<THE RULE BREAKER PORTFOLIO>

On the Chin

by Paul Larson (TMFParlay@aol.com)

CHICAGO, IL (Feb. 9, 1999) -- The Rule Breaker portfolio took it on the chin yet again by losing 6.13% of its value today. After the fourth straight day of losses, this portfolio's year-to-date performance has actually dipped into the red. That's right, the Rule Breaker portfolio went from being up over 13% last Wednesday to poof! Negative YTD returns. We've got company, however, as the S&P 500 also took a turn for the worse and today started showing negative returns for the young year.

If it could go wrong today, it did. Every single one of the long positions dropped, while the single short position, of course, rose. Ouch! Our formerly high-flying "A" stocks took the brunt of the damage, as can be seen from the quotes below:


        Change    Closing Bid
Amazon  - 9 1/8   $100.00
Amgen   - 5 9/16  $115.69
AOL    - 11 1/8   $147.88
@Home   - 7 15/16  $92.38
Are we struck with panic? Hardly. We're just going along with our daily business, looking for ways to deploy the excess cash sitting in the portfolio. Bad days happen, and you've got to expect them if you are investing in the stock market. Volatility is part of the price of admission you pay when exposing yourself to potential gains stocks have to offer.

As is always the case when the market takes a dip, some very wise prognosticators came out of the woodwork to say, "a correction is near." Even a broken clock is correct twice a day. Perhaps they're right this time, perhaps not. We're Fools, and we humbly know that we don't have the skills (nor do we need them) to accurately predict the market's movement. Save, invest, be patient -- That's what we're best at.

Even though you wouldn't be able to guess from looking at the stock quotes, there was not much substantive news to account for the precipitous drops seen in many of the Rule Breaker stocks today. Some out there attributed a complex deal between search engine second-banana Lycos (NYSE: LCOS) and USA Networks (NYSE: USAI) as reason for weakness in Internet and technology stocks, but I fail to see the direct connection to any of the Rule Breakers.

If there was any news worth mentioning, it was actually of the good sort. America Online today announced that it has accumulated 16 million subscribers -- a feat that should make investors smile. The company took all of five weeks to add its most recent million, which is the fastest jump between million-member watermarks to date. In other words, it appears that AOL's membership growth is accelerating, not just plunking along at a stable rate. Adding members is good, adding more members this month than you added last month is better.

As we've said in this space dozens of times, America Online will live or die by how many subscribers it can retain under its belt. Every additional subscriber is not just another monthly access fee to collect; it is an additional set of eyeballs for advertisers and another potential e-commerce customer.

At its current pace of subscriber acquisition, AOL looks to have 17 million members by St. Patrick's Day. We used to go entire seasons between million-subscriber announcements, but now it is just a matter of weeks.

When will AOL's momentum be slowed? Will it slow at all? As always, we'd appreciate your thoughts on the Rule Breaker message board. Wondering how to register and have your voice heard in the discussion? Check out Jeff's column from yesterday.

In other news, Starbucks (NYSE: SBUX) today made it known that it opened its first store in Kuwait. That's right, Kuwait. Through franchising and a joint venture with a local firm (a good idea in unfamiliar and distant lands), Starbucks plans to sprinkle stores in Lebanon, Saudi Arabia, Oman, Bahrain, and the United Arab Emirates.

There are currently 177 stores operating outside the continent, but the company hopes to have over 1000 stores open in Europe, Asia and the Middle East within the next four years. Will Starbucks be able to replicate the international success of McDonalds (NYSE: MCD) and Rule Maker Coke (NYSE: KO) and truly become a global brand? If not, it will not be for lack of trying.

Amazon continued to break the rules today when it announced a new return policy for books it recommends. These books will be allowed to be returned even after they are read. Amazon's CEO Jeff Bezos said in the press release, "It doesn't matter how dog-eared or worn it is, even if you ripped out the pages because you thought the book was so bad, you can still return the pieces to us for a full refund."

The "Satisfaction Guarantee" has been around for a long time, but it appears to be a first in the publishing industry. I'm certain the goodwill created here with Amazon's customers will only add to the company's lead in online book sales.

Amazon also announced that it will fully disclose which books have been prominently placed due to payments from the publishers. Bricks and mortar stores often get incentives to advertise products or to put certain titles on the "end stacks." However, this is rarely disclosed, and it appears that Amazon is, yet again, blazing a new trail.

Speaking of books, I thought I'd close tonight by reminding that the Foolish book tour rolls into Denver tonight, St. Louis tomorrow, and Dallas on Thursday. For more information, click here.

Fool on!

--Paul Larson

What's happening with Harry? Click here to find out.

02/09/99 Close

Stock  Change    Bid 
 ---------------- 
AMZN  -9 1/8  100.00
AMGN  -5 9/16 115.69
AOL   -11 1/8 147.88
T     -3 15/16 87.06
ATHM  -7 15/16 92.38
DJT   +  3/16   4.50
DD    -2 1/8   53.81
XON   -  1/2   72.19
IP    -  3/4   42.44
IOM   -  3/16   6.75
LU    -4 9/16  96.13
SBUX  -1 1/4   48.81
TDFX  -  1/16  11.50
 
                   Day   Month    Year  History  Annualized 
      R-BREAKER  -6.13% -12.91%  -2.30%  880.59%   65.81%
        S&P:     -2.22%  -4.96%  -0.75%  178.86%   25.50%
        NASDAQ:  -3.91%  -7.79%   5.39%  220.86%   29.46%
 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    147.88    8035.28%
   9/9/97  1320 Amazon.com     6.58    100.00    1419.93%
  5/17/95  1960 Iomega Cor     1.28      6.75     427.18%
  10/1/96    84 LucentTech    23.81     96.13     303.75%
  8/12/96   130 AT&T          39.58     87.06     119.98%
  12/4/98   450 @Home Corp    56.08     92.38      64.72%
  4/30/97 -1170*Trump*         8.47      4.50      46.86%
 12/16/98   290 Amgen         85.75    115.69      34.91%
  2/20/98   200 Exxon         64.09     72.19      12.63%
  2/20/98   215 DuPont        59.83     53.81     -10.06%
  2/20/98   270 Int'l Pape    47.69     42.44     -11.02%
   7/2/98   235 Starbucks     55.91     48.81     -12.69%
   1/8/98   425 3Dfx          25.67     11.50     -55.20%

    Rec'd    #  Security     In At     Value      Change
   8/5/94  1100 AmOnline    1999.47 162662.50  $160663.03
   9/9/97  1320 Amazon.com  8684.60 132000.00  $123315.40
  12/4/98   450 @Home Corp 25236.13  41568.75   $16332.62
  5/17/95  1960 Iomega Cor  2509.60  13230.00   $10720.40
 12/16/98   290 Amgen      24867.50  33549.38    $8681.88
  8/12/96   130 AT&T        5145.11  11318.13    $6173.02
  10/1/96    84 LucentTech  1999.88   8074.50    $6074.62
  4/30/97 -1170*Trump*     -9908.50  -5265.00    $4643.50
  2/20/98   200 Exxon      12818.00  14437.50    $1619.50
  2/20/98   215 DuPont     12864.25  11569.69   -$1294.56
  2/20/98   270 Int'l Pape 12876.75  11458.13   -$1418.63
   7/2/98   235 Starbucks  13138.63  11470.94   -$1667.69
   1/8/98   425 3Dfx       10908.63   4887.50   -$6021.13

                              CASH  $39332.55
                             TOTAL $490294.55

Note: The Rule Breaker Portfolio was launched on August 5, 1994, with $50,000. Additional cash is never added, all transactions are shared and explained publicly before being made, and returns are compared daily to the S&P 500 (including dividends). For a history of all transactions, please click here.

</THE RULE BREAKER PORTFOLIO>

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