<THE RULE MAKER PORTFOLIO>

My Selling Strategy

By Phil Weiss (TMF Grape)

TOWACO, NJ (April 27, 1999) -- I first heard the name Benjamin Graham when I took my investment analysis course in college. Since then, the idea that I have most closely associated with him is that there are two emotions that should be eliminated when it comes to investing -- greed and fear. Tonight, I have a story about how those emotions impacted my selling decisions of two non-Rule Makers in my personal portfolio: 3Com (Nasdaq: COMS) and Lucent Technologies (NYSE: LU).

First, a little background is in order. My overriding investment strategy is to buy and hold stocks for the long haul. When I purchase a stock, I don't have a specific exit strategy. Rather, I let my on-going analysis of the company determine if and when (if ever) a stock should be sold. However, in early January, I mentioned that my number one investment-related New Year's resolution is to reduce the number of stocks that I own.

When I decide a stock is a candidate for sale, I have a selling strategy, which I usually follow pretty closely. Occasionally, though, I let my emotions get the better of me. The principle of this strategy is to maximize the price at which I sell the stock. This is the only time that my investment decisions have anything other than a long-term focus.

My strategy involves setting a minimum selling price as well as a general target price on the upside. If the stock price starts increasing, my floor price moves up in tandem. This strategy protects me on the downside and helps me to take advantage of positive market price fluctuation. I realize that this strategy may seem a bit unFoolish, but it has more often than not helped me realize a higher selling price than if I had immediately jettisoned the stock at the moment I decided to sell.

The first stock I decided to sell this year was 3Com. I purchased it after it had fallen quite a bit following the merger with U.S. Robotics. When I evaluated its earnings report for the quarter that ended in November of last year, I was disappointed to see that even though earnings were on the upswing, margins were decreasing and receivables were taking longer to collect. This left me with the impression that the company was stuffing product into the sales channel to remove inventory from its balance sheet, while at the same time increasing receivables -- a point that I even called the company to discuss. In addition, charges to earnings related to the Robotics acquisitions kept appearing each and every quarter in a way that made my head spin. Sales growth was pretty anemic, too. Basically, 3Com was not the company that I thought it was when I first purchased it.

I decided to sell. I originally set my floor price at $35. Then, when it hit and passed that level so quickly, I upped my floor price to $40. It then hit $45 and closed in on $50. I raised my floor price to $45. At that point, I considered selling, but remained too greedy. Then, the stock started dropping, yet I failed to sell at my floor price according to the rules of my own strategy.

Next thing I knew, the stock was under $45. Rumors of a bad quarter surfaced, but I convinced myself they were without merit. Why I had faith in 3Com's management, I don't know. I should've known better considering the company's history of disappointing earnings and habit of leaking news to the Wise.

Unfortunately, greed got the better of me. My original decision to sell based on 3Com's lack of operational improvement became secondary to looking for a better and better selling price. The end result of this is that I still hold shares that I could have sold at a gain. In the near future, I intend to implement my strategy once again, this time sticking to my rules. So ends my tale of greed. Now I have one of fear.

Back in January, I compared Lucent to Cisco Systems (Nasdaq: CSCO). At that time, I said that one of the reasons that I like Cisco much better is the superior quality of its financial statements. I also noted that Lucent's financials were declining in quality each quarter.

In late-February of this year, I reviewed Lucent's 10-Q for the quarter that ended last December. Among other things, I noted that its debt load was still too heavy, its Flow ratio was weakening, and the company was taking longer and longer to collect its accounts receivables. This last fact was particularly disconcerting in a quarter where the company was criticized by many for slow revenue growth. I concluded that I was no longer comfortable with the way Lucent was running its business -- at least from what I could see in reading the financial statements.

When I made the decision to sell, the stock was in the $90s (pre-split). I finally sold last Monday (near the low) only to see the stock go up $8-9 points by week's end. My fear of repeating the 3Com scenario led me to sell at an inopportune time, but I can't complain. Sticking to my selling strategy enabled me to sell at a much higher price than when I made the original decision to sell. Also, I showed that I learned from the mistake that I made with 3Com.

So, what do you think of my selling strategy? Come share your thoughts on the Strategy message board (linked below).

Tomorrow, I'll be back to discuss my recent conversation with Cisco Systems.

Phil Weiss, Fool

04/27/99 Close

Stock Change    Bid
AXP   +4 7/16   138.75
CHV   +3 1/2     98.94
CSCO  -2 9/16   115.06
EK    +1         77.63
GM    -  3/8     88.50
GPS   -  1/16    68.88
INTC  -2 3/16    62.25
KO    +2 5/16    69.44
MSFT  -4         84.00
PFE   -2 5/8    121.13
SGP   -  15/16   51.88
TROW  +1 3/4     38.94
XON   +  9/16    78.25
YHOO  -7 3/4    184.50


                  Day     Month  Year    History
        R-MAKER  -0.80%   3.51%  15.29%  45.88%
        S&P:     +0.20%   5.94%  11.18%  37.52%
        NASDAQ:  -1.88%   5.71%  18.68%  57.43%

Rule Maker Stocks

    Rec'd    #  Security     In At       Now    Change
    2/3/98   48 Microsoft     39.13     84.00   114.65%
    5/1/98   55 Gap Inc.      34.37     68.88   100.39%
   6/23/98   34 Cisco Syst    58.41    115.06    96.99%
    2/3/98   22 Pfizer        82.30    121.13    47.18%
   2/13/98   44 Intel         42.34     62.25    47.03%
   2/17/99   16 Yahoo Inc.   126.31    184.50    46.07%
   5/26/98   18 AmExpress    104.07    138.75    33.33%
    2/6/98   56 T. Rowe Pr    33.67     38.94    15.63%
   8/21/98   44 Schering-P    47.99     51.88     8.09%
   2/27/98   27 Coca-Cola     69.11     69.44     0.48%

Foolish Four Stocks

    Rec'd    #  Security     In At     Value    Change
   3/12/98   20 Eastman Ko    63.15     77.63    22.93%
   3/12/98   17 General Mo    72.41     88.50    22.23%
   3/12/98   20 Exxon         64.34     78.25    21.63%
   3/12/98   15 Chevron       83.34     98.94    18.71%

Rule Maker Stocks

    Rec'd    #  Security     In At     Value    Change
    2/3/98   48 Microsoft   1878.45   4032.00  $2153.55
   6/23/98   34 Cisco Syst  1985.95   3912.13  $1926.18
    5/1/98   55 Gap Inc.    1890.33   3788.13  $1897.80
   2/17/99   16 Yahoo Inc.  2020.95   2952.00   $931.05
   2/13/98   44 Intel       1862.83   2739.00   $876.17
    2/3/98   22 Pfizer      1810.58   2664.75   $854.17
   5/26/98   18 AmExpress   1873.20   2497.50   $624.30
    2/6/98   56 T. Rowe Pr  1885.70   2180.50   $294.80
   8/21/98   44 Schering-P   2111.7   2282.50   $170.80
   2/27/98   27 Coca-Cola   1865.89   1874.81     $8.92

Foolish Four Stocks

    Rec'd    #  Security     In At     Value    Change
   3/12/98   20 Eastman Ko  1262.95   1552.50   $289.55
   3/12/98   20 Exxon       1286.70   1565.00   $278.30
   3/12/98   17 General Mo  1230.89   1504.50   $273.61
   3/12/98   15 Chevron     1250.14   1484.06   $233.92

                              CASH     $70.09
                             TOTAL  $35099.47

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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