As we announced we would on Wednesday, the Rule Breaker portfolio shorted 1150 shares of Affymetrix (Nasdaq: AFFX) shortly after the bell on Thursday morning at $21.61 per share plus an $8 commission charge. The short sale formally increased our cash position by $24,843.50, but we'll keep that around for when we cover. If Affy moves higher, we'll have to pay more than that. Where will the money come from?
Since the very first day of our service in August of 1994 when this portfolio was formed, we Fools haven't added a single dime to the account. The gain from $50,000 to $500,000 has been by dint of capital appreciation. As we now approach our seven-year anniversary, I see two basic problems that have been occasioned by this never-add-money decision:
(1) The only way we can ever add to an existing position or initiate a new position is by selling out of an existing one -- and incurring capital gains taxes.
Ever since we adjusted our returns for taxes consonant with our celebration that the Securities and Exchange Commission (SEC) finally made mutual funds do so, I have been more than usually focused on the tax implications of what we're doing. After all, at the proverbial end of the day when the proverbial rubber meets the road, what really matters is your non-proverbial after-tax take. That's the part that, y'know, is your money.
So the artificial environment created by this portfolio's having to sell something to buy something else arbitrarily forces us to pay taxes when we needn't. Most people for most of their lives don't make such decisions; they have more cash coming in from their salary savings, and if they want to add to an existing investment or initiate a new one, they use that new money and don't pay any taxes.
At the same time, all of us do pay capital gains taxes on positions we close out on principle, or to use the cash for whatever reason we invested in the first place (retirement, house, etc.). Anyway, the key point here is that in the past we've had to rack up a capital gain simply to put a new Rule Breaker idea into play. That continued disincentive would cause us, without cash infusions, not to make many future investments.
(2) We teach people the rhythm of save and invest, save and invest, and yet we fail to model this in our own portfolio.
Our nation's savers (bless them) must make an investment decision with those incoming dollars that they've put away. That's not always easy. Which existing holding would you add to? Which new stock would you buy, and with how much? These are extremely interesting, important, and relevant decisions that we all must make as investors, but as the Rule Breaker portfolio has been set up, we are (depending on your point of view) either shielded from or robbed of making them.
Those are the problems. A key core value that we live by at Fool Inc. is this: "We relentlessly search for better solutions." We as a team have scratched our heads lots about this one recently, and come up with an almost completely unoriginal answer: Add regular amounts of money to the portfolio like our Rule Maker brethren.
Thus, we presently plan to add $50,000 per year to this portfolio, added in quarterly installments, to begin July 1st. This new proposed policy, which we'll ask your opinion on shortly, will help us achieve three things:
(1) Better after-tax returns. We are highly motivated to do this for this very reason. We don't want to keep selling off a winning stock just to buy a new one! These positions need not be mutually exclusive.
(2) Tougher, and more, decision-making. With the $12,500 we'll be adding each quarter, we'll hold quite a debate both internally and with you our Foolish community in terms of how the money is best invested. Should we just add it in even amounts to all our existing holdings? Put it all in just one? Or should we instead buy a new stock? Leave it in cash? Et cetera. This tough decision-making will not only be a good intellectual challenge, it'll enrich our conversation with you and show you our "bottom-line" thoughts on our existing stocks at their present prices.
(3) It'll get us over the $1,000,000 mark, finally. Hey, if we can't do it by capital appreciation, let's just stick the money in there! We're all about big round numbers!
Just kidding on the third one. Anyway, we're proposing the above as a better solution. In our most recent RB team meeting, we selected $50,000, or about 10% of the present portfolio, so that it's a meaningful enough sum to matter. We selected a quarterly time frame because it feels about right... not too rapid-fire, not too far apart. Feels Foolish.
OK, you guessed it: We'd like to hear your opinion prior to implementing this. Please take this poll and let us know how you feel about the idea.
Should the Rule Breaker add $12,500 every quarter to the portfolio?
a) Fantastic idea! I want a ringside seat!
b) It's a reasonable proposition. Carry on.
c) I'm for it when the wind is north-north-west, against it when it's southerly.
d) Seems unnecessary. I think things were just fine.
e) I am totally opposed to it. I'll fight it to the bitter end.
David Gardner, Fool
June 21, 2001