Rule Maker fans, you may not have realized it, but we're coming up on an important milestone -- the five-year anniversary of Tom Gardner's original Simpleton Portfolio. The Simpleton Portfolio, you may recall, was unveiled online in July 1995 with the goal of beating the market's average return over a 10-year period without an investment adviser, without ANY trading, without mutual fund expense ratios, without capital gains taxes, and especially without much more than a few hours per quarter to follow each company's operational performance.

Tom tells the story as follows:

"In July of 1995, after suffering through another brief, handsome television advertisement from a big financial firm -- one of the many which suggest that you, the individual, don't have the time, expertise, or discipline to manage your own money -- I decided to string together a portfolio of 10 stocks online that I believed could be held as a group for 10 years and expected to generate excellent returns.

"This idea directly conflicted with the colorful advertisement. The voice-over from the nice man on TV was saying 'You can't do this. Don't try.' But then this 10-stock, 10-year portfolio suggests that you can. Further, this proposal implies that if you know where to look, your stocks might provide you a 9.75-year break from doing anything more than reviewing the performance of your companies each quarter. Gone are the worries about your savings every day, week, or hour."

Halfway into this Foolish experiment, the Simpleton Portfolio is faring... well, just take a look for yourself:

The Simpleton Portfolio

                7/7/95   6/9/00
              Purchase  Present    Total
Company          Price    Price     Gain
Dell Computer    $1.00   $45.06   +4389%
America Online   $1.66   $54.75   +3198%
Sun Micro.       $3.17   $89.94   +2735%
Cisco Systems    $3.07   $64.38   +1997%
Texas Inst.      $8.58   $83.75    +876%
Intel           $17.02  $127.06    +647%
Gap Inc.         $5.00   $33.06    +561%
Microsoft       $11.95   $68.81    +476%
Hewlett-Pack.   $29.89  $128.00    +328%
SGI             $43.25    $8.69     -80%

TOTAL N/A N/A +1513% S&P 500 556 1457 +162%

An incredible performance marred only by the unavoidable fact that it's only a hypothetical model portfolio. But if (if only!) it were real, Tom would actually have bragging rights around the foos ball table because even his big bro's Rule Breaker performance can't top the Simpleton. An original investment of $10,000 spread equally among those 10 companies would now be $161,300 -- that's net of tax, too, assuming the shares were still owned today. With that kind of OUTperformance, I'd say there are probably a few lessons for us:

  1. Winning in the stock market is attainable -- if you set out to own businesses, not trade slips of paper.

    Perhaps the greatest advantage of the Simpleton Port is that it was created and then tucked safely away from overeager hands that might've begun "locking in profits" in Dell (Nasdaq: DELL) in 1996 or America Online (NYSE: AOL) in 1997 or Cisco (Nasdaq: CSCO) in 1999. The greatest companies are always "expensive" because they're on every investor's wish list. I propose that only a focus on fundamental business quality could've provided an investor with the fortitude to hold these rockets as they blasted through every supposed valuation barrier over the past five years. The vast majority of traders who dabble in technical analysis or momentum strategies never would've had the guts to hang on because they didn't really know the rare quality of what they owned.

  2. It pays to focus on where the world is going -- "expanding possibilities," as we call it.

    Many of the Simpleton's holdings appear now to be "obvious" Rule Makers, but in 1995, many of these companies -- such as Dell, AOL, and Cisco -- were mid-cap emerging Rule Makers. The investor that saw the growing importance of a networked world would've bought one or all three of these and prospered. The greatest returns go to Fools who can look ahead, identify where the world is going, and buy the companies with the management, financial resources, and strategies to succeed. Not that this is at all an easy task -- no! But the point is that our mental energies are best spent on thinking about where the future might take us, not today's peewee ratios and the like.

  3. Patience with great companies will eventually be rewarded -- probably when you least expect it.

    For several years, a Simpleton investor would probably have been tempted to sell some or all of the portfolio's underperformers: Hewlett-Packard (NYSE: HWP), Sun Microsystems (Nasdaq: SUNW), and Texas Instruments (NYSE: TXN). In hindsight we know such a decision would've been a BIG mistake, but for several years it looked pretty grim for these companies. Hewlett-Packard was a sleeping giant showing no signs of awakening. Sun's big iron servers didn't have a chance against Wintel. Texas Instruments was in the cyclical DRAM business with a smattering of non-core electronics businesses. One could've easily made the decision to sell any one of these. Only a belief in management's ability to reinvent the business would've led an investor to hang on. Sometimes it takes time for a company to come into its own and find market conditions where it can thrive.

Within these lessons, I've hit a couple of times on the importance of being reluctant to sell. How does this fit with our proposed "Four for Four" sell strategy? Please post any thoughts you might have on the Rule Maker Strategy discussion board.

And finally, if you haven't already, don't forget to sign up for next month's Rule Maker Seminar. To learn more, check out our seminar page.

Next week, I'll walk through some potential takeaways from Tom's Simpleton Portfolio counterpart, the Money-Heavy Portfolio.

Fool on!

--Matt Richey, TMF Verve on the boards