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

Predictions Great Fiction
Plus, the very unFoolish Quote of the Day

by Jeff Fischer (TMFJeff@aol.com)

Paris, France (Jan. 7, 1999) -- Every new year, the question most frequently asked in financial circles is "What will the stock market do this year?" Every year, the answer should be "I don't know."

Unfortunately, however, most of the Wise in the business believe that they can predict what will happen in the next twelve months, even though the stock market's performance is contingent upon thousands of worldwide variables and the unforeseen. So, what are the Wise calling for this year? Essentially, the same thing that many of them "foresaw" last year: growth slowing sharply, corporate profits declining, inflation and unemployment rising, and a stagnant stock market. This was the prognosis for 1998.

It didn't come true.

Always eager to beat dead horses, many of the Wise are now simply predicting the same thing for 1999. (Can you believe they're paid to do this stuff?!) A consensus of 50 analysts found that they expect U.S. economic growth to slow to 2.2% from 3.7% last year, while inflation should gain over half a percentage point to 2.2%, and unemployment, now at record lows, should rise. But if 1998 and other years are any indication, we should bet against all of these predictions coming true.

A recent 25-year study by the National Bureau of Economic Research found that annual growth estimates provided by analysts for the year ahead are typically incorrect by 100% or more, and estimates have not become any more accurate in the past decade with much better technology. (Hint: that's because even computers and charts can't predict world events.)

The economic expansion that began in the U.S. in 1991 is about to become the second-longest in this century following the Industrial Revolution. The stock market has risen at least 20% for each of the past four years. It had never done so before, not even three times in a row. Nobody was able to predict this surge -- a giant, monstrous surge. So how can anyone possibly predict what will happen in the next twelve months? They can't. (For more about the inability to predict markets, visit the April 1998 Fool Port column titled The Big Strike Out.)

The Rule Breaker Port is as unpredictable as anything else financial. We invest in companies that are creating and redefining entire industries, so the stocks that we hold move of their own volition, with their own force, whatever the stock market does. The S&P declined today, but Amazon booked ahead $21, or 15%, Amgen formulated a 3.4% gain, and @Home dealt us a $9, or 10%, advance -- all helping the portfolio to surge 6%. The economy could stagnate and many of our Rule Breaking companies would still grow at a record-breaking speed. (This ability is often indicative of a Rule Breaker or Rule Maker.)

Iomega (NYSE: IOM) rose, too, and on record volume, but with zip for news. The only commentary on Iomega that I could find was David's column last night, in which he wrote that Iomega was his 1999 choice for his family's annual stock contest. If David wins the contest (again!), he wins another bottle of wine. He provided Foolish reasoning behind his choice, and Iomega rose 16% on market-leading volume of nearly 19 million shares. Coincidence? (Smirk... smile. Glug glug glug. Actually: Sip. Sip. Sip.)

@Home (NYSE: ATHM) continues to strike new highs following its Tuesday announcement that AT&T (NYSE: T) will be its partner in extending its network nationwide. @Home shared that the deal with AT&T will make its network, if not the fastest, one of the fastest in the country. With television, the Internet, and telephone all destined to converge through one medium, @Home is positioning itself to lead a new industry. The stock market is taking notice. This investment has already gained 88% since our December 4 purchase. Wowsa! Many mutual funds haven't gained that much in the last four years combined.

Onto another Rule Breaker.

Achieving over $650 million in '98 sales, Amazon.com (Nasdaq: AMZN) will likely surpass $1 billion in sales this year, one or two years ahead of various estimates. Once its customer and sales-base grows to such a size, and its expansion and marketing expenses decline significantly as a percentage of sales, the company will be in a much better position to turn a profit. Hey, it might finally appease all of the bears whose only point (an irrelevant point anyway!) is that Amazon "has yet to make a profit." Hello? Most companies never make a profit. Most businesses fail. Meanwhile, those that do make a profit usually do so only after many years. Amazon has a business model that will likely accomplish this given time. Financial journalists should take business history courses before being paid to write drivel.

We'll close with the Very unFoolish Quote of the Day. Today the front page of the International Herald Tribune quotes a Merrill Lynch analyst that I won't name out of respect, because I don't know the man personally. However, what he said deserves a spotlight and a response. This full-service Merrill analyst warned that "American consumers appeared to be using the stock market as a savings vehicle... and that stock valuations were extremely high."

OK. Two points.

First, Americans should use the stock market as a savings vehicle. That has been the Motley Fool's message since its founding: the stock market is the best long-term savings vehicle in existence. Second, the analyst's statement contradicts itself. If Americans are using the stock market as a savings vehicle (implying: long term), then they shouldn't be very concerned about valuation anyway, although the analyst implies that they should.

Also, what is his idea of "fair valuation?" Is it based on outdated measures? As the public becomes educated about the stock market and demand for shares rise, we have to adjust our theories on what fair value is. Value is always determined by supply and demand. If higher demand exists and is sustainable, then a company as solid as Coca-Cola could deserve to maintain a P/E multiple of 45. And why not, given that money market cash is trading at a 31 multiple?

More on valuation tomorrow. Meanwhile, forget the Merrill Lynch analyst. What does Harry Jones have to say today?

01/07/99 Close

Stock  Change    Bid 
 ---------------- 
AMZN  +20 7/8 158.88
AMGN  +3 5/8  109.88
AOL   -1 7/16 147.13
T     -  5/8   82.25
ATHM  +9 5/16 105.69
DJT   +  3/8    5.44
DD    -  3/16  57.94
XON   -  1/8   74.75
IP    -  3/4   42.56
IOM   +1 3/16   9.44
LU    -  11/16116.50
SBUX  +  3/16  51.75
TDFX  -  5/8   12.88
 
                   Day   Month    Year  History  Annualized 
        R-BREAK  +5.94%  15.46%  15.46% 1058.91%  73.98%
        S&P:     -0.21%   3.30%   3.30%  189.70%   27.18%
        NASDAQ:  +0.23%   6.08%   6.08%  222.99%   30.34%

Note:  Yearly, historical and annualized returns for the 
S&P include dividends.

    Rec'd    #  Security     In At       Now      Change
   8/5/94  1100 AmOnline       1.82    147.13    7994.02%
   9/9/97  1320 Amazon.com     6.58    158.88    2314.79%
  5/17/95  1960 Iomega Cor     1.28      9.44     637.07%
  10/1/96    84 LucentTech    23.81    116.50     389.33%
  8/12/96   130 AT&T          39.58     82.25     107.82%
  12/4/98   450@Home Corp.    56.08    105.69      88.46%
  4/30/97 -1170*Trump*         8.47      5.44      35.79%
 12/16/98   290 Amgen         85.75    109.88      28.13%
  2/20/98   200 Exxon         64.09     74.75      16.63%
  2/20/98   215 DuPont        59.83     57.94      -3.17%
   7/2/98   235 Starbucks     55.91     51.75      -7.44%
  2/20/98   270 Int'l Pape    47.69     42.56     -10.75%
   1/8/98   425 3Dfx          25.67     12.88     -49.84%

    Rec'd    #  Security     In At     Value      Change
   9/9/97  1320 Amazon.com  8684.60 209715.00  $201030.40
   8/5/94  1100 AmOnline    1999.47 161837.50  $159838.03
  12/4/98   450@Home Corp. 25236.13  47559.38   $22323.25
  5/17/95  1960 Iomega Cor  2509.60  18497.50   $15987.90
  10/1/96    84 LucentTech  1999.88   9786.00    $7786.12
 12/16/98   290 Amgen      24867.50  31863.75    $6996.25
  8/12/96   130 AT&T        5145.11  10692.50    $5547.39
  4/30/97 -1170*Trump*     -9908.50  -6361.88    $3546.63
  2/20/98   200 Exxon      12818.00  14950.00    $2132.00
  2/20/98   215 DuPont     12864.25  12456.56    -$407.69
   7/2/98   235 Starbucks  13138.63  12161.25    -$977.38
  2/20/98   270 Int'l Pape 12876.75  11491.88   -$1384.88
   1/8/98   425 3Dfx       10908.63   5471.88   -$5436.75

                              CASH  $39332.55
                             TOTAL $579453.86 

</THE RULE BREAKER PORTFOLIO>

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