<THE RULE MAKER PORTFOLIO>

The Foolishness of Laziness

by Rob Landley (TMF Oak)

AUSTIN, TX (May 7, 1999) --

"Know yourself. If you need help, call the FBI."
-- Deteriorata.

I've picked up a lot of strange pieces of information hanging around fool.com. I've discovered that The Font Of All Knowledge And Wisdom is "Helvetica Boldface 12." I've found out that somebody on this planet manufactures a paisley hat with bells on it and apparently makes a profit doing so. And, I've also been exposed to a very large number of companies I'd love to buy stock in.

We've got Rule Makers and Rule Breakers, Merchant Kings, and Tweeners. We've got Beating The Dow strategies such as the RP4, and more workshop screens than I could ever hope to follow. My home town of Austin, Texas has around 2,000 high-tech start-ups at any given time, with a local IPO of a company I know every couple of weeks. The Fool has an entire portfolio devoted to finding great DRIP investments, and a message board devoted to your favorite stock ideas. If I ever wanted to ensure that I was over-diversified, I could always buy the S&P 500 index and trust the American economy as a whole to do nice things with my money. I've never had a shortage of investment ideas, only a shortage of money to invest in them and time to properly research them.

But, if I had to pick one overriding motivation behind my investment strategy, it would have to be laziness. I've never invested in anything that required an "exit strategy" because I don't want to have to pay that much attention. On a similar note, if there was ever a perfect time to invest in a stock, you could pretty much guarantee I'd sleep late that day and procrastinate for the rest of the week. I invest money when I have money to invest, and only sell a stock if I have a compellingly better idea of what to do with the money. It's that simple.

Laziness is the force that prevents me from buying a completely new stock every time I get more money. I don't want to try to keep track of what fifty companies are doing. I don't have that kind of time. Instead, I'd rather try to find a few of the best companies out of the mob of good ones, and only invest in those. The down side is that there's always some stock I didn't buy that does better than the rest of my holdings combined, and if it's one of the ones I looked at and skipped over, that's frustrating. Of course, if I bought every stock idea I had, the 1% of my money that I'd put into that unknown super-stock would hardly impact my returns at all. Probably the biggest advance I've made as an investor is learning not to worry about lost opportunities, but to just make the best of what I have.

I was first attracted to the idea of paying off all my debts so I'd receive fewer bills every month and have less paperwork to deal with. I like 401(k) plans not just because of the employer matching funds and the tax-deferred status, but because I don't have to think about them. I like DRIP plans for a similar reason: "Oh, another one of those little DRIP envelopes showed up with the month's bills? I'd better send them something." I love my online broker because there's very little paperwork involved, and I periodically consider just consolidating all my various DRIP shares in that one brokerage account so I'll have less to keep track of. (And one of these days, I may even get around to doing it.)

This is why I was attracted to Rule Maker investing back when it was called "The Simpleton Portfolio." Buying and holding the same companies for ten years sounded like something I could do. More importantly, it was an investment philosophy I could understand: In order to get above average returns, find above average companies to invest in. Since companies exist to make their owners rich, act like an owner rather than a trader. For bonus points, sleep late and ignore your account for months at a time, then go out and play volleyball. Works for me.

But in order to goof off with a clear conscience, I have to know that my investment is in good hands. No matter what company I'm looking at, I have to understand the business or I won't put my money into it. My primary investment criteria is, of course, "How good of a job do I think these guys are doing?" But before I can answer that question, I have to ask, "How well do I understand what exactly these guys do?"

What's important to me is understanding the business. What does this company do to make money, and what does the future hold for it? Do I trust the management to do a good job? Are the raw materials hard to come by? What new products are in the pipeline? What the heck do they do for a living? Would I want to work for them? Would I want to own a chunk of them?

The 10-K and 10-Q reports are a vital source of information about how a company is run, but I look at them a little differently than the rest of the Rule Maker team. Although the Flow Ratio and Rule Maker Total Score are good first glance numbers, they're not my style. I'm not trying to boil a business down to a single number that sums up how well the company is doing. I'm looking for understanding. How fast does inventory turn over? How many days worth of operating expenses does the company have on hand in cash? How many days worth of sales dollars are in accounts receivable? (Ooh, word problems! For that last one, take total sales for the quarter, in dollars, divided by the number days in the quarter. That's sales per day. Then accounts receivable divided by the sales per day is your answer! Did I get it right?). Are all of these answers up or down from last quarter? (You mean I've got to do it AGAIN? Sigh...)

I don't just look at the SEC filings. I also look at the company's advertising, its website, and try to talk to some other people who use its product (even if I also use it myself). What does my local ISP think of Cisco products? How much Coke does my local grocery store sell, and how does that stack up with Pepsi and the store brands? Is there a Gap store in my local mall? How does my company stack up to the competition?

If I do all the work up front before investing in the company, it's a lot easier to be lazy afterwards. This isn't to say I'm willfully blind to the performance of my companies, just mellow enough to forget about them for months at a time until some kind of interesting information wanders by. Especially with Rule Makers, anything big enough to have an impact on the performance of these monster companies will probably make the evening news.

Finally, I will admit that even after all this work, I've sometimes eliminated a company because I don't like it enough to justify the price I'd have to pay to get in. Sometimes, a stock IS just too darn expensive. (This from someone who owns 10 shares of Amazon.com.) Every stock purchase is a trade-off between risk and reward, and the higher the price the higher the risk. Since there's almost no risk inherent in the long-term success of a company like Coca-Cola, the price can rise fairly high and stay within my comfort zone. But, if I'm not DARN SURE of the future success of the company behind the stock, I start worrying about the company's ability to grow into its stock price. Then, if I'm worrying about how much I'm paying for the thing, that gets back to "exit strategies," which I just don't want to deal with.

An investment strategy based on sheer laziness probably isn't the best role model for your own portfolio, but since I have several decades left in my investment time horizon, and I don't invest any money I can't afford to lose, it works for me pretty well.

- Oak

05/07/99 Close

Stock Change    Bid
AXP   +3 11/16  134.69
CHV   -2 15/16   94.88
CSCO  +1 9/16   108.50
EK    +  13/16   78.81
GM    +1 1/4     86.63
GPS   -1         63.25
INTC  +1 1/4     60.94
KO    -1 3/8     67.75
MSFT  +1 1/8     79.06
PFE   +1 1/16   116.94
SGP   -  3/8     50.00
TROW  -1         38.38
XON   +  1/4     82.75
YHOO  -4 7/16   147.44


                  Day     Month  Year    History
        R-MAKER  +0.04%  -2.19%   9.63%  38.72%
        S&P:     +0.97%   0.74%   9.74%  35.74%
        NASDAQ:  +1.27%  -1.54%  14.18%  51.47%

Rule Maker Stocks

    Rec'd    #  Security     In At       Now    Change
    2/3/98   48 Microsoft     39.13     79.06   102.03%
   6/23/98   34 Cisco Syst    58.41    108.50    85.75%
    5/1/98   55 Gap Inc.      34.37     63.25    84.03%
   2/13/98   44 Intel         42.34     60.94    43.93%
    2/3/98   22 Pfizer        82.30    116.94    42.09%
   5/26/98   18 AmExpress    104.07    134.69    29.42%
   2/17/99   16 Yahoo Inc.   126.31    147.44    16.73%
    2/6/98   56 T. Rowe Pr    33.67     38.38    13.96%
   8/21/98   44 Schering-P    47.99     50.00     4.18%
   2/27/98   27 Coca-Cola     69.11     67.75    -1.96%

Foolish Four Stocks

    Rec'd    #  Security     In At     Value    Change
   3/12/98   20 Exxon         64.34     82.75    28.62%
   3/12/98   20 Eastman Ko    63.15     78.81    24.81%
   3/12/98   17 General Mo    72.41     86.63    19.64%
   3/12/98   15 Chevron       83.34     94.88    13.84%

Rule Maker Stocks

    Rec'd    #  Security     In At     Value    Change
    2/3/98   48 Microsoft   1878.45   3795.00  $1916.55
   6/23/98   34 Cisco Syst  1985.95   3689.00  $1703.05
    5/1/98   55 Gap Inc.    1890.33   3478.75  $1588.42
   2/13/98   44 Intel       1862.83   2681.25   $818.42
    2/3/98   22 Pfizer      1810.58   2572.63   $762.05
   5/26/98   18 AmExpress   1873.20   2424.38   $551.18
   2/17/99   16 Yahoo Inc.  2020.95   2359.00   $338.05
    2/6/98   56 T. Rowe Pr  1885.70   2149.00   $263.30
   8/21/98   44 Schering-P   2111.7   2200.00    $88.30
   2/27/98   27 Coca-Cola   1865.89   1829.25   -$36.64

Foolish Four Stocks

    Rec'd    #  Security     In At     Value    Change
   3/12/98   20 Exxon       1286.70   1655.00   $368.30
   3/12/98   20 Eastman Ko  1262.95   1576.25   $313.30
   3/12/98   17 General Mo  1230.89   1472.63   $241.74
   3/12/98   15 Chevron     1250.14   1423.13   $172.99

                              CASH     $70.09
                             TOTAL  $33375.34

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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