<THE RULE BREAKER PORTFOLIO>
Foolish vs. Wise
And good times and bad, they repeat
by Jeff Fischer (TMFJeff)
ALEXANDRIA, VA (May 27, 1999) -- Message board conversations intensify as the stock market declines, because some people become increasingly concerned day by day. We don't, however, and we try to convey why in these columns and on the boards. Even so, sometimes readers Foolishly question our investment strategy. Our strategy is so static, they might say. We never react to price swings, and prices were much higher earlier, they'll argue.
Let's start there.
I compare investing to climbing a mountain. If you buy companies that will continue to grow over many years, this is what investing is: a long climb that includes typical setbacks. When you climb a mountain, you don't climb straight up. In fact, you often must go down to a certain path before you can resume to climb up again. Sometimes you must climb much higher than your next path, then you must go down, down, down to that path, and then sideways on it for hours, before finally you can climb again. It might be a long time before you get higher then you already were, but you're always making progress nonetheless.
Regarding the stock market, many people incorrectly anchor -- to draw on David's recent psychology columns -- to single data points such as past highs. People anchor to a stock's recent high price and anytime the stock is below that price, they view it as a missed opportunity because, supposedly, the stock could have been sold at the high point.
There are a few problems with this.
First, people seem to forget that they're using hindsight when looking at the past high and lamenting it as "missed." Second, no matter what the argument, as a long-term investor, I disagree with this thinking. (OK, that's not a problem, it's just my opinion. Let me explain.)
I see the climb of a stock as needing to be up, down, sideways, down again, and then maybe up again -- but then down yet again, perhaps, before finally going up again. I don't anchor on the latest high and say "I shoulda sold." That's plain silly. The present high is just one data point in what will become thousands over decades, many of them, hopefully, much higher on the chart. Stocks are naturally volatile. They swing back and forth, back and forth, and up and down -- before they shimmy, long term, to a future destination. It's that future destination, typically at least 5 years ahead, that I, as a long-term investor, am most interested in. Whatever happens in the meantime, let it happen.
That's Foolish. That's long-term investing. The opposite -- price tracking -- is focusing on near-term uncertainties. There are at least two faults with that: 1) it's near-term thinking, and 2) it's very uncertain anyway, so what's the point of tracking it? Some investors seem to track prices just so that when a stock declines, they can point to old highs and say "shoulda."
"Fools, you shoulda sold Amazon at $200."
Why is that Wise to say?
First, we don't sell stocks due to temporary price fluctuations. We own businesses that offer the most potential when held for at least 5 years more -- always. The desire to own something at least "five years more" can be perpetual if you own great businesses. Think about that.
Second, people who now say -- and this is a true example -- that we should have sold Amazon at $200 said the same thing in the past, too, always soon after Amazon declined, interestingly enough. Last year following a decline: "Fools, you shoulda sold Amazon at $180."
Of course, that means they told us that Amazon should have been sold at about $30, counting the splits since last year. So, $30, eh?
To make matters even more Wise, many Wise people seem to forget that they shouted the word "sell" previously. We were emphatically told by many not to buy Amazon when we announced our intention to do so, and then we were told to sell Amazon at $2 billion, and next at $4 billion because it was twice the market value of the competition. Then, finally, we were told to sell again by the same people at $10 billion, and all the way up, again and again -- while they never admit that they said to sell at the very start, 1000% ago, and repeatedly since. Wrong from the first step, how can they ever be right?
What is most Wise, however, is that we're being told how to do anything regarding this portfolio. The point of Foolishness is to make one's own decisions. Some Fools post their portfolios on the message boards. The last thing I'd ever think to tell them is what to do with their holdings. That's entirely unFoolish.
Meanwhile, this portfolio is only an example to learn from, not a model to follow. So, the more mistakes that this portfolio commits, the more we all can learn. Due to this, I view the portfolio as only a positive. After all, what are the negatives behind a living example from which to learn? There are none. You watch, you learn. You should almost hope that this portfolio makes mistakes. More learning would result.
Now, today's column is especially devoted to Fools on the Rule Breaker message board who don't seem to understand this portfolio's mission -- which could be our own fault. Let us try to explain further.
What it means to be long term. It means you invest for years. You buy and you hold, and hold, and hold companies. We aren't kidding. We're not about to swap out of our leading Internet-based companies due to near-term price concerns, which is what I think the valuation concerns are: near term. Over 5 years, these stocks should grow into and then out of current valuations. Given our cost-bases, over a long duration these stocks should crush the market for us.
Our sell strategy. Maybe Tom and David knew it, maybe not, but their sell strategy emulates Warren Buffett's strategy. (If you're going to learn from someone, learn from the best.) If Buffett finds something better in which to invest, he'll do what he needs to -- including selling -- to buy it. Plus, he doesn't set price targets when he buys a stock (if he did, would he have sold Coke by now?). He buys parts of businesses to hold and hold.
Likewise, our sell strategy stands for everything long term. By not selling until we find something better, we're always in the stock market, which is where we want to be. When we find something better, we sell a lesser company to buy it. Period. We don't flip-flop on current positions as long as the business is strong. We look at businesses, because businesses can be rationalized. We can't rationalize near-term market prices.
If you have a better long-term sell strategy, please post it. We'll happily consider it here.
Our purpose. David has presented his Rule Breaker criteria for the portfolio -- they're always in the righthand listbox. With our background in place, all new Fools can approach the portfolio and see what we're about. This daily column is meant to expound and advance our knowledge and our investment approach. The Rule Breaker Port is meant to help investors, like you and me, learn. Not help investors make money -- not directly. Instead, help investors to learn from our mistakes and successes. What a Fool does with his or her acquired knowledge is optional.
Our faults? We're not perfect; never claim to be; wouldn't want to be. We're individual investors. We're long-term Fools. In something as complex as the public markets, no approach is perfect. In fact, it is logistically impossible to be perfect in the stock market. However, we aim to crush the averages and the underperforming pros by investing in great companies for the long term. Our long-term approach offers the maximum benefit with the lowest hassle. It is about that simple, fellow Fools.
In the news...
The Nasdaq Market made official its intention to increase trading hours for at least the Nasdaq 100 stocks. The NYSE will follow. For obvious reasons, this news is unimportant to us. We'd be happier if daily trading hours were shortened rather than lengthened. Mr. Buffett, meanwhile, wouldn't mind if the market closed for 10 years.
Time and events...
"In a never-ending, staggering march the population is jamming the roads towards Macedonia. Twenty miles of carts drawn by cows, bullocks, and muddy-flanked water buffalo, with exhausted, staggering men, women and children, blankets over their heads, walking blindly in the rain beside their worldly goods.
"The main stream is being swelled from all the back country. They don't know where they are going. They left their farms, villages and brown fields and joined the main stream of refugees. It is a silent procession. Nobody even grunts. It is all they can do to keep moving. Their brilliant peasant costumes are soaked and draggled. Chickens dangle by their feet from the carts. An old man marches bent under a young pig, a scythe, and a gun, with a chicken tied to his scythe. A husband spreads a blanket over a woman in labor in one of the carts to keep off the driving rain. She is the only person making a sound.
"There are 250,000 refugees to be evacuated. The Bulgerian frontier is shut against them. There is only Macedonia. Nearly half a million refugees are in Macedonia now. How they are to be fed nobody knows, but in the next month all the world will hear the cry: 'Come over into Macedonia and help us!'"
Meanwhile, the stock market was rising. Was rising. It rose for the next seven years, in fact, all the way until 1929. For the above description was written in 1922.
After 1929, the stock market fell and then it went sideways, and then it finally rose again, two decades later. That is how it went and that is how it goes. Meanwhile, the best companies rise more than others, and some stocks never rise. It is about that simple. Things rise and things fall and things go sideways and you can invest however you want. We Foolishly buy the best companies that we can find and we hold them, because all statistics show that to be the very best strategy, bar none. We don't pretend to be able to value a company to the penny with a discounted cash flow model. We know the world is much more variable than that. Good times and bad on the stock market; good times and very bad in life -- unfortunately, both repeat most unexpectedly.
Day Month Year History Annualized R-BREAKER -3.17% -19.78% 30.26% 1207.38% 70.69% S&P: -1.79% -4.03% 4.56% 193.10% 25.07% NASDAQ: -0.33% -4.86% 10.33% 235.91% 28.66% Rec'd # Security In At Now Change 8/5/94 2200 AmOnline 0.91 116.13 12677.14% 9/9/97 1320 Amazon.com 6.58 114.56 1641.27% 5/17/95 1960 Iomega Cor 1.28 4.56 256.33% 12/4/98 450 @Home Corp 56.08 121.94 117.43% 2/26/99 300 eBay 100.53 169.00 68.11% 12/16/98 580 Amgen 42.88 62.81 46.50% 4/30/97 -1170*Trump* 8.47 5.13 39.48% 7/2/98 470 Starbucks 27.95 35.69 27.66% 2/23/99 300 Caterpilla 46.96 55.38 17.91% 2/23/99 290 Goodyear T 48.72 57.38 17.78% 2/23/99 180 Chevron 79.17 93.00 17.47% 2/20/98 260 DuPont 58.84 65.13 10.67% 1/8/98 425 3Dfx 25.67 19.81 -22.81% Rec'd # Security In At Value Change 8/5/94 2200 AmOnline 1999.47 255475.00 $253475.53 9/9/97 1320 Amazon.com 8684.60 151222.50 $142537.90 12/4/98 450 @Home Corp 25236.13 54871.88 $29635.75 2/26/99 300 eBay 30158.00 50700.00 $20542.00 12/16/98 580 Amgen 24867.50 36431.25 $11563.75 5/17/95 1960 Iomega Cor 2509.60 8942.50 $6432.90 4/30/97 -1170*Trump* -9908.50 -5996.25 $3912.25 7/2/98 470 Starbucks 13138.63 16773.13 $3634.50 2/23/99 300 Caterpilla 14089.25 16612.50 $2523.25 2/23/99 290 Goodyear T 14127.38 16638.75 $2511.38 2/23/99 180 Chevron 14250.50 16740.00 $2489.50 2/20/98 260 DuPont 15299.43 16932.50 $1633.07 1/8/98 425 3Dfx 10908.63 8420.31 -$2488.31 CASH $9924.87 TOTAL $653688.93Note: 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>