The Rear-View Mirror
Fighting our nature to improve our returns

By David Gardner (MotleyFool)

ALEXANDRIA, VA (June 15, 1999) --

Objects in mirror may appear closer than they are.

Most people who analyze stocks use a rear-view mirror.

It's human nature, of course. The past is far easier to picture than the future, for the simple reason that the past has already happened. So we look at the 52-week high and low, or the most recent news release, or (as "technical analysts" are wont to do) a graph of the stock's recent performance, and we use these things to form our opinion of a company.

I call this "losing track of the road." Motor down an interstate highway with your nose pressed to your rear-view mirror and you won't make it very far before you crash. You've lost track of the road. You were looking backward.

Now, few people actually drive this way consistently. As we use our tangible, physical eyes driving our tangible, physical cars, it's too obvious to us that we must keep our focus trained not behind but ahead, on that sun-splashed S-curve in the road, or the swerving blue eighteen-wheeler with the "WIDE LOAD" sign. For these visible reasons, we rarely drive looking backward, and haven't much difficulty keeping track of the road.

Investing is a different story. The stock market trades off future expectations far more than past results. It's the same sort of road, pointing ahead and rewarding those who look down it (not back up it). But because it's not tangible and physical, and because we are not using our ocular eyes but the eyes of our inner minds, the investment road frustrates and confounds many people. They are driving, looking backwards.

Who might this be? Two examples out of many come quickly to mind. One is the person who cannot understand why any company presently losing money would be lucratively valued: "It has a P/E of infinity!" This outraged fellow is confounded by -- cannot get over -- the notion that present-day prices showcase expectations of future profit streams. What a simple concept, and yet how many long-time journalists or market analysts still have their eyes on the mirrors? A second backward-looker is the momentum investor who has, say, hopped aboard "the Internets," riding their past performance. The past six weeks have her picking up the pieces of her scattered little auto. Along with many others, both of these investors lost track of the road.

The sad thing is, it's easy to do. Heck, happens to me all the time. Even recognizing the mistakes inherent in backward-looking investing, I allow many useless distractions to bedevil my otherwise Foolish perspective. Streaming real-time quotes, what some bloke just said on cable TV, the recent past performance (good or bad) of one's stocks, all of these represent short-term diversions that undermine our better instincts, and our better investment returns.

The first step, as they say, is recognizing that we have a problem. The second is working to correct it.

You come to this space every day. You understand our principles. So you should have a leg up on the backward-lookers. Hey, the Rule-Breaking investor cannot afford to use a rear-view mirror. That's what the rest of the world does, with its focus on what's already happened, or its rote thinking, or its lack of imagination. It's for this reason that most people cannot effectively analyze Rule Breakers, and this fact is what makes Rule-Breaking investing profitable... for those who can accept the risks.

It is very true, as an old Meat Loaf lyric went -- and as I took for my epigraph tonight -- "Objects in the mirror appear closer than they are." They are closer to our mentalities than they should be. They appear more important than they are. Objects in the mirror appear closer than they are..

The best discussion that goes on our Motley Fool message boards exists between people who are focusing on the businesses being discussed, rather than speculating about their stock prices. I would so much rather read someone's future vision of Amazon.com -- whether it's encouraging or terrifying -- than thoughtless speculation about its stock price: "It's going to $X by Y date." Sure, sure. Leave that to the Wise -- allow them their distractions. Here in Fooldom, let's stay focused on the evolution of business, on the actual products and services, on competition, on relevant facts that discerning investors can use to make better investment decisions.

Let us not, as we see today in our enjoyable Eyes on the Wise message board, look backwards with the analysts. Infowonk, in this post, points to a hilarious statement from the investment manager of a Wasatch Fund, who writes in a quarterly report, "The stock prices of large companies have risen primarily due to expansion of the price-to-earnings (P/E) ratio (the price of a stock divided by its earnings per share)."

Read that statement again and then note, as TMF Cheeze points out, that it says nothing more than this: "The price went up because it went up"!

Have you ever watched someone strap on virtual reality gear (headset, body suit, whatever) and play a virtual reality game? For them the experience is engaging, and "real." For you, the observer, they look idiotic. I liken this to reading that line in the Wasatch report; watching someone "analyze" stocks this way -- watching someone dilate while looking at the rear-view mirror -- is a lot like watching someone play a virtual reality game.

What may separate one investor from another during these horrible past two months in which our best stocks have been collectively halved is simply the direction in which they're looking. The market has been stumbling all over itself to exit our Rule Breakers, bailing. The reaction of most of us is to train our focus on these recent events, to expect that what has already occurred will continue to occur. As if AOL can drop $9 every day, or eBay will keep losing 14 bucks until it goes out of business. In two months, Excite@Home (that's the company's name now, by the way!) has fallen from $198 to $80. Will it lose another $118? You could almost be convinced of it, listening to some of the media's coverage, or a diverse assortment of market commentators.

(The chairman of the FCC today made some positive comments about laying off regulating cable Internet service, by the way. These included, "We do not have a monopoly in broadband. We have a no-opoly because the fact is, most Americans don't even have broadband. We have to get these pipes built.")

So focus on the future, not the past. Go against the "what have you done for me lately" perspective of human nature. Watch the road ahead. Whether you are a bear or a bull is not so material, here. It is just where you are looking.

For my own part, the most backward-focused and overblown story of the month is eBay's failure to keep its service running smoothly over the past week. Yes, that was a problem. Yes, the company lost revenues. Yes, it represents a failure that has hurt the business and its shareholders.

But which way are we looking, here? You think these problems are terminal? You think a year from now that eBay won't still be the best, most frequented, most convenient place to buy and sell anything, for anyone? My own view of the future says eBay's continued leadership, profitability, and growth are a virtual certainty over the near-to-intermediate term, whether they managed to keep the site up last week or not. Reminds me of AOL hitting headlines in 1996 for going down, or for its customers not being able to sign on. What a great time to buy, as the stock sunk from $75 to $25.

"Objects in the mirror appear closer than they are." Ask yourself how much you are looking in that mirror when you invest. I have never met a backward-looker who bought a Rule Breaker.

(Recommended reading: Today's Fribble, which simply and eloquently illustrates the point above.)

Oh yeah, the BreakerPort came back 3% today, beating the market averages.

Fool on!

David Gardner

06/15/99 Close

Stock  Change    Bid 
AMGN  +1 1/2     55.31
AMZN  +4 1/2     96.50
AOL   +4 3/8     94.50
ATHM  +1 9/16    80.06
CAT   -1 1/2     58.44
CHV   +1 1/4     96.00
DD    +  5/16    70.50
DJT   -  1/4      4.94
EBAY  -  1/2    135.50
GT    -2 1/16    58.75
IOM   -  1/8      3.94
SBUX  +1 9/16    36.69
TDFX  +1 1/16    15.44

                  Day     Month  Year   History   Annualized 
      R-BREAKER  +3.28% -18.13%   9.57%  999.78%   63.78%
        S&P:     +0.55%  -0.04%   6.18%  197.44%   25.14%
        NASDAQ:  +0.68%  -2.26%  10.12%  235.29%   28.27%

    Rec'd    #  Security     In At       Now      Change
   8/5/94  2200 AmOnline       0.91     94.50   10297.76%
   9/9/97  1320 Amazon.com     6.58     96.50    1366.73%
  5/17/95  1960 Iomega Cor     1.28      3.94     207.52%
  12/4/98   450 Excite@Hom    56.08     80.06      42.76%
  4/30/97 -1170*Trump*         8.47      4.94      41.70%
  2/26/99   300 eBay         100.53    135.50      34.79%
   7/2/98   470 Starbucks     27.95     36.69      31.24%
 12/16/98   580 Amgen         42.88     55.31      29.01%
  2/23/99   300 Caterpilla    46.96     58.44      24.43%
  2/23/99   180 Chevron       79.17     96.00      21.26%
  2/23/99   290 Goodyear T    48.72     58.75      20.60%
  2/20/98   260 DuPont        58.84     70.50      19.81%
   1/8/98   425 3Dfx          25.67     15.44     -39.86%

    Rec'd    #  Security     In At     Value      Change
   8/5/94  2200 AmOnline    1999.47 207900.00  $205900.53
   9/9/97  1320 Amazon.com  8684.60 127380.00  $118695.40
  12/4/98   450 Excite@Hom 25236.13  36028.13   $10792.00
  2/26/99   300 eBay       30158.00  40650.00   $10492.00
 12/16/98   580 Amgen      24867.50  32081.25    $7213.75
  5/17/95  1960 Iomega Cor  2509.60   7717.50    $5207.90
  4/30/97 -1170*Trump*     -9908.50  -5776.88    $4131.63
   7/2/98   470 Starbucks  13138.63  17243.13    $4104.50
  2/23/99   300 Caterpilla 14089.25  17531.25    $3442.00
  2/20/98   260 DuPont     15299.43  18330.00    $3030.57
  2/23/99   180 Chevron    14250.50  17280.00    $3029.50
  2/23/99   290 Goodyear T 14127.38  17037.50    $2910.13
   1/8/98   425 3Dfx       10908.63   6560.94   -$4347.69

                              CASH   $9924.87
                             TOTAL $549887.68
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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