Rule Breaker Philosophy
On buy and hold and methods of old (and present)

by David Gardner

ALEXANDRIA, VA (March 31, 1999) -- The Rule Breaker Portfolio closed out a RAGING March Wednesday as we scored one more "W" for the home team, tallying a gain of 1.76% versus a down market (S&P 500 down 1.11%, Nasdaq down 0.75%). For the month -- and what a month it was! Seriously! -- the numbers looked like this:

Rule Breaker: 39.93%
S&P 500:       3.88%
Nasdaq:        7.59%
This was the seventh consecutive monthly gain for our portfolio, following a nasty panic-driven August '98. It's been an incredibly strong market. Check out these past seven months:

       Rule Breaker    S&P 500  
Sept.  23.89%          6.31%
Oct.   12.17%          8.13%
Nov.   29.42%          5.91%
Dec.   44.46%          5.47%
Jan.   12.17%          4.07%
Feb.    1.25%         -3.23%
March  39.93%          3.88%
Rule Breaker trivia fans will note that our excellent March was not a record, though it was our second best, after last December....

What budged the BreakerPort today? Three of our A's contributed the biggest moves: Amazon.com up 4.5%, America Online up 1.7%, and At Home up 2.9%. Amazon continues to benefit from its new auction site.

I want to spend today re-asserting and establishing some of the philosophy behind the Rule Breaker Portfolio.

First up was this post from Brett, a new Fool. Brett was inquiring about changes in our investing approach between our first book, The Motley Fool Investment Guide, and our third book, Rule Breakers, Rule Makers. To what extent have we altered the way we pick stocks and run the portfolio?

The "Foolish 8" approach to small-cap investing laid out in our first book provided the eight criteria we use for selecting small-cap stocks. This approach, which has been in play in our Rule Breaker Port in various ways at various stages throughout its history, was the first approach we ever published in a book. For many, this therefore became the Foolish way to pick growth stocks. And yet, to the surprise and occasional confusion of some, we nevertheless would occasionally buy a stock like Amazon.com (as we did in 1997), which had NO profits or earnings and thus fundamentally failed the Foolish 8 standards. Why would we do this?

Enter our new book, Rule Breakers, Rule Makers. The purpose of my half of the book was to explain just exactly why we do buy stocks like Amazon.com sometimes -- and why, often, they wind up being our best investments. My aim in that book was to lay out in cogent terms the exact things that have characterized the greatest investments we've ever made -- and show how those same things have, in fact, been true of many of the greatest investments anyone could have made over the last several decades, whether Wal-Mart in 1970 or Microsoft in 1986 or Cisco in 1990.

As you can see, the two books contain similar, but distinctly different approaches. Both aim to find dynamic growth stocks and help you beat the market, and I continue to believe that both are fine approaches in their own right. (I just received an e-mail yesterday from a happy customer of our Foolish 8 spreadsheet whose investments had gained 70% over the past year, hence the reason for writing.) This said, the Rule Breaker approach is my favorite, since it finds companies that "shake the earth when they are born," to paraphrase Shakespeare. I do at present believe that the Rule Breaker approach -- suitable only for aggressive, knowledgeable, long-term investors who can afford to lose what they're investing -- is ultimately a superior approach, otherwise we would not be using the approach in this space every day. Why? Again, because you're investing in a greater number of potential powerhouses with higher visibility and higher stakes.

But just because I think I like this approach more does not in any way mean that I don't like our Foolish 8 approach. It's the Gehrig to my Ruth. So if you're a Foolish 8 small-cap investor, despair ye not. And -- if you're not already aware of it -- we have an excellent Foolish 8 message board, which you can click here to visit. As you can see, the Foolish 8 approach is alive and well.

A second clarification, or restatement. Some people consider us to use a "long-term buy and hold" approach, here. While I mostly consider this true, this phrase means different things to different people. Some believe that the phrase is emphatic and pure: You ONLY buy and then HOLD. You do NOT change your mind and sell. You do NOT trade.

This is not what I mean by "long-term buy and hold." Clearly, it's been our policy from the beginning to move our money away from stocks we no longer believe in. It would be boneheaded to sit on a stock that you don't believe in -- and that goes for whether the stock is a winner or a loser for you. We must all constantly ask ourselves, "Is MY money invested right now the best way it can be?"

So let me ask you...

...is YOUR money invested right now the best way it can be?

If not, activate our primary sell rule, written four years ago in The Motley Fool Investment Guide:

"When you find a better place to put your money, put it there."

This is Foolish common sense at its simplest, but we often discover in life that common sense ain't that common. Truth be told, I've violated my own teachings occasionally in the past, usually to my own detriment.

Thus, let those Foolish words be writ on the subject -- for some, the misconception -- of what we mean by "long-term buy and hold." Our horizon is long term. Our belief is you should own stocks you "buy." We buy with the idea that we will hold, generally for as long as possible.

And yet... and yet... if we find a better place for our money, we will put it there.

May our April performance keep catching the March wind....

Fool on.

-- David Gardner, March 31, 1999

!!!FOOLISH NEWS FLASH!!! David and Tom will be live on CNBC tomorrow morning at 7:40 a.m. ET -- get up early, West Coast! The Fool has an exciting announcement to make tomorrow. (This has been a !!!FOOLISH NEWS FLASH!!!)

What's up with Harry Jones today?

03/31/99 Close

Stock  Change    Bid 
AMZN  +7 1/2  172.19
AMGN  -3 11/16 74.88
AOL   +1 9/16 146.25
ATHM  +4 1/2  157.50
DJT     ---     4.00
CHV   -  9/16  88.44
CAT   -1       45.94
DD    +  1/4   58.25
GT    +  3/4   49.81
IOM   +  1/4    5.13
SBUX  -  3/16  28.06
TDFX  +  9/16   12.50
EBAY  +  3/16 137.31
                   Day   Month    Year  History  Annualized 
      R-BREAKER  +1.76%  39.93%  58.93% 1495.23%  81.38%
        S&P:     -1.11%   3.88%   4.97%  194.18%   26.11%
        NASDAQ:  -0.75%   7.59%  12.27%  241.83%   30.24%

    Rec'd    #  Security     In At       Now      Change
   8/5/94  2200 AmOnline       0.91    146.25   15991.76%
   9/9/97  1320 Amazon.com     6.58    172.19    2517.13%
  5/17/95  1960 Iomega Cor     1.28      5.13     300.26%
  12/4/98   450 @Home Corp    56.08    157.50     180.85%
 12/16/98   580 Amgen         42.88     74.88      74.64%
  4/30/97 -1170*Trump*         8.47      4.00      52.77%
  2/26/99   300 eBay         100.53    137.31      36.59%
  2/23/99   180 Chevron       79.17     88.44      11.71%
  2/23/99   290 Goodyear T    48.72     49.81       2.25%
   7/2/98   470 Starbucks     27.95     28.06       0.39%
  2/20/98   260 DuPont        58.84     58.25      -1.01%
  2/23/99   300 Caterpilla    46.96     45.94      -2.19%
   1/8/98   425 3Dfx          25.67     12.50     -51.30%

    Rec'd    #  Security     In At     Value      Change
   8/5/94  2200 AmOnline    1999.47 321750.00  $319750.53
   9/9/97  1320 Amazon.com  8684.60 227287.50  $218602.90
  12/4/98   450 @Home Corp 25236.13  70875.00   $45638.87
 12/16/98   580 Amgen      24867.50  43427.50   $18560.00
  2/26/99   300 eBay       30158.00  41193.75   $11035.75
  5/17/95  1960 Iomega Cor  2509.60  10045.00    $7535.40
  4/30/97 -1170*Trump*     -9908.50  -4680.00    $5228.50
  2/23/99   180 Chevron    14250.50  15918.75    $1668.25
  2/23/99   290 Goodyear T 14127.38  14445.63     $318.25
   7/2/98   470 Starbucks  13138.63  13189.38      $50.75
  2/20/98   260 DuPont     15299.43  15145.00    -$154.43
  2/23/99   300 Caterpilla 14089.25  13781.25    -$308.00
   1/8/98   425 3Dfx       10908.63   5312.50   -$5596.13

                              CASH   $9924.87
                             TOTAL $797616.12

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 in the yearly, historic and annualized returns). For a history of all transactions, please click here.


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