In this space, I and my fellow Rule Maker managers get the most satisfaction in writing about potential Rule Maker investments and analysis techniques. I often tell people that our job is twofold: half teacher and half securities analyst. We're much more focused on teaching than portfolio management. As such, we don't huddle around the computer every night to check the returns of our Rule Maker Portfolio.

People occasionally ask me how the Maker Port is doing, and I tell them, "Don't know to be honest, but we're beating the S&P on a historical basis." Our philosophy is that if we buy a focused group of great Rule Makers, and mercilessly squeeze our expenses to a minimum, then we should be well set to beat the market's average return over the long run. Based on our philosophy, we see little need to scrutinize the day-to-day performance of our holdings.

Our focus is on the businesses, not the portfolio. We consider that a strength. But what we've come to learn is that any strength taken to an extreme becomes a weakness.

Unlike the Rule Breaker Portfolio, which invested $50,000 back in 1994 and has never invested another dime since, the Rule Maker Portfolio invests additional cash on a monthly basis. We've even made two small withdrawals of capital for incidental purposes. These transactions make it a good deal more complex to track our performance against the S&P 500 benchmark.

As explained on Friday, we measure our performance against the S&P 500 by shadowing our portfolio's every move with an equivalent move within the S&P index. If we buy $1,878.45 worth of Microsoft (Nasdaq: MSFT) on 2/3/98 (as we did), then on that same day and in the same dollar amount we record a purchase of the S&P 500 index. We call this version of the S&P's performance the "S&P 500 DCA," based on our own track record of dollar-cost averaging (DCA) into the market. This method creates an apples-to-apples comparison to our performance on a transaction basis.

All seems well, right? This method of performance tracking certainly seemed fine to us for a long time -- up until this weekend, when we really scrutinized our exact methodology.

We discovered that our port tracking method was good, but not the best. For us as a company here at The Motley Fool, two of our core values are uncompromising honesty and relentless innovation. Our goal is to present our portfolio's performance with the utmost conservatism and transparency. This weekend, we came to realize that a more conservative method of tracking our performance would be to create an S&P 500 DCA that mirrors our deposits, rather than the trades.

Here's our thinking: As soon as we deposit fresh cash into our discount brokerage account, the clock is ticking. That money now represents opportunity -- the opportunity to achieve a return on investment. One choice is to mindlessly replicate the S&P 500's return by investing in S&P 500 Depositary Receipts (AMEX: SPY). Just because it sometimes takes us a week or two before we get around to allocating our cash into Rule Makers doesn't mean we shouldn't compare ourselves against the performance of the S&P 500 from the moment that cash entered our account.

To this, you respond, "What difference does it make for crying out loud?!"

The real impact comes from the early days of our portfolio. We originally funded our account with $20,000 on January 6, 1998. From there, we slowly parceled out investments into Microsoft, Pfizer (NYSE: PFE), T. Rowe Price (Nasdaq: TROW), Intel (Nasdaq: INTC), Coca-Cola (NYSE: KO), and so forth. As such, we weren't fully invested until late June 1998. While cash sat in our account, we suffered the opportunity cost of being out of the market. In retrospect, we should've invested our spare cash into the S&P index until we allocated it into Rule Makers.

So, here's what it boils down to: Based on the more conservative deposit-date version of the S&P 500 DCA, we've discovered that we're beating the market by a slimmer margin than we reported on Friday. Here's an update to those numbers, with the implementation of the new, more conservative version of our S&P benchmark: 

As of 9/28/00             Since inception   Annualized
Rule Maker                     41.77%         14.05%
S&P 500 DCA (deposit date)     35.94%         11.91%
As you can see, we're still beating the market's average return, but by a much slimmer margin. It is worth noting that our returns are after-tax, which the S&P is not.

Finally, let me show you how our returns stack up as of last night. (Right now, I'm calculating this data manually based on a spreadsheet until our techies implement the new S&P 500 DCA formula here on the site. That should happen by next week.) Here are our returns as of last night:
As of 10/2/00             Since inception   Annualized
Rule Maker                     35.54%         11.74%
S&P 500 DCA (deposit date)     33.88%         11.24%
As you can see, our Rule Makers have recently been sucking wind versus the S&P. We've taken a beating of late, especially in Intel and Yahoo! (Nasdaq: YHOO). We're now only a hair's breadth ahead of our benchmark on an overall return basis (also called "total return").

Another way of tracking portfolio returns is the Internal Rate of Return (IRR) metric. This is a close cousin of our deposit-date S&P 500 DCA benchmark. Though a full explanation will have to wait until a future column, in brief, IRR is the annualized rate of return that matches all historical deposits/withdrawals with the current account value.

IRR is the most sophisticated means of tracking portfolio returns because it is practically the only method that accurately measures the time value of money. And even though IRR is sophisticated, it need not be complicated because the Fool's My Portfolio tool automatically calculates this return for you.

Again, I'll devote an entire column to IRR in the future, but for now, here are our returns as of last night compared on the S&P 500 on an IRR basis: 
As of 10/2/00         IRR  
Rule Maker           14.96%
S&P 500              14.32%
We believe we now have the best method of port tracking possible with the combination of IRR and overall returns relative to the S&P 500 DCA (deposit-date). This one-two punch best reflects the true economic performance of our portfolio. As soon as possible, we'll seek to provide this data to you here on the site on a daily basis.

Also, a piece of portfolio news: Yesterday, we sold our shares of Gap Inc. (NYSE: GPS), as we announced we would last week. We sold our 82 shares for $19.50 a stub, and incurred a $14.95 commission in the process. All told, our proceeds were $1,584.05.

Finally, interested investors should consider signing up for The Motley Fool's Biotechnology Investing Seminar Online, which starts October 16. The seminar offers 15 lessons over five weeks to help investors evaluate biotech companies.

-Matt Richey, TMFVerve on the Discussion Boards