All right. We haven't commented much on the portfolio's results lately. It's time now to mention the fact that the Rule Breaker Portfolio is beating the pants off the major indices this year. We're up almost 26%, compared to drops of 8% in the S&P 500 and 18% in the Nasdaq. What's our secret? Here are some opinions.
Jeff Fischer
Shares of eBay (Nasdaq: EBAY) have risen 94% this year while the Nasdaq has declined 18%. Thursday, while the Nasdaq fell 3.5%, eBay rose 3.5%. The stock has held up like a rock. Why? First, the company keeps beating earnings expectations, a rarity today. Second, this year many investors began to realize the sustainable competitive advantages possessed by the world's leading online marketplace. As eBay's sustainable advantages cement, its stock value rises. This could hold true for years as its advantages become more insurmountable.
eBay has long been my favorite stock to own. In addition to the qualities just stated, its business is not dependent upon the country's economy. It isn't a traditional retailer, and it doesn't operate in a challenging technology industry. eBay is providing a meeting place for millions of people to buy and sell. This business may prove largely recession-proof.
The lesson reiterated here: Seek companies that possess sustainable advantages that protect their sales and profits at all times, if possible. And seek companies that serve a market you can understand and can reasonably predict.
A story that is lacking luster this year (but isn't horrible either) is that of the new AOL Time Warner (NYSE: AOL). The company is challenged to meet its aggressive sales goal of $40 billion, but, as I wrote in April, the stock may be poised to top the market into 2004, should all go fairly well with the business.
Tom Jacobs
Let's take a half-time look at our three companies that use biotechnology in Rule Breaking ways: Recombinant DNA pioneer Amgen (Nasdaq: AMGN), developing therapeutic and monoclonal antibody drug maker Human Genome Sciences (Nasdaq: HGSI), and bioinformation company Celera Genomics (NYSE: CRA). Three very exciting companies, only one currently profitable.
I've discussed Amgen's high valuation and the risks should any of its current pipeline candidates stumble. The recent European approval of Aranesp provided good news, but the FDA has said that data for Amgen's prostate treatment Abarelix is inadequate for approval. This may hasten the decline in Amgen's substantial valuation premium, probably based on its perceived status as a "biotech" company.
That premium will inevitably fall as Amgen's potential and results are measured more against so-called traditional big drug makers like Johnson & Johnson (NYSE: JNJ) or Pfizer (NYSE: PFE), which are using biotechnology advances in their own operations. In other words, if big pharma were to paraphrase Richard Nixon today, they would say "we are all biotechs now." Frankly, if we weren't already long Amgen, it might make a good short. I don't think it's an eBay, richly valued in the short term but potentially worth much more in the long term.
Jeff Fischer wrote last week that HGS continues to do exactly what it promises -- put new drug candidates into clinical trials. He analyzed Celera's move into drug making through buying drug discovery company Axys Pharmaceuticals (Nasdaq: AXPH). The development of both of these Rule Breaker companies into profitable entities will take a long time, if it ever happens at all. They are fascinating to watch.
If it's half-time, where are the biotech cheerleaders? On the sidelines, watching the game, learning a new chant:
D-N-A, D-N-A,
Let's all cheer for genetic bricks and mortar!
Decode my genome, grow me a new arm,
And go investors, whether longer or shorter!
Brian Lund
I will never understand why people care about arbitrary things like how a portfolio is doing since January 1. I've written before about this problem of framing. It's completely uninformative -- well, maybe not completely uninformative, but nigh uninformative -- to discuss results from one date to another. You could make any case you want.
For the week, the S&P 500 is beating us. For the month, the Nasdaq is beating us. Over the last 12 months, we're down about 28%, worse than the 16% fall in the S&P 500 but better than the Nasdaq's 46% drop. The long-term results are all that matter. In that respect, we can't complain. Our internal rate of return since inception tops 35% annually. If we can keep that up for 20 more years, then we can celebrate.
Which brings me to what I think is our most important development so far this year: We've begun reporting our returns on an after-tax basis, just as the mutual fund industry will soon be required to. To do so, we had to consider past tax payments as periodic cash additions to the portfolio, which despoiled our pure "$50,000 initial investment with no cash added" presentation. That means that our internal rate of return much more accurately reflects our real return than overall return.
Now that we have essentially begun adding cash for taxes, I think we would make our portfolio much more interesting and realistic if we introduced new funds on a regular basis, as our Rule Maker counterparts do. We would need to add more than their $500-per-month, since our portfolio is bigger. Ten percent per year or so would be interesting.
It's been a good first half of the year. May the second half be just as good, or at least just as interesting.
Jeff Fischer sells random things on eBay every few months (airplanes, barges, skyscrapers). Tom Jacobs isn't giving up his day job and owns no shares of companies mentioned. Brian Lund always wanted to be a carpenter. Jeff and Brian own eBay, among other stocks in this article. See their profiles for all their holdings. The Motley Fool has a disclosure policy.
