<THE RULE BREAKER PORTFOLIO>
What Happened to Fool Port?
My One-Stock Contest Pick This Year
Which stock did I pick?
By David Gardner
Alexandria, VA (Jan. 6, 1998) -- The Rule Breaker Portfolio scored a big gain today, demonstrating to our delight that 5%+ jumps were not just the stuff of 1998. Ahhhhhh, back in the saddle again. The Breakers of Rules rung up profits that equate to a gain in the overall portfolio of exactly 5.45% -- a sentence that is unnecessarily wordy, but whaddaya want for free? Heavens to Murgatroyd.
The market, as represented by the S&P 500, rose 2.22%. The Nasdaq gained 3.09%.
For the month, we're now up 9%, with the S&P 500 up 4%. The average mutual fund is probably up 1%, maybe breakeven. I'm surprised that industry hasn't mostly imploded by now. But so long as the Rukeysers, Dobbses, and CNBCs of the world keep interviewing fund managers as often as they do, I suppose they'll keep fund assets propped up for a while.
But long term I can already hear that GREAT BIG SUCKING SOUND coming out of the managed funds, as they move toward the more Foolish index variants. (Then who will all these guys interview -- the index funds' computer monitors?) We've been predicting this sucking sound for five years, and it's already audible. We weren't the first to say this -- Jack Bogle, THE MAN at Vanguard, was there saying it and creating it long before us -- but we were certainly blaring this message before such predictions were all the rage. And I hope we've helped improved your financial life with the message.
OK, now down to business. Every year I enter a family stock picking contest for a good bottle of wine. The past three years, I've actually won this contest, which means that my extended family overrates me. (They don't realize that in a stock picking contest with friends that I ran several years before, I couldn't catch a W to save my life.) This year, I had a tough decision:
What is the ONE stock I'm going to choose?
(It's a simple contest, you see.)
America Online gave me the W in 1996 and 1998, with a one-year break from AOL over to McAfee Associates in 1997. (I still have an unpublished buy report for this very portfolio of McAfee that I never ran -- two years ago -- because at the time I was finding it too hard to justify the valuation. What a fool I was -- small "f," as you can see from that stock's performance.) McAfee -- now Network Associates -- was a stock that always looked richly priced -- ALL THE WAY UP to incredible returns -- just as is the case with so many other Rule Breakers.
It took several years of noticing this to convince me that there was a lesson to be learned there, which is exactly what led to our new book. Now, with Rule Breakers, present valuation in a semi-efficient market will always take a back seat to the sheer status of the true Rule Breaker and its fulfillment of the six attributes. If that doesn't make sense to you, pick up a copy of the new book tonight and help push The Fool book to #1 across all of Amazon! (We're just one slot behind Tom Wolfe as I write.)
Anyway, I thought of going AOL again, but even if it won this year there wouldn't be as much satisfaction in that bottle of wine. I mean, come on! Three outta four? BOR-innnngggg. I figured that bottle might taste a bit sweeter -- er, rather, more full-bodied and musky -- if I went a bit more out on the limb. My brother-in-law had already swiped Amgen, trying to out break me with my own Breaker.
Now, @Home would've been nice. Certainly, in retrospect -- and at this point only in a very short-term sense -- @Home, which rose $16 1/8 today, would've been a great pick. The stock is now up 72% from our purchase a month ago. Amazon.com would've been a fine selection, as well. Amazoningly, Amazon rose another $13 1/2 today. Both of them turbo-powered the Wednesday's BreakerPort.
But hold your horses, driver! Perhaps instead, the market will have a bad year. I considered this possibility. If the market has a bad year this year, don't be surprised if Amazon.com and @Home get halved. No bottle of wine for me. (That doesn't dissuade me as a long-term investor, because if the companies continue to gain market share, brand recognition, and Internet customers, their stocks will be great long-haul winners even from these prices. So at half the prices, I'd be twice as interested.)
If the market had a bad year, I'd look to my Fool Four. Heck, AT&T was up $3 1/4 today, Exxon rose $3, Du Pont rose $1 5/16, and even lagging International Paper grew up $1/2. Lucent, our AT&T spin-off semi-Dow Dog semi-Rule Maker selection, rose $3 3/16. Can't go too wrong there -- my little two-year-old has some of that in his college portfolio. Anyway, I feel good about all these stocks through good and bad times, but if we hit bad times, these'll be the wagons to rally around.
So I considered the Fool Four.
But you know what? I said no. You see, if the market turns down, eBay will get killed, and my father-in-law shorted eBay. (Much safer to do when you only stand to lose a bottle of wine!)
So this year in my family stock picking contest I wound up saying a single seven-letter word, and it begins with an "I."
I said I-O-M-E-G-A. EYE-OH-MEGA. A bottle of wine bet on dear old IOM.
I harbor hopes that the old nag may ride again.
Iomega (NYSE: IOM) rose $1/4 today to $8 1/4. It's up 12.8% so far this year. So it's already risen a bit, and I think I'm beating my brother-in-law. I know I'm beating my father-in-law! (Sorry there, John, but there's obviously lotsa time left.)
Iomega's 250-megabyte Zip drive is out. I don't have one yet, but I think it's smart to continue to improve and deepen your technology. Those new drives are of course "backwards-compatible" with the 100-megabyte disks -- the only backwards-compatibility I care about. What I did see on a weekend trip to my local CompUSA was the new Clik! drive, whose Clik! disks hold 40 megabytes and are only slightly bigger than a 25-cent piece. You use the Clik! drive primarily as your film equivalent in your digital camera.
Digital cameras are going to be a very big business, and I like Iomega's marketing approach and ability to reach consumers with branded technology. A slew of new digital camera models will be coming out in the next 12-24 months, and a bunch of those will have a little slot for a Clik! disk. (At present, the drive works with any flash-memory cameras.) These new Clik! cameras will come from the so-called "OEM" (original equipment manufacturer) partners, who will build custom cameras to feature the Clik! disk. You take your pictures, you swap out your Clik! disk, insert it in the drive attached to your computer, and upload them to your hard drive and your photo archives. Then pull the Clik! disk back out and stick it in your camera.
Ouch! Kodak! (I'm apparently full of exclamation points.)
We're already beginning to see large partners like Agfa offering Clik! tie-in deals, as you can see from this press release posted to our message boards today.
Iomega has new products, a new and respected management, some fresh Wall Street coverage, and it remains just far enough off Wall Street's radar that it might do very well in 1999. But it's a calculated risk, of course. I could've made a safer and surer pick for the family contest. But you know what? Wouldn'a been as fun. Investing has to be fun, too.
Have you read the Harry Jones Portfolio report today? It's my first new stop -- albeit a brief one -- every night.
-- David Gardner, January 6, 1999
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Day Month Year History Annualized R-BREAKER +5.45% 8.99% 8.99% 993.96% 71.78% S&P: +2.22% 3.51% 3.51% 190.27% 27.25% NASDAQ: +3.09% 5.85% 5.85% 222.26% 30.30% Note: yearly, historical, and annualized returns for the S+P 500 include dividends Rec'd # Security In At Now Change 8/5/94 1100 AmOnline 1.82 148.56 8073.10% 9/9/97 1320 Amazon.com 6.58 138.00 1997.51% 5/17/95 1960 Iomega Cor 1.28 8.25 544.33% 10/1/96 84 LucentTech 23.81 117.19 392.22% 8/12/96 130 AT&T 39.58 82.88 109.40% 12/4/98 450@Home Corp. 56.08 96.38 71.85% 4/30/97 -1170*Trump* 8.47 5.06 40.22% 12/16/98 290 Amgen 85.75 106.25 23.91% 2/20/98 200 Exxon 64.09 74.88 16.83% 2/20/98 215 DuPont 59.83 58.13 -2.86% 7/2/98 235 Starbucks 55.91 51.56 -7.77% 2/20/98 270 Int'l Pape 47.69 43.31 -9.18% 1/8/98 425 3Dfx 25.67 13.50 -47.40% Rec'd # Security In At Value Change 9/9/97 1320 Amazon.com 8684.60 182160.00 $173475.40 8/5/94 1100 AmOnline 1999.47 163418.75 $161419.28 12/4/98 450@Home Corp. 25236.13 43368.75 $18132.62 5/17/95 1960 Iomega Cor 2509.60 16170.00 $13660.40 10/1/96 84 LucentTech 1999.88 9843.75 $7843.87 12/16/98 290 Amgen 24867.50 30812.50 $5945.00 8/12/96 130 AT&T 5145.11 10773.75 $5628.64 4/30/97 -1170*Trump* -9908.50 -5923.13 $3985.38 2/20/98 200 Exxon 12818.00 14975.00 $2157.00 2/20/98 215 DuPont 12864.25 12496.88 -$367.38 7/2/98 235 Starbucks 13138.63 12117.19 -$1021.44 2/20/98 270 Int'l Pape 12876.75 11694.38 -$1182.38 1/8/98 425 3Dfx 10908.63 5737.50 -$5171.13 CASH $39332.55 TOTAL $546977.86
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