Dec 13, 1999 at 12:00AM
That's right. I have no idea. And do you know why? Because I didn't look. The Rule Maker strategy is about economization of effort. This means that we go out, do our homework, find the best companies available in some pretty dynamic industries and buy 'em. That's it. Once we have bought, 90% of our effort on each company is done. You see, the majority of success in investing comes before we have ever made a purchase. Long-term investing success comes from thorough preparation, superior research and control of one's emotions.
Victorious warriors win first and then go to war, while defeated warriors go to war first and then seek to win. - Sun Tzu
The concept behind Rule Makers is simple and elegant. It also, admittedly and by design, ignores the fastest growth companies on the market. No VA Linux (Nasdaq: LNUX) for the Rule Maker. No Ariba (Nasdaq: ARBA). No Freemarkets (Nasdaq: FMKT). These companies cannot and would not qualify for Rule Maker status, in spite of the market giving them a current value of so and so bazillion dollars.
Now let's be honest. There are few of us who are not attracted by the extraordinary return on investment being exhibited by these companies. Only an absolute bloody idiot would elect in hindsight to hold a company that appreciates by 20% in a year over one exhibiting growth of 50% per month, all risk factors being equal.
Are these rapid gains sustainable? Are they based upon anything other than the greater fool theory? (This theory holds that someone can buy a company with momentum at any price because some yahoo will be willing to buy it at an even higher price.) Well, maybe. In fact, sure they are. But the pricing of these companies has almost entirely ignored the risks they face in expanding their businesses. Certainly, among them, one or more of these companies is going to misstep, and shareholders at that moment will be unable to get to the exit fast enough. This probability requires that shareholders expend a great deal of energy to keep up with events. And that's OK, if you are willing to put in the time to watch the market like a hawk.
But that's not for me. I believe this market period, where unproven, unprofitable businesses are rewarded with hyper-rich market caps, is an aberration. Not that I can prove this; unfortunately even the most sophisticated debater would tell you that it is impossible to prove a negative. And I don't quietly relish the day that I can wag my finger, cluck my tongue, and say "I told you so."
Rule Makers are all about efficient use of energy. They are the biggest companies in their industries, and there is not much chance for them to disappear tomorrow. Rule Making does not require us to look into the future and make predictions about where commerce, or entertainment, or finance, or culinary tastes are going. We know what people like and use, and we expect these trends to be in effect ten years from now.
This is why I do not feel the need to track stock prices on a daily basis. They are interesting, yes. But they are also unimportant. For those of you who own your homes, do you know right this second what the market value of your house is? Do you watch CNBC religiously to determine whether 123 Fool Street went up or down, or by how much? I certainly hope not. But the fact is, over the last decade the real estate market has created more wealth for more people in the U.S. than the equity markets. Still, most of us only find out what the market considers the value of our home at the point in time when we are going to sell it. And that's the way it should be.
With Rule Maker stocks, I sometimes believe that we would be better off if the market shut down for a year at a time, reopening on a single day to allow people to rebalance. This would prevent the hammering Coke (NYSE: KO) took when it replaced its CEO, a move many people applauded, but it would also prevent such frightening displays as the run-up of Yahoo! (Nasdaq: YHOO) last week, a move noteworthy because of the complete lack of fundamental underpinning.
But watching investments is pretty fun, isn't it? Kind of like why even though we know the odds are against us in a casino, many among us still like to play a little blackjack or take a spin on the roulette wheel. And that's fine. But for this brief period in time, I am choosing not to play, not to watch, not to worry. I couldn't do this if my portfolio consisted of momentum companies, but with Rule Makers I can walk away for a while and know they'll be sound as a pound when I return.
At long last we have gotten our Rule Maker account set up at American Express Brokerage, so the portfolio is ready to make its belated December investment of $500. I have the honor of first nomination. For this investment I vote that we select American Express (NYSE: AXP). Seems logical, doesn't it? We just picked up and moved our accounts over to American Express to take advantage of their free stock buys available for accounts with assets of at least $25K). I believe that the market will show that thousands of larger portfolios will do the same.
But free means free, right? AmEx is using this program as a loss leader. AmEx isn't expecting to make any money off of its online brokerage, but then again, that is not what AmEx does best anyway. AmEx is an expert at marketing services from vendors to customers. In other words, when Mr. Rule Maker moves itself over to AmEx and begins making transactions, this will be just a bit more information that AmEx will have that it can market to its Travel Department, its Financial Department, and its charge cards. Further, AmEx will use this information to match up its new brokerage customers with vendors that the company believes the customers will find interesting. And finally, by setting the minimum account limit for free trades, AmEx is guaranteeing that it will be receiving high-value portfolios from high net worth individuals. These are the type of markets that vendors drool over.
Brilliant move, AmEx. I'd like to give you a $500 biscuit. Let's see what my compadres have to say.
- Dec 13, 1999 at 12:00AM
- The Market Cap Game, Round 3: Do You Know What These Major Names Are Worth?
- What Wall Street's Crystal Ball Gazers See Coming and What You Can Do About It
- When Warren Buffett Gambles, He's Barely Even Gambling
- Lessons in the Long Game From NBA Frugality MVP LeBron James
- Benefitfocus (BNFT) Q4 2017 Earnings Conference Call Transcript