<THE RULE MAKER PORTFOLIO>

Adding New Money
My Perspective

By Phil Weiss (TMF Grape)

TOWACO, NJ (May 4, 1999) -- Last night, Tom began our week-long discussion on adding money to a Rule Maker portfolio. As Tom said, if you have eliminated credit card debt and have accumulated savings that you can set aside for at least five years, then -- and only then -- is it time to consider adding money to stocks. Tonight, I'm going to discuss how I go about adding money to my own Rule Makers.

Whether adding money to a new stock or an existing holding, my chief concern is the quality of the business. In fact, I believe that business quality is at least 1,000 times more important than the current valuation (see Rule Maker Step 7). When purchasing a stock for the first time, I make sure to invest time in researching and understanding the company, as it's my intent to become a long-term holder of the stock. Most of the time, however, I simply add to my existing holdings of companies that I already know and understand.

In analyzing a company's business quality, I focus primarily on the objective, numerical criteria. Qualitative attributes such as brand strength and mass market habit are certainly important, but I place greater importance on gross margins, net margins, the cash-to-debt ratio, and the Flowie, as mentioned in Rule Maker Step 6. In addition, I look not only at the current location of these metrics, but also their direction over a number of quarters and years. The Rule Maker spreadsheet (linked at bottom) makes this procedure rather painless.

Whether purchasing a Rule Maker for the first time or the tenth time, traditional valuation measures (e.g., Price to Earnings ratio (P/E), Price to Book Value, etc.) are not a factor in my analysis. My somewhat controversial take on this issue came up recently at a meeting of my investment club when I shared with the group a spreadsheet that I use to track the quarterly performance and business quality of my companies. The conspicuous absence of the P/E ratio and current stock price on my spreadsheet led to an interesting discussion on the subject of valuation. Some of my fellow partners are sensitive to the P/E of their stocks. Although I used to place some significance on this metric, I no longer do so.

Another important aspect in managing my portfolio is keeping my number of stocks to a manageable level. When purchasing additional shares of a Maker that I already own, I first assess the company's business location and direction. Then, I look to see how the stock has performed during the time that I have held it. Finally, I look at how much money I have already invested in that stock, as I don't want any one stock to become too big a part of my portfolio. In general, I like adding to winners more than doubling down on losers, and I focus more on my basis in the stock than the market value of my shares. If a stock fares well under these tests (e.g., Cisco or Microsoft), then I'll look to add more. If it doesn't (e.g., Coca-Cola), then I won't add a block of shares to my existing investment.

I also must admit that I sometimes look at a company's stock price relative to its 52-week high. If a company passes my analysis, and I find it is trading at some percentage off its high, I view it as an opportunity to scoop up a bargain. Then again, seeing a stock hit new highs does not prevent me from buying more shares. As I said at the outset, business quality is the overriding determinant in my purchases. But if a high-quality company happens to be "on sale," it's gravy.

Another component of my investment approach is dollar-cost-averaging. When I add to my existing holdings in a stock, I always allocate a similar amount of funds to each purchase. This approach causes me to buy more shares when the price is low and less shares when the price is high. There are some stocks in my portfolio that I've purchased as many as six different times using this method. Buying on multiple occasions helps to minimize the potential valuation risk in an investment strategy that otherwise ignores valuation.

Since I typically devote a fixed amount of money to all of my purchases, one trick I use is to calculate how much the current stock price would have to go down (or up) from the current price for me to be able to purchase either one more share (or one fewer share). If the price is close to the level at which I could pick up another share, I'll often check in on the price a few times during the day to see if I can squeeze out an additional share. If it's not close, or if I know that I have a busy day ahead at work, then I'll just put in my order the night before and buy at the market's open.

Finally, I also have some Rule Maker stocks that I purchase through my Dividend Reinvestment Plans (DRIPS) each and every month. When it comes to these stocks, I just purchase the same dollar amount of stock each month. In this case, I don't mind purchasing even when the company doesn't fare as well under my analysis of financial location and direction. For example, although I won't buy a block of Coca-Cola shares right now, I am willing to buy shares through my DRIP every month. Once a year, I evaluate whether the monthly investment amount should be increased or not. Other than that, this process is automatic.

Tune in tomorrow night for Al's perspective on this topic. I'll see you in this space again next Tuesday. In the meantime, I'll catch you on any or all of our three Rule Maker message boards, which are linked below.

Fool on!

Phil Weiss (TMFGrape)

05/04/99 Close

Stock Change    Bid
AXP   -6 1/4    127.13
CHV   -1 3/4    100.31
CSCO  -5        108.63
EK    +2         77.25
GM    -4 3/4     89.00
GPS   -  5/8     69.88
INTC  -1 7/16    61.69
KO    -  1/2     68.69
MSFT  -1 13/16   78.06
PFE   -2 3/4    114.25
SGP   -  1/16    49.69
TROW  -  1/8     38.38
XON   +  7/16    86.50
YHOO  -3 5/16   159.25


                  Day     Month  Year    History
        R-MAKER  -1.92%  -0.66%  11.35%  40.90%
        S&P:     -1.67%  -0.24%   8.68%  34.44%
        NASDAQ:  -1.99%  -2.27%  13.34%  50.35%

Rule Maker Stocks

    Rec'd    #  Security     In At       Now    Change
    5/1/98   55 Gap Inc.      34.37     69.88   103.30%
    2/3/98   48 Microsoft     39.13     78.06    99.47%
   6/23/98   34 Cisco Syst    58.41    108.63    85.97%
   2/13/98   44 Intel         42.34     61.69    45.71%
    2/3/98   22 Pfizer        82.30    114.25    38.82%
   2/17/99   16 Yahoo Inc.   126.31    159.25    26.08%
   5/26/98   18 AmExpress    104.07    127.13    22.16%
    2/6/98   56 T. Rowe Pr    33.67     38.38    13.96%
   8/21/98   44 Schering-P    47.99     49.69     3.53%
   2/27/98   27 Coca-Cola     69.11     68.69    -0.61%

Foolish Four Stocks

    Rec'd    #  Security     In At     Value    Change
   3/12/98   20 Exxon         64.34     86.50    34.45%
   3/12/98   17 General Mo    72.41     89.00    22.92%
   3/12/98   20 Eastman Ko    63.15     77.25    22.33%
   3/12/98   15 Chevron       83.34    100.31    20.36%

Rule Maker Stocks

    Rec'd    #  Security     In At     Value    Change
    5/1/98   55 Gap Inc.    1890.33   3843.13  $1952.80
    2/3/98   48 Microsoft   1878.45   3747.00  $1868.55
   6/23/98   34 Cisco Syst  1985.95   3693.25  $1707.30
   2/13/98   44 Intel       1862.83   2714.25   $851.42
    2/3/98   22 Pfizer      1810.58   2513.50   $702.92
   2/17/99   16 Yahoo Inc.  2020.95   2548.00   $527.05
   5/26/98   18 AmExpress   1873.20   2288.25   $415.05
    2/6/98   56 T. Rowe Pr  1885.70   2149.00   $263.30
   8/21/98   44 Schering-P   2111.7   2186.25    $74.55
   2/27/98   27 Coca-Cola   1865.89   1854.56   -$11.33

Foolish Four Stocks

    Rec'd    #  Security     In At     Value    Change
   3/12/98   20 Exxon       1286.70   1730.00   $443.30
   3/12/98   17 General Mo  1230.89   1513.00   $282.11
   3/12/98   20 Eastman Ko  1262.95   1545.00   $282.05
   3/12/98   15 Chevron     1250.14   1504.69   $254.55

                              CASH     $70.09
                             TOTAL  $33899.97

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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