<THE RULE BREAKER PORTFOLIO>

Perspective
Plus, @Home's Home Raided?

by Jeff Fischer (TMFJeff)

ALEXANDRIA, VA (June 4, 1999) -- Some people have asked, "When will this bloodbath end? Stocks have declined for weeks!" The Nasdaq Market responded with a record 3% jump on Friday, but the bloodbath is far from over. In fact, it never really began.

Perspective. The concept behind it relates well to David's series on the psychology of investing. (Please see Wednesday's column for that series.)

The S&P 500 and Nasdaq have remained in positive territory this year. Meanwhile, Amazon stock ended 1998 at $107, so it's up slightly since; @Home was at $74 last December, so it's up 27%; AOL was $77, so it's up 53%; and eBay is up over 70% this year. Meanwhile, Amgen ended 1998 at $52, and Starbucks was at $28.

So, all of our large Rule Breakers have risen this year. The fact that the stocks have fallen from recent highs only means "bloodbath" if you anchor yourself to the highs and measure from there. But why do that? One should measure a stock's performance from one's purchase price and compare that performance to the S&P 500. Are you beating the market? That's the question to ask. Not, "are you worth 20% less than you were two months ago?" That's a volatility issue. Your portfolio's value will always fluctuate. It is the market average that you want to beat. As an investor, you can't do much about the market's whims.

Meanwhile, I don't consider 52-week high and low prices valid data points of measurement anyway. The high and low prices are two arbitrary numbers (for all practical purposes) that investors bid a stock to under various situations. (I don't believe that the stock market is immediately and accurately efficient. That's like saying the stock market can predict the future perfectly. Never. No way.) Just because a stock has hit a certain high -- say Amazon at $221 -- that doesn't give that high any lasting importance. It was a number reached for whatever reason at the time. (Many times you don't know why.)

Apparently, most of the Wise do lend importance to past highs and lows, however. We often hear that "Widget Inc. is 40% below its high, which makes it attractive now."

It isn't attractive if the business is weakening. And who is to say that the high price was deserved in the first place? Too many investors and financial journalists value stocks based on past highs and lows. "This stock is expensive. It's near its high. This one is cheap, it's 50% below its high." Wise.

Foolish: the high and low don't mean anything. All that matters is where the business is going next. That, in turn, will determine where the stock price goes next. Past highs and lows were scored when opinions about the potential differed. Opinions about the potential when measuring from any given day will influence a stock's future price regardless of past highs and lows. (If the market was always efficient, we wouldn't see such wide variations between annual highs and lows, would we?)

My favorite "Eyes on the Wise" situation has developed over the past three weeks. Consider this, Fools. For as long as certain companies have been public (AOL, Yahoo, Amazon, eBay, @Home, Priceline), they have been called overvalued by the majority. Often, they've been called "insanely valued." They were called that until a few weeks ago, when recent peaks were hit.

Since then, many of these stocks have fallen 35% or more. So, what are the Wise now beginning to write? I saw it written yesterday that the stocks are beginning to rise again now because "bargains exist that can't be passed up." And today, prices rose because "many of the stocks might now represent attractive values."

Fools, what is missing here? The stocks are being said -- by some of the same sources -- to have gone from "insanely valued" to "bargain" level. How can that even be possible? How can something be insanely valued, fall 35%, and suddenly be a bargain?

Where is the middle to that equation? Where is the fair value?

There isn't one. Because that's not how Wise journalism works.

How exciting is it to write about something as if it's trading at a reasonable price? Most Wise publications don't believe that there's a story there. Something needs to be greatly overvalued, or a bargain. Perhaps that's why stocks, including Internet-related ones, can go from one end of the spectrum (overvalued) to the other end (bargain) so quickly in the world of the Wise -- without any valuation numbers being given, mind you. Often, just the past 52-week high and low price is mentioned, along with market cap. Now there's useful information by itself. (Sarcasm is the wit of... well, you know.)

Perspective: A good value is not always represented by a stock that is far below its high. A stock at a new high is not always priced "highly." An AOL at $150 is not insanely valued if an AOL at $110 is a bargain. That's virtually impossible.

More perspective: Some Wise sources now say that Internet-related stocks are at bargain levels (apparently, because they're below recent highs). Yet, months ago when the stocks were at lower valuations than they are now, but were making new highs, the same Wise sources claimed that the stocks were insanely valued. Can you see why they'd do that? It's very poor perspective anchored on the high price.

Next, you are not experiencing a bloodbath if your portfolio is up more than the stock market's average 11% per year over its lifetime. Beating the market is sugar. Congratulations. That's Foolish. But looking at the past high-water mark of your portfolio's value and then comparing everything to that is essentially evaluating yourself on an arbitrary data point -- one that you never truly realized, only experienced.

Final perspective: a person is never old. How "old" is 100 years on this good ol' planet?

Anyway, some news:

The Rule Breaker rose over 4% (gaining what it lost on Thursday and more) on strength in America Online (NYSE: AOL) and despite a swoon in @Home (NYSE: ATHM). The two stocks moved on news that a federal judge ruled in favor of Oregon officials who believe that AT&T (NYSE: T) should provide its cable network to competing Internet access providers. This decision probably puts into motion what could prove to be a very long series of lawsuits.

Who might win? I'd say AT&T, either way. It's AT&T's network. If it shares it with competitors, it will charge for access. Competitors would cover the cost by charging higher prices for services, meaning that AT&T's majority-owned @Home could score a competitive advantage.

Anyway, AT&T doesn't have a monopoly on high-speed Internet access and the notion that it does -- as it's presented -- is silly. DSL will be available country-wide from many providers, as will satellite access. There are many ways to achieve high-speed Internet access. AT&T is pursuing the cable route. It owns the cable network. It paid for it. AT&T should be able to do with it what it wishes. Or, should the first satellite connection companies make their satellite services available to every competitor, too? America is a country of business based on capitalism, not socialism.

Heck, AT&T has competition even from single guys. Paul Allen's High Speed Access Corp. (Nasdaq: HSAC) came public today and rose 56%, to above $20 per share. The company competes with @Home and RoadRunner by providing high-speed Internet access through a cable modem.

Here's one reporter's summary of the AT&T news. Meanwhile, the Fool's @Home board is hopping with great discussion.

Have a Foolish weekend!

06/04/99 Close

Stock  Change    Bid 
------------------ 
AMGN    ---      60.50
AMZN  +3 3/8    108.44
AOL   +11 5/16  117.75
ATHM  -10 3/4    94.50
CAT   +2 3/8     62.81
CHV     ---      91.56
DD    +3 5/16    70.25
DJT   -  1/4      5.19
EBAY  +7 3/16   168.50
GT    -1         60.75
IOM   -  5/16     4.13
SBUX  +  1/16    36.00
TDFX  +  3/16    18.00

                  Day     Month  Year   History   Annualized 
      R-BREAKER  +4.54%  -5.00%  27.14% 1176.14%   69.43%
        S&P:     +2.17%   1.99%   8.33%  203.21%   25.82%
        NASDAQ:  +3.12%   0.32%  13.03%  244.13%   29.16%


    Rec'd    #  Security     In At       Now      Change
   8/5/94  2200 AmOnline       0.91    117.75   12855.93%
   9/9/97  1320 Amazon.com     6.58    108.44    1548.18%
  5/17/95  1960 Iomega Cor     1.28      4.13     222.16%
  12/4/98   450 @Home Corp    56.08     94.50      68.51%
  2/26/99   300 eBay         100.53    168.50      67.62%
 12/16/98   580 Amgen         42.88     60.50      41.11%
  4/30/97 -1170*Trump*         8.47      5.19      38.75%
  2/23/99   300 Caterpilla    46.96     62.81      33.75%
   7/2/98   470 Starbucks     27.95     36.00      28.78%
  2/23/99   290 Goodyear T    48.72     60.75      24.70%
  2/20/98   260 DuPont        58.84     70.25      19.38%
  2/23/99   180 Chevron       79.17     91.56      15.65%
   1/8/98   425 3Dfx          25.67     18.00     -29.87%

    Rec'd    #  Security     In At     Value      Change
   8/5/94  2200 AmOnline    1999.47 259050.00  $257050.53
   9/9/97  1320 Amazon.com  8684.60 143137.50  $134452.90
  2/26/99   300 eBay       30158.00  50550.00   $20392.00
  12/4/98   450 @Home Corp 25236.13  42525.00   $17288.87
 12/16/98   580 Amgen      24867.50  35090.00   $10222.50
  5/17/95  1960 Iomega Cor  2509.60   8085.00    $5575.40
  2/23/99   300 Caterpilla 14089.25  18843.75    $4754.50
  4/30/97 -1170*Trump*     -9908.50  -6069.38    $3839.13
   7/2/98   470 Starbucks  13138.63  16920.00    $3781.38
  2/23/99   290 Goodyear T 14127.38  17617.50    $3490.13
  2/20/98   260 DuPont     15299.43  18265.00    $2965.57
  2/23/99   180 Chevron    14250.50  16481.25    $2230.75
   1/8/98   425 3Dfx       10908.63   7650.00   -$3258.63

                              CASH   $9924.87
                             TOTAL $638070.50
 
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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