<THE RULE MAKER PORTFOLIO>
What Happened to Cash-King?

Is Yahoo! a Rule Maker?

By Al Levit (alanl@ix.netcom.com)

Glendale, CA (Jan. 13, 1999) -- On Monday, I promised that I would write about whether Rule Maker investors should be buying Internet stocks. Phil looked at this last week when he examined American Online (NYSE: AOL) as a Rule Maker. It turns out that a couple of weeks before that I had purchased Yahoo! (Nasdaq: YHOO), a second Internet company, for my son Alex's college fund. Today and tomorrow, I will describe why I purchased Yahoo! when I did. Then I'll wrap up the week by explaining why I picked Yahoo! over AOL.

I will describe my rationale for my pick of Yahoo! in detail tomorrow. Today I want to share with you why I was even looking at a company like Yahoo! in the first place.

One of the things that drew me to Yahoo! is that the company has been around for years, which is decades in Internet time. Of course, that means that fortunes have already been made by early investors in the company. On the other hand, the Internet is still expanding (one estimate is that it doubles every 100 days). Thus, I believe that at least a few more fortunes can still be made in Yahoo! if things work out the right way. :)

I've heard pundits from the Wise remark that a few years ago people hoped that Yahoo! would be the next Microsoft (Nasdaq: MSFT), but these days everyone is merely looking for the next Yahoo!. We've commented in these columns before that we consider Microsoft to be the epitome of a Rule-Making company. Thus, whenever anyone compares a company favorably to Microsoft I can't help but form a favorable impression, even if I don't completely trust the source. In this case, however, I actually heard the comment after I bought the shares for Alex's account, so I consider my purchase unsullied.

I noted that I bought Yahoo! for Alex's college fund, which has already been set up with a base of Foolish Four stocks surrounded by a solid cadre of Rule Makers. Fortunately, as I noted a few months ago, my father has been nice enough to make sufficient deposits in the account so that Alex's college expenses will be well provided for. Alex is also seven years old, and none of the money in the fund will be needed for at least twelve years. Moreover, there is a very good chance that there will be money left over even after Alex leaves college. As a result, Alex literally has a higher risk tolerance than almost anyone else I know. Alex, at age seven, also has longer to benefit from the rewards of a good investment than any of us.

Thus, I think it is especially important that Alex has the chance to benefit from the changes that the Internet is bringing about. I've already seen to this in the traditional Rule-Making way by buying Cisco Systems (Nasdaq: CSCO) and Microsoft for Alex's account, but I wanted more for my son. Fortunately, since the total amount being invested in Yahoo! was only 3.5% of the college fund, Alex could afford it.

The Rule Breaker portfolio has given me a variety of ideas on how to profit from the Internet, and at this point I have chosen none of them. An examination of the Rule Breaker's record in the last year vs. the Rule Maker record might lead you to question my judgement, and that would be quite fair. In spite of this, I will provide the rationale for my choice tomorrow if for no other reason than one the best ways to learn is from mistakes, and the best mistakes to learn from are other peoples. In this case, perhaps you will be able to learn from mine!

I will conclude today by pointing out that as a Rule-Making investor sometimes I feel like I got an invitation to the best party of the century last year, and like a fool (small "f" definitely intended) I didn't show up. Looking back on last year:

  • There was a tremendous amount of growth on the Internet
  • I knew about it
  • I participated in it
  • I bought several books from Amazon.com
  • I wrote lots of messages on the Fool boards
  • I was online all the time, and yet
  • With the exception of ownership of Cisco, Microsoft, and to a certain extent Dell Computer (Nasdaq: DELL), I really didn't benefit from the "Net explosion" in the stock market.

When I look back at my 1998 returns, I see that I beat the market by a decent margin, which means I must have absolutely TROUNCED the vast majority of the managed mutual funds. (I wish I made 25% of those portfolio manager's salaries, but that's another column.) I even beat the return of the Rule Maker portfolio (basically by taking on more risk by over-allocating in technology and adding Merchant-King Dell). Thus, rationally, I have nothing to complain about and much to be thankful for, and indeed I am.

Even so, emotionally I can't help wishing I had more Internet exposure in my investments. I've tried, successfully so far, to keep my emotions from running my investments, but its always nice when a situation presents itself when an emotional response is also a rational response. I think I've got one now with a purchase of Yahoo! for Alex's college fund.

I could be wrong about this, but I have a feeling that I'm not the only one who feels that he's late to the Internet party and wonders whether there is still some room at the table for a Rule-Making investor. I'll cover that tomorrow and write about why I think that there is still plenty of time to buy into a company like Yahoo! Until then,

Fool on,

Al

01/13/99 Close

Stock  Change    Bid
AXP   -3 11/16 98.69
CHV   -  11/16 81.31
CSCO  -2 1/4   95.88
KO    -  3/16  65.25
GPS   +  3/4   58.94
EK    -  15/16 78.69
XON   -  1/4   70.50
GM    -1 3/16  81.69
INTC  +3 7/16  139.00
MSFT  +1 5/8   143.81
PFE   +3 5/8   116.69
SGP   -  1/16  51.06
TROW  -1 3/16  35.00
                   Day   Month    Year  History
        R-MAKER  -0.12%   2.18%   2.18%  32.98%
        S&P:     -0.41%   0.42%   0.42%  22.70%
        NASDAQ:  -0.17%   5.66%   5.66%  39.04%

Rule Maker Stocks

    Rec'd    #  Security     In At       Now    Change
    2/3/98   24 Microsoft     78.27    143.81    83.74%
    5/1/98 55.5 Gap Inc.      34.06     58.94    73.04%
   2/13/98   22 Intel         84.67    139.00    64.16%
   6/23/98   34 Cisco Syst    58.41     95.88    64.14%
    2/3/98   22 Pfizer        82.30    116.69    41.78%
   8/21/98   44 Schering-P    47.99     51.06     6.40%
    2/6/98   56 T. Rowe Pr    33.67     35.00     3.94%
   5/26/98   18 AmExpress    104.07     98.69    -5.17%
   2/27/98   27 Coca-Cola     69.11     65.25    -5.58%

Foolish Four Stocks

    Rec'd    #  Security     In At     Value    Change
   3/12/98   20 Eastman Ko    63.15     78.69    24.61%
   3/12/98   17 General Mo    72.41     81.69    12.82%
   3/12/98   20 Exxon         64.34     70.50     9.58%
   3/12/98   15 Chevron       83.34     81.31    -2.44%

Rule Maker Stocks

    Rec'd    #  Security     In At     Value    Change
    2/3/98   24 Microsoft   1878.45   3451.50  $1573.05
    5/1/98 55.5 Gap Inc.    1890.33   3271.03  $1380.70
   6/23/98   34 Cisco Syst  1985.95   3259.75  $1273.80
   2/13/98   22 Intel       1862.83   3058.00  $1195.17
    2/3/98   22 Pfizer      1810.58   2567.13   $756.55
   8/21/98   44 Schering-P   2111.7   2246.75   $135.05
    2/6/98   56 T. Rowe Pr  1885.70   1960.00    $74.30
   5/26/98   18 AmExpress   1873.20   1776.38   -$96.83
   2/27/98   27 Coca-Cola   1865.89   1761.75  -$104.14

Foolish Four Stocks

    Rec'd    #  Security     In At     Value    Change
   3/12/98   20 Eastman Ko  1262.95   1573.75   $310.80
   3/12/98   17 General Mo  1230.89   1388.69   $157.80
   3/12/98   20 Exxon       1286.70   1410.00   $123.30
   3/12/98   15 Chevron     1250.14   1219.69   -$30.45

                              CASH    $120.62
                             TOTAL  $29065.03

  
Note: On 8/4/98 $2,000 cash was added to the
portfolio. $2,000 will be added every six months.


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