Whew! Thank goodness that year is over. Why, look at those numbers at the bottom of the page -- all that nasty red is gone! Last week we were down 50% for the year. Now we're just down a couple of points!
Well, maybe that's the wrong way to look at it. January 1 is just a date on the calendar, and one on which we can't trade at that. Why should we measure investment returns by it? Well, there is one good reason: It's easy. I'm not sure on what day the Rule Breaker Portfolio hit its all-time high, and I'm not interested enough to take the time to find out.
Dec. 21, 1999 was pretty high, though. Here are the returns for each of our holdings since then:
Dec 21 Dec 29 1999 2000 %change $change AOL 85.00 34.80 -59.1 -201,804 AMZN 99.88 15.56 -84.4 -222,585 AMGN 50.13 63.94 27.5 16,023 CRA 62.50 36.13 -42.2 -33,233 ATHM 47.13 5.91** -87.5 -37,105 EBAY 72.19 33.00 -54.3 -23,513 HGSI 80.05* 69.31 -13.4 -6,016 SBUX 27.96 44.25 58.3 8,724 Total -499,509 *= Buy **= Sold
Wow. That's a lot of simoleons. That's 499,509 -- heck, call it half a million -- bones in the stock market graveyard. That's more than one dollar for every resident of Wyoming in 1999 (not including cattle, of course).
The numbers reveal that the primary culprits were Amazon.com (Nasdaq: AMZN) and America Online (NYSE: AOL). Those two cost us almost $424,000. Without them, the portfolio would only have dropped 28.9% since last Dec. 21, which looks pretty darn attractive right now. Of course, without them our total value would be... well, a whole lot lower. Live by the sword, die by the sword, I guess.
"No!" shouts The Investor. "You should have sold them when they were clearly overvalued! Why let a bad decision cancel out a good one?" It's a fair point. I mean, it was obvious that Amazon was never worth the $35 billion market cap it sported in 1999, and that it might not even be worth the $5.5 billion it trades for now. AOL, too, wasn't worth $200 billion then, nor $81 billion now. Isn't that clear?
Maybe it's clear to some, but I sure don't know what either of them is worth. A McKinsey Quarterly article (free registration required) from February valued Amazon somewhere between $3 billion and $79 billion. A more bearish discussion board post recently concluded that it is worth is -$1.4 billion (though it may possibly have some positive value), so let's call it $0 to $79 billion. In any case, its precise value -- the discounted value of its future cash flows -- is darn near unknowable. Maybe we could get closer with AOL, but it's awfully difficult to evaluate the synergies it will realize with Time Warner (NYSE: TWX), if there truly are any.
Of course, in retrospect, we should have sold both positions last year. They were overvalued, in the sense that they are now worth less. On the other hand, they have both looked pretty overvalued for most of their public lives. For some perspective, I looked back at the last notable drop in the market, the summer of 1998, when AOL fell almost 40% by September 1. On that day, Loverbear posted this: "The Fool's buy-and-hold strategy has never been tested in a bear market. I, for one, have never understood why it is good to hold and watch equity evaporate." Seems we should have known better than to have held AOL in 1998.
The next day, Jeff Fischer wrote about the value of AOL. He said: "Adding it all up, Foolanalysts (and other analysts) perceive a fair value for AOL of about $150 [$18.75 split-adjusted] per share in fiscal 1999, or 70% above the current price [of $11.05]." If you had told Jeff then that AOL would appreciate 220% over the next two-and-a-third years, which it has, he would have jumped up and screamed, "Woo hoo!"
Look again at that page from September 2, 1998. Starbucks (Nasdaq: SBUX) closed that day at a split-adjusted $16.44, down more than 40% since the portfolio purchased it two months earlier. Wasn't it screamingly obvious then that we had overpaid for our Starbucks shares? Here's a post that said as much.
Since that time, however, Starbucks is up 170%. It has appreciated about 58% since we bought it, versus an 18% gain in the S&P 500 (with dividends reinvested).
Did we overpay for Starbucks? Sure we did. We could have bought it at the "bottom" in September 1998 and done much better. What's more, Starbucks could prove to be "overvalued" right now and drop 60% in 2001. Someone who can buy at the bottom and sell at the top sure can make a mint in the stock market.
However, we can't do that. We don't know when we've reached the top or the bottom. We have absolutely no idea where the stock market will go tomorrow. If we did, you may be assured that we would have sold AOL and Amazon last December and plowed the proceeds into OSI Pharmaceuticals (Nasdaq: OSIP) -- along with our profits from all our other stocks after they stopped going up.
But we don't have the gift of market prescience and we aren't terribly interested in trying to learn it from those who preach it. We don't believe it exists. We think that we have a much better chance of spotting great businesses whose stock seems to have good potential to appreciate further over the long term than we do of guessing tomorrow's closing numbers.
We don't know that our businesses will fulfill their potential, of course. AOL could trail the market for the next 10 years. I've said before that Amazon may well continue to drop and end up filing for bankruptcy. Maybe Amgen (Nasdaq: AMGN) will never replace its premier products, Epogen and Neupogen, and not regain its current value for a generation. Maybe Human Genome Sciences (Nasdaq: HGSI) and Celera (NYSE: CRA) will never actually come up with a product to sell anyone. Maybe QXL.com will rise like a phoenix from the ashes and topple eBay (Nasdaq: EBAY).
All right, that last one is pretty unlikely, but the rest of them are very real possibilities. We're taking risks with these companies. They all still have plenty of room to fall. We hold on to them, however, because we think that they have good potential to appreciate faster than the market in the long term. We still like the businesses, and we think they will grow.
It's a new year, Fools, a new beginning. We will stick with our strategy as we look for new investments in companies that are changing the world. You can join us in our journey by signing up for our online seminar, Quest for Rule Breakers 2001, which begins January 16. You can learn more about it by clicking here.
Finally, start the new year out by making the world a better place: Contribute to this year's Foolanthropy drive, which ends Jan. 6!
Happy New Year, everyone!
--Brian Lund, who's so TMF Tardior that he insists the new millennium started yesterday -- and again tomorrow.