<THE RULE MAKER PORTFOLIO>

Mistakes We've Made

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

Glendale, CA (Feb 12, 1999) -- A few weeks ago I wrote a column about buying Yahoo! (Nasdaq: YHOO), and I mentioned that it might be a mistake. That prompted Bart Janssen to send me an email with the following words of Foolishness:

Only an idiot never learns from his own mistakes.

It takes intelligence to learn from your own mistakes.

It takes true genius to learn from other people's mistakes.

Bart's sentiment is certainly in the right place, although I'd like to think that a Fool doesn't have to be a genius to learn from other people's mistakes. Regardless of how much genius it takes, one of the best ways to learn from mistakes is to learn from someone else's. Therefore, The Motley Fool has an entire message board devoted to that purpose.

Today, however, even before you visit that board, the Rule Maker managers offer you a special opportunity to learn from our mistakes. It seems that there have been so many over the past few years that we can make you all geniuses by letting you all know how we've fouled up. Since I have taken it upon myself to submit this confessional, I'll start out with two of my personal mistakes.

A couple of years ago, I decided that I could take a chance and perhaps build up an early retirement fund. At the time, there was a lot of buzz on the message boards about Ancor Communications (Nasdaq: ANCR). Those of you who have had a chance to read Rule Breakers, Rule Makers (a.k.a. the RuleBook) may recognize this company. It is one of several whose charts Tom published on pages 173-177 when he showed how management gave the shareholders "the bird" by temporarily engineering a high stock price.

I'll leave it to Tom to tell the bird story in the RuleBook. As far as this column is concerned, it's only important to know that I don't think my purchase of Ancor was a mistake -- at least not one worthy of writing about today. I did my research before I bought, I knew Ancor was risky and the level of my purchase was appropriate with the risk. The mistake was that after Ancor's rise and fall, I bought more shares in the belief that if I liked the stock at $20 a share, I should like it even better at $15. Fools differ about such "averaging down," but most don't believe in it. You can count me in that camp going forward. New money is for winners, not for losers. A few months later Ancor had a problem that threatened it's ability to survive as an ongoing business. I sold all my shares at $4.00.

Unfortunately, the Ancor mistake isn't the one that I'm really ashamed of. That mistake came just a few weeks later. While I was reading everything I could in the Ancor message board. One of the most popular contributors wrote that he had just bought a large stake in another hot stock. For the one and only time in my life, I bought a stock with no research, based upon the recommendation of someone I knew only from postings on a message board. I was lucky that I lost only half my money on that one.

Rob hasn't pulled the kind of investment boners that I have, at least not yet. He really hasn't had a chance, because like a good Fool, he's devoted most of his resources to paying off his debts before he does any serious investing. He has made one serious investing mistake, though, from which we can all learn, and I quote him directly:

"My WORST WORST investment was getting into #*%&^@ debt in the first place..."

Phil's one error started out as anything but a mistake. He bought America Online (NYSE: AOL) in July of 1995. I wish I had that much foresight back then. Unfortunately, Phil sold the stock a month later. He made about 28%, but he had to pay capital gains taxes, and short-term ones at that (boo!, hiss!). Phil's bought AOL back since then, but he missed a lot of growth in between.

Unfortunately, when it comes to selling winners early, and buying them back much higher, I'm afraid that no one can beat the leader of our group. Tom has shared his nuggets over the Radio Show, but for those of you who have missed them (or who are still out of range), Tom:

Well, Fools, there you have it. Four Foolish managers with seven investment mistakes, and each and every one of them a real doozy. We'll undoubtedly make more, but we'll probably not repeat these because all of these mistakes fly in the face of Rule Maker theory. In fact, as time goes on and we make more mistakes we may even expand the theory to prevent repeating them as well.

One of the nicest things about Fooldom is that we are not bound by traditional Wall Street rules that insist that you never admit to a mistake. We take just the opposite point of view, that not only should you admit your mistakes but you should advertise them so that others can learn from them. Therefore, we appeal to the genius in all of you to learn from our mistakes and:

  • Avoid throwing good money after bad,
  • Never buy a company without researching it first,
  • Do your absolute best to avoid non-deductible debt, and
  • Hang on to the stocks of great companies when things get a little rocky.

I'll be back with you in three weeks,

Al

02/12/99 Close

Stock  Change    Bid
AXP   -  7/8   100.13
CHV   +  11/16 79.88
CSCO  -5 13/16 99.06
KO    -  1/2   63.88
GPS   -2 9/16  60.44
EK    -  7/16  65.38
XON   -1       69.44
GM    -1 15/16 83.81
INTC  -6 3/4   126.50
MSFT  -5       157.75
PFE   -2 1/8   130.13
SGP   +  1/8   54.44
TROW  -1 3/8   31.31
                   Day   Month    Year  History
        R-MAKER  -2.51%  -6.01%   2.47%  33.36%
        S&P:     -1.91%  -3.84%   0.07%  22.28%
        NASDAQ:  -3.48%  -7.34%   5.89%  39.34%

Rule Maker Stocks

    Rec'd    #  Security     In At       Now    Change
    2/3/98   24 Microsoft     78.27    157.75   101.55%
    5/1/98   55 Gap Inc.      34.37     60.44    75.85%
   6/23/98   34 Cisco Syst    58.41     99.06    69.60%
    2/3/98   22 Pfizer        82.30    130.13    58.11%
   2/13/98   22 Intel         84.67    126.50    49.40%
   8/21/98   44 Schering-P    47.99     54.44    13.43%
   5/26/98   18 AmExpress    104.07    100.13    -3.79%
    2/6/98   56 T. Rowe Pr    33.67     31.31    -7.01%
   2/27/98   27 Coca-Cola     69.11     63.88    -7.57%

Foolish Four Stocks

    Rec'd    #  Security     In At     Value    Change
   3/12/98   17 General Mo    72.41     83.81    15.75%
   3/12/98   20 Exxon         64.34     69.44     7.93%
   3/12/98   20 Eastman Ko    63.15     65.38     3.53%
   3/12/98   15 Chevron       83.34     79.88    -4.16%

Rule Maker Stocks

    Rec'd    #  Security     In At     Value    Change
    2/3/98   24 Microsoft   1878.45   3786.00  $1907.55
    5/1/98   55 Gap Inc.    1890.33   3324.06  $1433.73
   6/23/98   34 Cisco Syst  1985.95   3368.13  $1382.18
    2/3/98   22 Pfizer      1810.58   2862.75  $1052.17
   2/13/98   22 Intel       1862.83   2783.00   $920.17
   8/21/98   44 Schering-P   2111.7   2395.25   $283.55
   5/26/98   18 AmExpress   1873.20   1802.25   -$70.95
    2/6/98   56 T. Rowe Pr  1885.70   1753.50  -$132.20
   2/27/98   27 Coca-Cola   1865.89   1724.63  -$141.27

Foolish Four Stocks

    Rec'd    #  Security     In At     Value    Change
   3/12/98   17 General Mo  1230.89   1424.81   $193.92
   3/12/98   20 Exxon       1286.70   1388.75   $102.05
   3/12/98   20 Eastman Ko  1262.95   1307.50    $44.55
   3/12/98   15 Chevron     1250.14   1198.13   -$52.02

                              CASH   $2205.98
                             TOTAL  $31324.73

Added $ 2,000 on August 4, 1998 to the portfolio; this will show in the numbers at a later date.

Note: The Rule Maker Portfolio began with $20,000 on February 2, 1998, and it adds $2,000 in cash (which is soon invested in stocks) every six months.

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