If I want to start a Rule Maker portfolio of my own, do I need to buy all ten of TMF's Rule Maker stocks?
Before answering, let me say that investors who step out of underperforming mutual funds and build a portfolio of individual stocks are to be greatly commended. Tremendous rewards -- both monetary and psychological -- await those who take their financial future into their own hands. But if you merely piggyback our approach, that's as unFoolish as relying upon a professional money manager.
So, the answer to that commonly asked question is a resounding NO! The truth is that it's very much in your best interests to take the time to construct a portfolio that's suited to your own investment goals, emotional temperament, and particularly your investment time horizon. Consider that the TMF Rule Maker Portfolio doesn't have to worry about meeting retirement needs in five or ten years. In fact, our investment horizon is forever. (That's how long we'd like The Motley Fool to be around.) Sure, it's Tom's money, but this is not his personal retirement account! We're up nearly 25% so far this year, and we're grateful for those superb returns, but we're also prepared to endure extended periods -- as in years -- of negative returns. Are you?
If you need a defensive element to your portfolio, and especially if you have a non-taxable account such as an IRA, then you might want to allocate a portion of your assets to the time-tested Foolish Four strategy (check out this strategy's historical returns during the bear market of 1973-74). Alternatively, you may be willing to tolerate greater risk than we do in this portfolio in order to achieve greater potential returns. In that case, you may only want three or four (or one or seven...) Rule Makers to form a solid foundation upon which you then add some Rule Breakers or other small-cap stocks of your choosing. No matter what your goals or objectives, the idea here is for you to identify Rule Makers on your own and in the quantity of your own choosing. To borrow an old cliche, our goal in this space is to give you the fishing tackle, not the fish.
So, with that long-winded preface in place, I think this article was eventually going to address some ideas about which Rule Makers might be worth buying right now, right? Yes, of course, let's get to it finally. My stock selection strategy is to buy the companies that are on top of their game, with a management that's executing flawlessly, and a business that's firing on all cylinders. It's my opinion, and a core tenet of the Rule Maker philosophy, that the best companies just keep on getting better.
As dmauceli writes on the Rule Maker Strategy board:
"The question becomes how can we evaluate whether a company is a RM or not? Part of the answer is to *subjectively* analyze the company. Is the brand name a commodity? Does your Dad/son/brother/golfing buddy know/use/love the products? The other part of the answer is to look very carefully over the financials of the company. Unfortunately, I never took corporate finance, so I am not very good at reading balance sheets, and even worse at knowing when there are some ugly bruises hidden in them. So I use the RM spreadsheets as a tool to help me see what is going on with the company."
Ah yes, the RM spreadsheets; we have two Excel-based (only) spreadsheets, both of which are explained and available for free download on our RM Spreadsheets page. Our more advanced spreadsheet, the Rule Maker Ranker, is the tool of choice for analyzing companies on the RM Companies board. There, individuals have been scoring potential Rule Makers throughout the past year, with 148 analyses to date. All of that collective knowledge is updated monthly on our RM Master List, which is available as a link from every post on the RM Companies board. For example, click this post (a randomly selected post from the Companies board) and you'll see within the lime green bar at the bottom of the page a link labeled "Rule Maker Company Rankings."
Today, I posted a fresh update to the rankings, which is available at the following link:
- RM Master List as of 11/30/99
In looking down the top-ranked companies, you'll notice that only a handful are represented in this portfolio. Believe it or not, yes, there are other Rule Makers beyond the confines of this portfolio. Check out the top 20:
Score Company 56 Microsoft 54 Cisco 54 Intel 53 Yahoo! 50 Broadcom 50 General Electric 50 Linear Technology 50 Nokia 50 Oracle 49 Outback Steakhouse 48 VISX 47 Adobe 47 America Online 47 Eli Lilly 47 Starbucks 46 AT&T 45 Abercrombie & Fitch 45 EMC 45 Hennes & Mauritz 44 Amgen(Scoring Summary: Top score is 61. 50 and up is a top-tier Rule Maker. 40 to 49 is a second-tier Rule Maker.)
Out of those 20, notice that only four are in this portfolio. That means if you're copycatting us, you're missing out on a lot of potentially great investments. In my opinion, the companies that survive this stringent form of analysis and sit at the top of the RM Master List are the best starting point for Rule Maker investment ideas.
In parting tonight, I especially encourage you to check out the excellent recent analysis of Nokia (NYSE: NOK) in the following message board thread:
- Revised RM Ranking of Nokia for Jan-Sep 99
Have a great night, and Fool On!
Matt Richey
