ALEXANDRIA, VA (Sept. 21, 1999) -- The Rule Breaker portfolio held flat today, in the face of a 2% market drop. AOL retraced a step of its recent retreat, while eBay continued on The Comeback. After hitting $234 in late April, our shares of EBAY did something like a death rattle through the summer, dropping steadily and significantly to below $80! After today's rise of $4 5/8, though, eBay has now risen back over $140.

Long-time Fools who've read our 1999 book Rule Breakers, Rule Makers will recognize that phrase "death rattle." In my Rule Breakers section of the book, I talk about what I call the "Tweener Death Rattle," in which a former Rule Breaker's stock will typically lose some 40% of previous gains right about the time that its business is matched, and may never come back. "'Its business is matched?' What's this Gardner guy saying?" Well, a business is matched when a competitor offers a "legitimate alternative." It is at this point (trumpets sound, drums beat, cymbals crash) that a Rule Breaker is no longer a Rule Breaker.

It has been challenged. It has been, in a sense, duplicated. It has Tweened.

We say "Tweened" or "Tweener" because this is that gray and amorphous intermediate stage between a company's past as a Rule Breaker and its stretch toward the throne of the Rule Maker. During this period, the market is queasy, and unsure investors wield weak, unsteady hands. The stock often nosedives. And if the company fails to become a Rule Maker -- AHEM, Iomega -- the stock may never recover to its once lofty highs -- a true Tweener Death Rattle.

eBay, I submit, is in this stage right now. eBay is no longer a Rule Breaker. The company has been so dominant and so successful as it broke the Rules that competitors are coming in from all sides. We Fools have known about Yahoo!'s and Amazon's competing auctions for a while, though neither has reached the sort of scale necessary to challenge eBay. After all, unless there's a darn good reason otherwise, a seller will generally go wherever the most buyers are (for the highest auction), while a buyer will generally go wherever the most sellers are (for a wide selection, which often dampens prices).

But last Friday's announcement of FairMarket involves dozens of medium to large websites allying to create an alternative to eBay. When you take that announcement together with Amazon's and Yahoo!'s efforts, you can clearly see legitimate business alternatives out there.

Or can you? Are customers legitimately attracted to auction sites that feature far fewer fellow customers than they might find at eBay?

I believe that eBay is quickly moving toward becoming a Rule Maker -- possibly one of the great Rule Makers of our era. FairMarket is the last meaningful competitor in the space, the last disruptor that can stand in the way of eBay's ascension to the throne. So we will watch it with interest! My own personal belief, and the reason we continue to hold the stock, is that eBay is brilliantly managed and growing like crazy. It's going to be really hard to stop this company's "increasing returns dynamic," where every additional customer only makes the site itself stronger and harder to compete against. FairMarket to me looks burdened by not enough there there -- when I think "buying and selling," I don't generally think Lycos or Microsoft, but instead I think of eBay. That's mindshare. Plus, FairMarket's success will also be predicated upon the need for cooperation among all its diverse partners, and I'm skeptical of cooperation working on such a grand scale.

eBay is doing all the right things. It's creating high-end auctions of art, etc., through its Butterfield & Butterfield acquisition, and it's near working on local eBays in the 50 biggest metropolitan areas. In the past, it's been a pain to sell your used car on eBay. Hey, what if you live in California, and some guy in New Hampshire just bought it?! But metropolitan eBay storefronts make it possible to transact and exchange large, heavy items of all kinds. Look out, used car dealers.

The goal of the Rule Breaker portfolio -- our dream, really -- is to identify great Rule Breakers that will one day become Rule Makers, and hold, hold, hold. Occasionally on our message boards I see a misconception among some who think that we will or must sell a Rule Breaker once it's no longer a Rule Breaker. Au contraire! This portfolio exists to maximize its returns, as we state in principle #2 of managing the portfolio. The way to make the most money as an investor is to buy a Rule Breaker and hold it right through its Rule Maker status. That is the ultimate payoff, one that we are always looking for.

I'd love to hear your further thoughts about eBay on our eBay message board, or about the Rule Breaker portfolio on our Rule Breaker Strategies message board.

And as we close tonight, I want to thank you all for your notes of support and congratulation on our company's recent financing. The future looks amazing, and I hope you'll be a part of it. Speaking of amazing, I'm constantly amazed by the resources we have here in Fooldom that many of us may not even know of. To that end, let me point out a few:

We have a new message board called our Rule Breaker Companies message board, where the focus is identifying new Rule Breakers. We're in the midst of looking real hard at biotechnology, but are open to any and all suggestions and look forward to your contributions. The board makes a fine read for those who are ever interested in the pursuit of new Rule Breakers. We have a great team dynamic there on the board, fulfilling The Motley Fool message boards' stated mission of "Learning Together."

Also, did you know about our International message boards? Click in to see a host of discussions focused on foreign markets, many of them frequented by foreign Fools who live in those countries. As Foolishness expands across the globe, look for lots more fun and action on our foreign boards. That includes our first-ever foreign site, the award-winning Motley Fool UK, as well as some great posts right here on our International boards. Earlier today I was just reading this new post, in which the correspondent explains a part of Japanese investing that has no real equivalent here in the States. Namely, some Japanese publishing companies publish rags listing stock graphs of many well-known companies and indicate over the top of the graph whether to buy or sell the stock based on colorful icons like suns or rockets ("It's got a double rocket, honey!").

Finally, for all our best message board discussions you should definitely bookmark our Hot Topics page. Every day on that page we feature a fresh list of the best discussions going on in Fooldom, served up for your education, amusement, and enrichment. Those who are using My Fool (and if you don't know about this most convenient way to use the Fool click here because you should!) will note that you can add "Hot Topics" as a "Favorite Feature."

We're working on a few sells and a few buys. Stay tuned to this space in the weeks ahead.

Fool on!

-- David Gardner, September 21, 1999