There have been some great features on the Fool lately. Paul Commins has a fine Fool on the Hill article that is a must-read for long-term investors. Also, eBay (Nasdaq: EBAY) CEO Meg Whitman appeared on the Motley Fool Radio Show this past weekend. To listen to the interview, you'll need Windows Media Player or Real Player, which you can download from the page.
Here in Rule Breaker, Jeff Fischer started the week out right talking about the necessity of developing an investment strategy and sticking with it. In this respect, Jeff and John Bogle, the founder of The Vanguard Group, think alike.
Bogle is the man who developed and popularized the index fund. He is a friend of Foolish investors everywhere. He speaks out against high-cost, low-performance mutual funds, and he's always ready to give helpful advice to the individual investor. In early 2000, he was touring the country with the message that the S&P 500 was seriously overvalued and due for an extended period of underperformance. He thought that it was necessary for investors to ratchet down their expectations.
But did he advise people to move their money into bonds? No. He strongly believes that investors should not try to time the ups and downs of the market. The best thing to do is to establish an investment allocation that is right for you -- depending on your investment goals, time frame, financial situation, and risk tolerance -- and stick to it. Stick to it when everyone else is piling into stocks, stick to it when everyone's running for cover. "Emotional factors have destroyed more investment programs than economic factors ever have," Bogle says.
Our investment strategy, as expressed in our principles, is to take risks on individual stocks in pursuit of superior investment returns. We have a set of criteria that we use to select those stocks. While our general investment strategy does not change, our criteria are under constant examination. Here at Fool HQ, we search relentlessly for better solutions. We leave no assumption unquestioned and institutionalize no bias.
Today we unveil the latest rendition of the Rule Breaker criteria. The points will be familiar to those who follow the portfolio. They are very much as they were before, with the following changes:
- We've split the first criterion, formerly top dog and first-mover in an important, emerging industry, into two separate criteria. It has always been a two-step process to find the Rule Breaking industry and then identify the top dog within it. We've just formalized the division.
- We've tweaked our treatment of "first-mover" in the second criterion. We recognize that first movers are not always the ones who win. America Online, now AOL Time Warner (NYSE: AOL), Amazon.com (Nasdaq: AMZN), and Celera (NYSE: CRA) are living proof. The companies that win are the ones who first realize the enormous potential of the new industry and attack it with aggressive research and marketing efforts. We want the first-movers with gusto.
- We've been talking about adding 10x/5y as a criterion for some time. Now it's officially on the list. These changes bring the number of criteria to eight.
Finally, we've added another division to help guide our analyses. We have split our criteria into two groups: those that apply to the business in question, and those that apply to the stock. Since the business quality is of premier importance, we look first for a company that matches our five business criteria. Second, we move on to see whether the stock is at an attractive point for purchase right now. If it isn't, we can put the business on our radar for future review. The stock criteria are likely to fluctuate much more than the business, so it may be that an unattractive stock today could become attractive tomorrow.
Without further ado, here are the revamped criteria:
Business Criteria: The business should...
- Be in an important, emerging industry.
- Be the top dog and first-mover with gusto in that industry.
- Have a sustainable advantage.
- Have good management and smart backing.
- Have strong consumer appeal.
Stock Criteria: The stock should...
- Have a relative strength of 90 or better.
- Have the potential to appreciate 10-fold in 5 years.
- Have been called overvalued by a significant constituent of the financial media.
We give a brief synopsis of each criterion on our Strategy in Brief page. You can find a link to it on the left side of our Rule Breaker columns.
Remember, of course, that this is just one possible strategy. It's the one we use to select stocks for our portfolio, since we have decided that we want to spend a significant amount of time digging into our businesses and we can accept the risks (highlighted by a 50% loss last year) that go along with individual stock investing. This is money we can afford to lose. You need to decide for yourself what the best investment approach for you is.
Brian Lund finds that a dollar just doesn't go as far these days, when he's looking to buy a Harley rather than the Bub's Daddies of old. You can see his portfolio, which includes eBay, in his profile. The Motley Fool is investors writing for investors.