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

Valuation of a Nation
An intro. Plus, Amazon's customer service.

by Jeff Fischer (TMFJeff@aol.com)

Paris, France (Jan. 8, 1999) -- The first week of the year was stellar. The S&P gained 3.7%, the Nasdaq soared 6.9%, and the Rule Breaker advanced a giant 16.1%, with all three hitting new highs. Despite what some of the Wise will say, the first week of a new year never indicates anything regarding the stock market's performance for the year to come. Case in point: last year, the first week of trading was a nightmare.

As of January 9th of last year, the S&P was down 4.4%, the Nasdaq was off 4.2%, and this portfolio had lost a hefty 7%. Despite that poor start, 1998 proved to be our best year in history. So despite this year's record-strong beginning, 1999 could prove to be our worst year! (Knock wood.)

Amazon and @Home led the charge on news of strong computer sales (announced today) and continued appreciation for the business potential offered to Internet leaders. And, yes, there's also heady speculation and momentum players moving the shares -- momentum "investors" who continue to buy stock as long as it's making new highs. Alongside these forces, short-sellers dangling by a rope are also buying shares, propelling them higher.

On this day last year, Amazon was at a split-adjusted $16.50 per share (it's now ten times higher), and America Online was around $22 per share. On the backs of these two, the Rule Breaker Port surpassed a 1,000% return on Thursday for the first time. The $50,000 invested in August of 1994 is now worth over $582,000 in real money.

And this is just the beginning.

We celebrate our five-year anniversary in August, but we're already thinking ahead to our tenth year, and then twenty-fifth (by which time David's slight eccentricities will be amplified, surely, with time! Maybe he'll invest even more aggressively! Meanwhile, Tom and other Fools will own a good percentage of the country's wealth with their Rule Maker investments.)

Valuation of a Nation. When you invest in the leading companies of the United States (or when you buy an index fund, as Harry Jones just did), you're essentially investing in the long-term prosperity and growth of the entire country. How should one value that?

The Old. In the past, it was always believed that stocks should trade at a P/E multiple equal to the company's rate of earnings growth. It was also largely believed that stocks were very risky investments. Beyond that, it was difficult to obtain straight information about companies or learn how the stock market worked. The only way to buy stocks was through full-service brokers, on the phone or in person, and these brokers were rarely out to educate clients. Stocks were owned by the wealthy, for the most part; the minority.

The New. A new book co-authored by the respected James K. Glassman (a columnist for The Washington Post) is being harshly criticized for hypothesizing that Blue Chip companies (such as Coca-Cola, J&J and Merck) should always trade at P/E multiples of 50 to 100. Yes, 50 to 100, not a multiple equal to a rate of earnings growth.

What Has Changed. I haven't yet read Mr. Glassman's book (I don't know if it has been published yet, and apologetically I can't recall the co-author right now), but I will read it as soon as possible, and we'll talk about it. Opening myself to flames already, I believe that I will agree with the book. So beforehand, I have several statements to share regarding how the dynamics of the stock market have changed this century (especially in the last decade), and why the Old School valuation metrics might need to alter, too.

And now the big letdown! This column was completely written (with each headlined topic fleshed out), but then lost fifteen minutes before deadline (just as it was being sent), so I'll try it again next week. Apologies for the delay.

In the meantime, consider the old dynamics of the stock market. Think about the Old School belief that stocks must trade at a P/E multiple mirroring the earnings growth rate. Why is this? And how does this compare to the earning multiples granted other investment options?

Second, consider the Old School belief (a widely accepted belief in the past) that stocks are risky. If this belief is removed from the perception of the investing public (which is composed of long-term investors), how should the valuations granted to stocks change as a result? And third, consider the power shift of both information and action granted by the Internet. It is changing the way Wall Street works.

Amazon's Customer Service. We'll close with a brief true story about Amazon's customer service. Not only is the company sending gifts to many customers to develop loyalty, its customer service continues to shine.

We ordered a book from Amazon UK last week and were delivered (instead of a humor book by Bill Bryson about America) a giant tome called Ancestral Trails: The Complete Guide to British Genealogy and Family History. Imagine our American delight! This mammoth 700 page book costs 30 British pounds, or about $50, more than twice the price of what we ordered, although we only were billed for our book. The wrong book was mailed, is all.

We called customer service at Amazon UK today and they answered after two rings. (Very nice after being on Air France's PAY customer service line listening to piped-in music for ten minutes.) Our phone conservation took all of two minutes. If we translated correctly through the thick, lovely British accent, our correct book (and an immediate e-mail already confirmed this) is being sent today, free of charge. We then asked if we should return the giant Ancestral Trails book. The lady at Amazon responded, "You can keep that book for your troubles, or please donate it to your local library."

Politely, she wished us well and with that our business was done. Very nice. Only one problem. I'm currently in France, and I doubt that any French libraries want this British Genealogy book. So if you know any Brits who would like this book (perhaps over at the Fool UK?!), simply send them my way. I'll sell it to them for 30 pounds.

Kidding. They could just pay shipping! With that, check out Harry Jones See you next week. And Fool on!

01/08/99 Close

Stock  Change    Bid 
 ---------------- 
AMZN  +1 3/8  160.25
AMGN  +  15/16110.81
AOL   -1 3/4  145.38
T     +3       85.25
ATHM  +3 1/16 108.75
DJT   -  5/16   5.13
DD    +1 1/2   59.44
XON   -  7/16  74.31
IP    +3 3/16  45.75
IOM   -  1/16   9.38
LU    -1 1/4  115.25
SBUX  +1 1/8   52.88
TDFX  +  1/16  12.94
 
                   Day   Month    Year  History  Annualized 
      R-BREAKER  +0.60%  16.15%  16.15% 1065.82%  74.15%
        S&P:     +0.43%   3.74%   3.74%  190.88%   27.28%
        NASDAQ:  +0.79%   6.92%   6.92%  225.53%   30.55%
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    145.38    7897.74%
   9/9/97  1320 Amazon.com     6.58    160.25    2335.69%
  5/17/95  1960 Iomega Cor     1.28      9.38     632.19%
  10/1/96    84 LucentTech    23.81    115.25     384.08%
  8/12/96   130 AT&T          39.58     85.25     115.40%
  12/4/98   450@Home Corp.    56.08    108.75      93.92%
  4/30/97 -1170*Trump*         8.47      5.13      39.48%
 12/16/98   290 Amgen         85.75    110.81      29.23%
  2/20/98   200 Exxon         64.09     74.31      15.95%
  2/20/98   215 DuPont        59.83     59.44      -0.66%
  2/20/98   270 Int'l Pape    47.69     45.75      -4.07%
   7/2/98   235 Starbucks     55.91     52.88      -5.43%
   1/8/98   425 3Dfx          25.67     12.94     -49.60%

    Rec'd    #  Security     In At     Value      Change
   9/9/97  1320 Amazon.com  8684.60 211530.00  $202845.40
   8/5/94  1100 AmOnline    1999.47 159912.50  $157913.03
  12/4/98   450@Home Corp. 25236.13  48937.50   $23701.37
  5/17/95  1960 Iomega Cor  2509.60  18375.00   $15865.40
  10/1/96    84 LucentTech  1999.88   9681.00    $7681.12
 12/16/98   290 Amgen      24867.50  32135.63    $7268.13
  8/12/96   130 AT&T        5145.11  11082.50    $5937.39
  4/30/97 -1170*Trump*     -9908.50  -5996.25    $3912.25
  2/20/98   200 Exxon      12818.00  14862.50    $2044.50
  2/20/98   215 DuPont     12864.25  12779.06     -$85.19
  2/20/98   270 Int'l Pape 12876.75  12352.50    -$524.25
   7/2/98   235 Starbucks  13138.63  12425.63    -$713.00
   1/8/98   425 3Dfx       10908.63   5498.44   -$5410.19

                              CASH  $39332.55
                             TOTAL $582908.55 

</THE RULE BREAKER PORTFOLIO>

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