<THE RULE BREAKER PORTFOLIO>
The Parallel Port
Theme & Variations in F(ool)
By Nico Detourn (TMF Nico)
SILICON VALLEY, CA (April 21, 1999) -- One of the things that has always struck me about the Rule Breaker portfolio is the dominant theme running through it. This theme was present through changes in the portfolio's stocks and when it was still known by its original, hallowed name: The Fool Portfolio. The essential theme was unchanged by the formal statement of Rule Breaker Principles. Those principles serve as a guide, but what defines the portfolio's theme is, of course, the companies it invests in.
To be sure, not all the portfolio's picks have fit easily into this theme. Still, through a mix of planning and intuition -- and through the years, planning has increased, intuition has been sharpened, and the interplay of the two has been refined -- the theme of the portfolio reveals a particular view of the future and an understanding of the world we will live in. That world is, of course, wired, online, and interactive.
The emergence of such a theme in the Rule Breaker portfolio isn't surprising. It has been naturally developed through the port's longer-term approach to stock picking, rather than by simply jumping on hot stocks, though some picks have been or have become that, too.
This approach is what marks the difference between an investment philosophy and a merely procedural approach to selecting stocks because they are, say, "mid-cap techs," or "Internet stocks." Those categories are useful if you're trying to mass-market a mutual fund, but they don't offer much to individual investors building personal ports for the long-term. And despite its galactic renown, the Rule Breaker Portfolio is very much a personal portfolio in terms of its scale, scope, and, perhaps most importantly, its manageability.
It has to be said that simply having an investment theme is no guarantee of investment success. And in looking over its almost five-year trade history -- which has included America Online (NYSE: AOL), Iomega (NYSE: IOM), Applied Materials (Nasdaq: AMAT) (yep, the port owned that one once), KLA-Tencor (Nasdaq: KLAC), 3Com (Nasdaq: COMS), Amazon.com (Nasdaq: AMZN), @Home (Nasdaq: ATHM), eBay (Nasdaq: EBAY), and others -- I can't help noticing how the port's ongoing theme runs through its losers as well as its winners. That shows how any number of variations on the port's theme would have been possible.
Instead of buying America Online in August 1994, the portfolio could have cast its vote for the online medium via H&R Block (NYSE: HRB), the parent of CompuServe and the leading online service at the time. Or the port's managers might have waited and, in 1996, done some "profit taking" on the already extraordinary performance of AOL and bought CompuServe after its April IPO.
Had CompuServe been held through thick and almost exclusively thin -- it traded without positive distinction on the Nasdaq as CSRV -- it would have resulted in the early 1998 addition of WorldCom (Nasdaq: WCOM) to the portfolio when that company's buyout of CompuServe was complete, after which WorldCom, through a separate but contingent deal, transferred a key portion of CompuServe to AOL. Taking that path, we'd have a different portfolio today, but with the same basic theme.
That fork in the road would have (coulda and shoulda) led to a gain of over 200%, rather than an 8% loss, by the time the port disconnected from 3Com last December 1. Two different investments, two different results. Yet both represent plausible variations on the theme of a wired world.
In this parallel universe, in which brokerage accounts come with crystal balls, the Fool Port would have sold Iomega during its brief May 1996 high. And in a variation hardware play on the growth of the Internet, those Zip gains might have been zapped into EMC Corp. (NYSE: EMC), another storage products company whose price per share was then about twice what Iomega languishes at today.
Or, looking to the softer side of the Net, the portfolio might have gone with dynamic, young Netscape Communications, which at the time was staging a strong recovery from the more than 50% "correction" that followed its legendary IPO -- or so it seemed. Alas, crystal balls aren't infallible.
Just as with that hypothetical purchase of CompuServe, those Netscape shares would have spent many long, frustrating quarters bobbing in red ink before the alchemy of merger and acquisition transformed them -- pffffft! -- into shares of a stronger, more successful company, leading, of course, to the March 1999 return to the portfolio of America Online, bearing no grudge after having been so ungratefully shown the "sell" button in 1996 so those Fools could buy... CompuServe!
I guess it's true. What goes around comes around. The first time as opportunity cost, the second time as a wholly owned subsidiary.
Any of these alternate investments would have resulted in a Rule Breaker portfolio with a different complexion than the one we report on today. That port's total returns would also be different. My guess (I haven't run the numbers so I can't say for sure) is we'd be somewhat ahead -- with some timing assistance from that crystal ball, of course. Yet with all those variations, for better and worse, at each step along the way, the basic theme of our parallel port would have remained the same: a vision of an ever-shrinking, ever-faster world -- wired, online, and interactive.
Meanwhile, back in this world, the real Rule Breaker portfolio was up 5.48% with the help of strong showings by eBay and three of our four A's: @Home, Amazon.com, and America Online. As we know, stocks don't particularly need a reason to move. But AOL was probably helped today when it was selected as one of five new registrars of Internet domain names, something which since 1993 has been the exclusive province of Network Solutions (Nasdaq: NSOL). Not participating in today's Foolery was Amgen (Nasdaq: AMGN), whose quarterly earnings were reported yesterday, and which were analyzed in today's Lunchtime News.
Day Month Year History Annualized R-BREAKER +5.48% 1.19% 60.82% 1514.15% 80.51% S&P: +2.29% 3.87% 9.01% 205.03% 26.72% NASDAQ: +3.26% 1.08% 13.48% 245.51% 30.12% Rec'd # Security In At Now Change 8/5/94 2200 AmOnline 0.91 141.50 15469.13% 9/9/97 1320 Amazon.com 6.58 179.25 2624.48% 5/17/95 1960 Iomega Cor 1.28 5.06 295.38% 12/4/98 450 @Home Corp 56.08 141.94 153.10% 2/26/99 300 eBay 100.53 166.75 65.88% 4/30/97 -1170*Trump* 8.47 4.13 51.29% 12/16/98 580 Amgen 42.88 64.00 49.27% 2/23/99 300 Caterpilla 46.96 61.88 31.75% 2/23/99 180 Chevron 79.17 96.38 21.73% 2/20/98 260 DuPont 58.84 68.94 17.15% 2/23/99 290 Goodyear T 48.72 56.38 15.72% 7/2/98 470 Starbucks 27.95 31.19 11.57% 1/8/98 425 3Dfx 25.67 19.50 -24.03% Rec'd # Security In At Value Change 8/5/94 2200 AmOnline 1999.47 311300.00 $309300.53 9/9/97 1320 Amazon.com 8684.60 236610.00 $227925.40 12/4/98 450 @Home Corp 25236.13 63871.88 $38635.75 2/26/99 300 eBay 30158.00 50025.00 $19867.00 12/16/98 580 Amgen 24867.50 37120.00 $12252.50 5/17/95 1960 Iomega Cor 2509.60 9922.50 $7412.90 4/30/97 -1170*Trump* -9908.50 -4826.25 $5082.25 2/23/99 300 Caterpilla 14089.25 18562.50 $4473.25 2/23/99 180 Chevron 14250.50 17347.50 $3097.00 2/20/98 260 DuPont 15299.43 17923.75 $2624.32 2/23/99 290 Goodyear T 14127.38 16348.75 $2221.38 7/2/98 470 Starbucks 13138.63 14658.13 $1519.50 1/8/98 425 3Dfx 10908.63 8287.50 -$2621.13 CASH $9924.87 TOTAL $807076.12Note: 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.
</THE RULE BREAKER PORTFOLIO>