So here I am, late Wednesday night, trying to write something a bit "timeless" yet relevant. Tonight, I think I'll scribe a few thoughts that have been bumping around my skull for some time now.
First, let's take a look at some of the more salient mistakes that have been made by this portfolio's managers over the past few years. Keep in mind that these are very real mistakes that were made with very real money.
- Sonic Solutions (Nasdaq: SNIC). Bought in December 1994 at $14 1/4. Sold in November 1995 at $6 3/8. (Pain.)
- ATC Communications. Bought in October 1996 at $22.94. Sold in October 1997 below $4. (Big ouch!)
- Applied Materials (Nasdaq: AMAT). Bought in August 1995 at $57.53. Sold in May 1996 at $40.
- Iomega (NYSE: IOM). Soared above $25 per share in the spring of 1996. Today, it's barely treading water above $3. (Woulda, coulda, shoulda...)
Yikes! You would think that with gaffes like these that this portfolio would really be sucking wind, no? Yet if one scrolls to the bottom of the page to see the latest numbers, that's clearly not the case. Point # 1 -- One can make plenty of large mistakes and still beat the market by a wide margin.
As investors, having companies we own fail while watching their stocks go down is an inevitable part of being in the market. Those that say they've never made an investing mistake are either inexperienced or lying. However, all it takes is one good pick to make a whole bunch of mistakes irrelevant.
Let's now imagine that in addition to those large, real blunders just mentioned, we also had a terrible string of fictional bad luck. Just imagine if...
- The editors of Barron's saw their dreams come true and Amazon.com became Amazon.bomb, blowing up and going to zero.
- Caffeine was outlawed. Shares of Starbucks became worthless.
- eBay went down... permanently.
- Sears, DuPont, General Motors, Chevron, American Express, and every other Dow heavy ever held as a Foolish Four pick went bankrupt within 12 months of our investment.
- Cable modems? A fad. Excite@Home's stock? @Zero.
- Iomega blew itself up. (Oops, that really happened.)
- 3dfx fragged itself. (Oops, that really happened, too.)
In other words, imagine if every single stock in this portfolio beyond America Online went to zero. Two times in the past, in April 1997 and December 1998, parts of the original America Online investment were sold off. Imagine that every single stock bought with the proceeds from these sales also went to zero. Picture everything going to zilch, except America Online.
Got that picture in your head? Good.
Erase everything else from the Rule Breaker portfolio except for the current position in AOL. Since inception in 1994, this portfolio would have still racked up the following annualized performance in our fictional "disaster" scenario:
Fools: 37.9% Nasdaq: 30.5% S&P 500: 23.9% 90+% of mutual funds: less than the S&P 500See what I'm getting at here? Even with the copious mistakes made here -- and forgetting the spectacular gains that Amazon, Amgen, and others have contributed to this portfolio -- AOL alone would have been enough to trounce the market.
Of course, our critics will bark, "Eh, those Fools. Where would they be without AOL?" I'll devote an entire column to that question next week, but those that even ask it are missing one of today's points. Point # 2 -- All you need to beat the market is one really good company and the fortitude to hold, hold, hold.
In fact, when this portfolio bought AOL way back in 1994, the buy report said, "We are buying, and we are holding. And holding. And holding. Because when we come to like a company and its situation this much, we're very unlikely to let go, inside of a decade." Hmmm, a hint of current Foolish thinking long before its time.
Unfortunately, this portfolio sold chunks of AOL twice to diversify, and those two trades actually represent the largest mistakes in the portfolio's history. Assuming that the shares of AOL were never sold, those 85 shares bought at a cost basis of $4,945.56 in 1994 would have blossomed -- after six two-for-one splits -- to 5440 shares worth, at yesterday's close, $652,800. Doing the math, that means that over $345,000 was "left on the table" with AOL. Ouch again.
No one is going to cry over this lost opportunity since getting depressed over such things is fruitless. But we will learn from our mistakes, and the lesson here is that buying and holding, holding, holding can produce some spectacular returns.
Our experience as long-term investors also tells us that it only takes a single stock to make a wildly successful portfolio. For this portfolio, it was AOL that has really "made" the portfolio. For others, perhaps buying and holding, holding, holding Dell, Microsoft, Coke, General Electric, Cisco, Intel, Amgen, or Merck was enough to enrich a portfolio much more than any mutual fund ever could. Remember, it only takes one.
A final, tangential thought. In doing the background research for this piece (every bit of information came from publicly published information in the archives), I noticed that the trading commission to purchase AOL back in 1994 rang in at $79.31, and that was using a discount broker. Almost $80 a trade! Today's going commission -- eight bucks. Point # 3 -- Boy, have times changed.
As always, share any thoughts about tonight's recap in our Rule Breaker Strategies board. And if you are looking into, or for, any new Rule Breaker prospects, the conversation always continues on our Rule Breaker Companies message board.