<THE RULE BREAKER PORTFOLIO>

A Fool Tip: Step Back
Plus, @Home and AOL.

by Jeff Fischer (TMFJeff)

ALEXANDRIA, VA (May 4, 1999) -- The portfolio ended the day up 340% from one year ago, when David wrote a column in response to journalists' hyperbole, "Will it all End Badly?" The Breaker port is now up 545% from two years ago, when we happened to be covering blow out earnings from America Online, then $5 split-adjusted.

Let's quickly review.

Why do Fools Invest? To build long-term value. How do Fools build value? By buying stakes in promising companies and holding them. Can you provide an example? Of course. $10,000 invested in America Online three years ago is worth $317,500 today.

This has been a Foolish Review ™.

Today's Foolish Investing Tip: It's hardly worthwhile to report the daily prices of Amazon, eBay, and America Online, because they flip-flop more than a fish out of water. Amazon is the most volatile. Early this year it fell from $199 to below $100 before raising to a new high of $221, and now declining back to $143. In the course of five months, the stock has had a 100% move (from $100 to nearly $200); followed by a greater than 50% decline; which next turned into a 125% rise; and has now led to a 35% drop.

All told, the stock is up 35% this year, but let's step back further. It's up 853% in the past year. This leads to our Foolish Tip.

If you want to feel comfortable about your more volatile investments, stop watching them fluctuate. Watching their prices very closely is akin to standing over a pristine lake and staring straight down into the water, thereby seeing only mud swirls. If you raise your eyes, your vision can sweep over miles of shimmering water, and even take in the surrounding mountains and the blue sky. The big picture. So, this is more a reminder than a tip: keep focused on the big picture.

Let's look.

eBay (Nasdaq: EBAY) is valued at $22.6 billion. Will the online auction and classified advertising market -- currently estimated, when combined, to be a $53 billion industry -- support a higher valuation for eBay? Is eBay, outages of its service notwithstanding, doing things well? Is it the leader in consumer-to-consumer commerce? Yes. Are you confident in its long-term future? We are. Will it leverage its users and expand its market with new business offerings? It better. What is one of the most recognized and visited sites on the Web worth? Hmmm.

Sit back and think long term. Where could eBay be in five years as online growth explodes? By how much will eBay expand the auction and classified ad market? Could it be larger than $53 billion in 10 years? Won't most of the online world want to trade items back and forth?

Amazon.com (Nasdaq: AMZN) is valued at $22.7 billion based on shares outstanding. At one point over the past two days, eBay's value surpassed Amazon for the first time. Is the leading retailer on the Web -- the number one seller of books, music and videos -- going to build an online business worth more than $22.7 billion? Amazon should achieve $1.5 billion in sales this year.

The business-to-business e-commerce industry is expected to top $1 trillion to $2 trillion in three years, according to Cisco Systems. How large will business-to-consumer commerce (Amazon's niche) and consumer-to-consumer (auctions and classifieds) commerce become? How much of this commerce will Amazon command in five years? What about ten? Step back. Don't look only at today, or next month. Don't say, "Hmm... 8 million customers." Ask how long it will take to reach 35 million customers.

America Online (NYSE: AOL) is valued at $120 billion. AOL's management, like Foolish investors, is thinking ahead. AOL already has deals with SBC Communications and Bell Atlantic for high-speed xDSL Internet connection, but management is seeking a foothold in high-speed cable connection, too -- @Home Network's (Nasdaq: ATHM) camp. Today AOL said that it is talking with "everyone who can provide broadband access." The company is casting a wide net because all of the big fish are quickly getting caught.

It appears that AT&T (NYSE: T) will win the bidding war for MediaOne (NYSE: UMG). MediaOne serves 5 million cable customers, and AT&T's recent acquisition, Tele-Commuications Inc., serves 11 million. With MediaOne in its back pocket, AT&T would become the largest cable operator in the country. That's good for @Home, of which AT&T is a majority owner. AT&T has a vision to provide voice, data, and video through high-speed Internet cable connections. @Home is the leading brand.

America Online argues that it deserves access to cable laid by other companies, but it's not likely, in my opinion, that AOL will win this argument anytime soon. Meanwhile, acquiring MediaOne with Comcast and Microsoft, as was rumored, was supposedly going to cost AOL $20 billion in stock. AOL officials reportedly said that's not worth the money for 5 million reachable customers. So MediaOne will probably go to AT&T.

What's next for AOL? With 17 million users, the company shouldn't have a problem signing a partnership, but how ideal will the partnership be? Cable owners know the growing value of their high-speed cable networks.

Most interesting to me is the possibility of an AOL partnership with @Home. It's unfortunate that AOL didn't invest in @Home a few years ago. Imagine if AOL owned a large stake in @Home and by default Excite, too. Well, it probably isn't too late. @Home's CEO said as recently as last winter that he'd talk if AOL wanted. Of course, @Home is a tough negotiator. It should be. The company has front row seats to the high-speed access game. AOL isn't even in the stadium yet. @Home is valued at $17 billion. If it wins the high-speed cable game with AT&T on the pitcher's mound for it, where could the company be in five years? Where will AOL (with Netscape, don't forget) be?

The Rule Breaker will be right here.

Where are you going next tonight?

For more reading, today Drip Port discusses the need for investing discipline. Although the direct investment plans employed by Drip Port are typically slower-going than Rule Breaker screamers, all investors share the same need for Foolipline (Foolish discipline). The Drip Port writes about the equation, Discipline + Time = Compounding.

For other reading, pick up the book you're in the middle of reading (it's on the shelf over there), or instead keep abreast of Warren Buffett with TMF Puck's reports from Nebraska. Or, if you own Amgen (Nasdaq: AMGN), review the company's drug pipeline. And finally, two days ago James Glassman's Washington Post column tackled the sweeping story of "Internet Stocks."

Fool on!

05/04/99 Close

Stock  Change    Bid 
------------------ 
AMGN  -  7/16    60.50
AMZN  -7 15/16  143.00
AOL   -6 5/16   127.19
ATHM  -  11/16  135.69
CAT   +  1/4     65.44
CHV   -1 3/4    100.31
DD    -2 1/16    69.69
DJT   +  1/8      4.88
EBAY  -9 3/8    181.25
GT    +2 1/4     63.00
IOM     ---       4.94
SBUX  -1 1/8     36.38
TDFX  -  1/4     17.75

                  Day     Month  Year   History   Annualized 
      R-BREAKER  -3.77% -10.21%  45.80% 1363.42%   76.04%
        S&P:     -1.67%  -0.24%   8.68%  204.14%   26.42%
        NASDAQ:  -1.99%  -2.27%  13.34%  245.07%   29.83%


    Rec'd    #  Security     In At       Now      Change
   8/5/94  2200 AmOnline       0.91    127.19   13894.33%
   9/9/97  1320 Amazon.com     6.58    143.00    2073.50%
  5/17/95  1960 Iomega Cor     1.28      4.94     285.62%
  12/4/98   450 @Home Corp    56.08    135.69     141.95%
  2/26/99   300 eBay         100.53    181.25      80.30%
  4/30/97 -1170*Trump*         8.47      4.88      42.44%
 12/16/98   580 Amgen         42.88     60.50      41.11%
  2/23/99   300 Caterpilla    46.96     65.44      39.33%
   7/2/98   470 Starbucks     27.95     36.38      30.12%
  2/23/99   290 Goodyear T    48.72     63.00      29.32%
  2/23/99   180 Chevron       79.17    100.31      26.71%
  2/20/98   260 DuPont        58.84     69.69      18.43%
   1/8/98   425 3Dfx          25.67     17.75     -30.85%

    Rec'd    #  Security     In At     Value      Change
   8/5/94  2200 AmOnline    1999.47 279812.50  $277813.03
   9/9/97  1320 Amazon.com  8684.60 188760.00  $180075.40
  12/4/98   450 @Home Corp 25236.13  61059.38   $35823.25
  2/26/99   300 eBay       30158.00  54375.00   $24217.00
 12/16/98   580 Amgen      24867.50  35090.00   $10222.50
  5/17/95  1960 Iomega Cor  2509.60   9677.50    $7167.90
  2/23/99   300 Caterpilla 14089.25  19631.25    $5542.00
  4/30/97 -1170*Trump*     -9908.50  -5703.75    $4204.75
  2/23/99   290 Goodyear T 14127.38  18270.00    $4142.63
   7/2/98   470 Starbucks  13138.63  17096.25    $3957.63
  2/23/99   180 Chevron    14250.50  18056.25    $3805.75
  2/20/98   260 DuPont     15299.43  18118.75    $2819.32
   1/8/98   425 3Dfx       10908.63   7543.75   -$3364.88

                              CASH   $9924.87
                             TOTAL $731711.75


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.

</THE RULE BREAKER PORTFOLIO>

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