<THE RULE MAKER PORTFOLIO>

The Golden State
A Fool who found her way

By Tom Gardner

ALEXANDRIA, VA (March 23, 1999) -- This past week, David and I had an opportunity to speak to investment and technology groups out on the West Coast. We started in Pasadena and Redondo Beach, delivering speeches to the members of the "Distinguished Speakers Series" (with our staple joke that whenever Fools are introduced as distinguished speakers we may be verging on a stock-market top).

We then traveled up to San Jose, where we addressed Silicon Valley's Churchill Club and Commonwealth Club. California has embraced Foolishness like no other state in the union. (They've put our East Coast brethren to shame -- over two dozen newspapers up the West Coast have picked up our newspaper column. Where are The New York Times, The Boston Globe, and The Washington Post?)

Tonight, I wanted to share a brief tale about our presentation to the Churchill Club in San Jose, which reminded me of the many wonders of our Rule-Making approach to investing, business, and life.

During the Q&A period of our talk, I was asked to list a few of my favorite technology companies. The top two are automatic at this point. The king of the hill is Microsoft (Nasdaq: MSFT). The software company has 40% after-tax margins, $19 billion in cash, spends more on research & development of the Internet than all of the Internet companies combined, and is managed by young leaders who have proven time and again that they'd rather win the long race than lead the pack after the first lap.

I think that the second-best technology company in the world today is Cisco Systems (Nasdaq: CSCO). The networks builder has grown sales and earnings in excess of 45% per annum over the past five years. Cisco's gross margins are above 65%; its net margins are above 20%. There isn't a trace of long-term debt on its balance sheet, and the company has more than $2.2 billion in cash. Unbeknownst to many, Cisco is actually more of an operating-system software company for the Internet than a hardware provider.

Both Microsoft and Cisco have been extraordinary investments over the past 1-, 3- and 5-year periods... regardless of the valuation at which an investor purchased them.

After the hour-long presentation to the Churchill Club, a woman came up afterwards and smilingly made two confessions. First, she admitted that she'd been the one who fired off the applause during my Cisco comments because she was a Cisco project manager on one of their firewall products. "In fact," she went on to say, "because my father always buys stock in the companies I work at, he's now a great investor. Cisco did a lot better than, well, my second confession! Are you ready?"

And her second confession was that, prior to Cisco, she'd been working at (insert sound of a bicycle wreck) Quarterdeck Corp. (OTC: QDEK). A former Rule Breaker Portfolio short, Quarterdeck has fallen all the way down to 50 cents per share today. The numbers told the nightmare all the way down, as Microsoft simply embedded Quarterdeck's Windows productivity enhancements into Windows 95. In the wake of that Softy product release, Quarterdeck went down to the mat, never to stand again.

I asked this Fool if she was angry about our coverage of Quarterdeck a few years back?

"Absolutely not," she cried. "We were laughing. Quarterdeck was a disaster. I'm just thankful that I got out of there, and that when I jumped ship I landed on Cisco's deck. There's a world of difference in working at a market leader rather than toiling on a drunken ship. And my stock options sit on opposite ends of the spectrum, from worthless to worth too much! And, again, it's turned my dad from struggling investor to market-beater!"

The lesson I take from this little Foolish tale is that not only should we invest in America's greatest companies, we might as well aim to work at them, too.

Last but not least, our Question of the Week is off to a hot start on the Strategy message board. So far, the overwhelming majority thinks Gap's swingin' ads are the best. Do you agree? If you haven't already, be sure to offer your two cents on which Rule Maker's ads are best and why.

And if you're new to the Rule Maker, come learn the basics and ask any question (no matter how "dumb!") on the Rule Maker Beginners message board.

Tom Gardner, Fool

03/23/99 Close

Stock  Change    Bid
AXP   -1 9/16  121.31
CHV   -1       87.38
CSCO  -2 7/16  100.31
KO    -1 13/16 65.88
GPS   -1 3/8   65.00
EK    -  5/8   65.63
XON   -1       72.75
GM    -4 11/16 85.56
INTC  -  9/16  114.56
MSFT  -6 1/4   166.56
PFE   -3 13/16 139.25
SGP   -1 3/16  56.69
TROW  -2 5/16  33.69
YHOO  -9 1/2   155.50
                   Day   Month    Year  History
        R-MAKER  -2.77%   4.35%   8.78%  37.64%
        S&P:     -2.69%   1.92%   3.00%  27.47%
        NASDAQ:  -3.05%   1.52%   5.94%  40.53%

Rule Maker Stocks

    Rec'd    #  Security     In At       Now    Change
    2/3/98   24 Microsoft     78.27    166.56   112.81%
    5/1/98   55 Gap Inc.      34.37     65.00    89.12%
   6/23/98   34 Cisco Syst    58.41    100.31    71.74%
    2/3/98   22 Pfizer        82.30    139.25    69.20%
   2/13/98   22 Intel         84.67    114.56    35.30%
   2/17/99   16 Yahoo Inc.   126.31    155.50    23.11%
   8/21/98   44 Schering-P    47.99     56.69    18.12%
   5/26/98   18 AmExpress    104.07    121.31    16.57%
    2/6/98   56 T. Rowe Pr    33.67     33.69     0.04%
   2/27/98   27 Coca-Cola     69.11     65.88    -4.68%

Foolish Four Stocks

    Rec'd    #  Security     In At     Value    Change
   3/12/98   17 General Mo    72.41     85.56    18.17%
   3/12/98   20 Exxon         64.34     72.75    13.08%
   3/12/98   15 Chevron       83.34     87.38     4.84%
   3/12/98   20 Eastman Ko    63.15     65.63     3.92%

Rule Maker Stocks

    Rec'd    #  Security     In At     Value    Change
    2/3/98   24 Microsoft   1878.45   3997.50  $2119.05
    5/1/98   55 Gap Inc.    1890.33   3575.00  $1684.67
   6/23/98   34 Cisco Syst  1985.95   3410.63  $1424.68
    2/3/98   22 Pfizer      1810.58   3063.50  $1252.92
   2/13/98   22 Intel       1862.83   2520.38   $657.55
   2/17/99   16 Yahoo Inc.  2020.95   2488.00   $467.05
   8/21/98   44 Schering-P   2111.7   2494.25   $382.55
   5/26/98   18 AmExpress   1873.20   2183.63   $310.43
    2/6/98   56 T. Rowe Pr  1885.70   1886.50     $0.80
   2/27/98   27 Coca-Cola   1865.89   1778.63   -$87.27

Foolish Four Stocks

    Rec'd    #  Security     In At     Value    Change
   3/12/98   17 General Mo  1230.89   1454.56   $223.67
   3/12/98   20 Exxon       1286.70   1455.00   $168.30
   3/12/98   15 Chevron     1250.14   1310.63    $60.48
   3/12/98   20 Eastman Ko  1262.95   1312.50    $49.55

                              CASH    $185.03
                             TOTAL  $33115.72


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.

Read More Rule Maker Reports
 
Spacer