  12/4/98   450@Home Corp. 25236.13  32400.00    $7163.87
  4/30/97 -1170*Trump*     -9908.50  -4680.00    $5228.50
 12/16/98   290 Amgen      24867.50  29652.50    $4785.00
  8/12/96   130 AT&T        5145.11   9733.75    $4588.64
  2/20/98   200 Exxon      12818.00  15000.00    $2182.00
  2/20/98   215 DuPont     12864.25  11811.56   -$1052.69
   7/2/98   235 Starbucks  13138.63  12043.75   -$1094.88
  2/20/98   270 Int'l Pape 12876.75  11626.88   -$1249.88
   1/8/98   425 3Dfx       10908.63   5259.38   -$5649.25

                              CASH  $39332.55
                             TOTAL $481772.61

</THE RULE BREAKER PORTFOLIO>

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