Born as the Fool Portfolio on Aug. 4, 1994 and rechristened on Dec. 12, 1998, the Rule Breaker Portfolio is growing up. It's now in its eighth year as a very real money portfolio, not a fantasy role-playing game. It began with $50,000 of David Gardner's (TMFDavidG) cold, hard cash, and when we buy or sell, real money moves. That sets us apart from other model portfolios you may know.
We announce all our trades in advance, and you can see our history of chest-thumping successes and our head-hanging failures through our transaction history archive. You can also browse this website to learn more about the strategy, as well as learn to identify Rule Breaker stocks with our online seminar.
How has the RB port performed?
For many months, you've noticed below each column a note about our changeover of data providers. We had hoped eventually to offer the overall portfolio numbers and comparisons with the S&P 500 and Nasdaq Composite indexes, just as we had before. Hope springs eternal, but for now we'll type these numbers each week at the bottom of the column, aided by an Excel spreadsheet.
It's essential for investors to compare portfolio returns to a benchmark to examine how well they are doing. If your strategy fails over many years to outperform a broad market index, you might consider simply matching that index's return by buying a low-expense mutual fund or exchange-traded fund that reproduces the index. You not only ensure that you will not fall under the market averages, but you save yourself all the time and energy that go into selecting and keeping track of the businesses in which you invest.
Here are the annual returns of the Rule Breaker Portfolio from 8/4/94 to 2001, and 2002 returns through yesterday's close:
Year Rule Breaker S&P 500 Nasdaq 1995 68.17% 34.11% 39.92% 1996 42.93% 20.26% 22.71% 1997 25.75% 31.01% 21.64% 1998 199.08% 26.67% 39.63% 1999 61.88% 19.53% 85.59% 2000 -52.55% -10.14% -39.29% 2001 -3.91% -13.04% -21.05% 2002 to 3/18 -5.06% 1.52% -3.76%
We now see that the portfolio outperformed the S&P 500 in 2001, though it, the S&P 500, and the Nasdaq Composite were all negative. By the way, we used the Internal Rate of Return function that takes into account the time-value of money. That's more accurate for us because of our July and October 2001 (and future quarterly) $12,500 deposits. Otherwise, adding cash would simply add to our balance and increase our returns by the deposit amounts.
Longer-term returns
While we're certainly happy that the portfolio outperformed the S&P 500 for five out of the seven last full years, it doesn't tell us the whole story. What if the two bad years -- 2000 and 2001 -- were so horrendous that overall we would have done better since Aug. 1994 by investing in an index fund?
Here's how we've done against the same market averages for the week, month, and year, but more importantly since Aug. 4, 1994:
RB Port S&P 500 Nasdaq Week 10.13% -0.23% -2.72% Month 0.17% 5.31% 8.41% Year* -5.06% 1.52% -3.76% Total Return** since 8/4/94 400% 154% 161% CAGR*** since 8/4/94 28.91% 13.02% 13.39%
*We plan to add $25,000 in April: $12,500 for the quarter and $12,500 that we didn't deposit in Jan. Ooops!
**For the Portfolio, Total Return = (Current Value - All Cash Deposited)/All Cash Deposited. Because we add $12,500 quarterly, this isn't as meaningful as the next item.
***Compound Annual Growth Rate using Internal Rate of Return. This performance measure accounts for the periodic deposits.
Here we see that the portfolio has an excellent record against both the S&P 500 and the Nasdaq Composite indexes. Past returns are no guarantee of future results, of course. And no matter how well or poorly this portfolio performs, no reader should mimic this portfolio. It's high risk, and we've often said that it's best to keep the amount of your portfolio devoted to Rule Breaker stocks -- if you decide that it's appropriate for you to invest in any -- to no more than 20%.
Looking at the CAGR, it's interesting to note the power of small differences. This is illustrated by the Rule of 72, which holds that when you divide 72 by a given CAGR the result is the number of years it takes your principal to double at that CAGR. So at the portfolio's 28.91% CAGR, the port has roughly doubled just under every three years. A few points of CAGR one way or another dramatically change the time it takes your money to really grow.
Feedback on Starbucks and online advertising
One of the strengths of the Fool Community is that whenever we write something, we hear from Fool Community members with industry-specific knowledge. Two weeks ago we extolled the business virtues of the Starbucks (Nasdaq: SBUX) card and the concepts of slippage and float, and several Fools emailed me to point out that slippage and float are not endless under most state laws. Here's one example:
"In most states the use of a card or gift certificate is considered a bailment and does not expire. However, after a certain period of time you have to turn the unused funds over to the Secretary of State. My wife worked for a company that made and sold their own traveler's checks. They had to track all uncashed checks and eventually turn the money to the Secretary of State in California where it was held in a special fund. If Starbucks is keeping the uncashed portion of the cards, then in a few years they could be in big trouble with some local governments."
That explains why Starbucks cards read on the back, "After 12 months of non-use, a $2.00 per month service fee will be deducted from the remaining balance until depleted unless prohibited by law." So Starbucks does not have an interest free loan from you forever, but only from the time of your purchase until you use up the card or this provision depletes your balance. Still a pretty good deal for the company.
After last week's column on online advertising companies, I thought about an economic concept that should have been included: barriers to entry. Sure, advertisers might buy more space on websites, but what if the growing supply of ad dollars simply draws new competition for those dollars? It depends on how hard it is to build a site and compete. Either way, ad dollars might flow to the most-viewed sites, anyway. A Fool who sells both online and offline advertising space posted his thoughts on the subject on our Qualcomm discussion board (30-day free trial to read, subscription required to post). This brief and interesting post is much less optimistic than last week's take.
Many happy returns of the day, and have a most Foolish week!
Tom Jacobs (TMF Tom9) prays regularly to the spreadsheet gods and goddesses. At press time, he owned no shares of companies mentioned here. To see his stock holdings, view his profile, and check out The Motley Fool's disclosure policy.
