What is this Rule Maker thing all about and who are these guys running the show?
If you've stumbled upon our daily musings, you may have asked this question at some point or another. The public experiment we call the Rule Maker Portfolio has been up and running now for just over three years. So far, our performance -- or shall I say underperformance -- has made the buy-and-forget S&P 500 index fund look like an awfully good option.
To those who have lost money recently on various investments that have been highlighted in the Rule Maker Portfolio, I'm right there with you -- one of my favorite Rule Makers, Yahoo! (Nasdaq: YHOO), has been especially crushed of late. Such losses come with the territory of individual stock investment. At the same time, each of us has the fortunate opportunity to learn from our mistakes and make good on those learning experiences in the future. In that sense, I hope the Rule Maker Portfolio has been a valuable learning lesson for us all despite the underperformance. Can we not learn as equally from failure as success?
Perhaps we Rule Maker managers are just a bunch of lowercase-f fools, or maybe our intellectual curiosity and competitive natures just have the best of us, but we aren't giving up. We'll continue to seek out the world's strongest, best-managed growth companies -- those that have the potential to compound their shareholders' investment for years and years. We'll also seek to learn from our mistakes, while sticking to the following four defining aspects of our investing philosophy:
- Opportunity: Our goal is to participate in the success of capitalism's top 10% who collect 90% of all market capitalization.
- Ownership: We take the long-term perspective of an owner, not a trader (i.e., "buy to hold").
- Simplicity: We seek to maximize life opportunity, striving to beat the market while sticking to a logical, non-time-consuming approach.
- Efficiency: We aim for ultra-low portfolio turnover to minimize commissions and taxes.
That's the essence of our approach. Now, let me introduce (or re-introduce) you to who we are:
Tom Gardner created the Rule Maker strategy and continues to be a major source of ideas (some of which we actually listen to). He founded The Motley Fool in 1994, having studied the public markets under the tutelage of his father. Tom has forever since taken a particular interest in understanding how companies grow, which companies dominate their markets, and what happens when things go wrong at a business. His investment approach has been heavily influenced by Philip Fisher, author of Common Stocks and Uncommon Profits. Stories about long-term business owners really resonate with Tom -- one of his favorites is the story of Joseph Rosenfield, the manager of Grinnell College's endowment, which grew from $11 million to $1 billion over 32 years. It did so with only six stock sales.
Phil Weiss has been a manager of the Rule Maker Portfolio since its outset. By day, Phil is a CPA with responsibilities in international tax research and planning for an S&P 500 company. As such, he's our resident accounting guru. He studied some investment-related concepts in college, and made his first investment in 1987. Once he paid off all his college loans and purchased his first home in 1994, he began investing a little more seriously. He was first attracted to Rule Maker investing when he read a Fool Portfolio column and related Fribble written by Tom. Also a fan of Philip Fisher, Phil especially appreciates the Rule Maker approach because it offers a means by which he can invest and still have time for his family.
Zeke Ashton joined the Rule Maker team back in November 1999 to fill a slot we badly needed: somebody to remind us why we bought T. Rowe Price (Nasdaq: TROW). For Zeke, the attraction of the Rule Maker approach is its simple logic: identify great companies, buy their shares at reasonable prices, and watch them appreciate (and grow to appreciate them) over time. Prior to his work at the Fool, Zeke worked in Europe for several years as a software consultant, assisting banks and large corporate clients with the implementation of treasury and risk management systems. This experience sparked his interest in the financial markets, and working with the Fool gives him an opportunity to do two things he really enjoys: learning about investing, and passing on what he's learned.
Richard McCaffery came to The Motley Fool in 1999 after spending four years as a business reporter at trade newspapers covering the commercial satellite and computer technology industries. After discovering The Motley Fool Investment Guide, Rich read every investment book he could get his hands on, as well as a few hundred annual reports, and lots of Warren Buffett's musings. What appeals to him about the Rule Maker approach is its focus on buying great companies at reasonable prices, and the chance we get to learn as much as possible about the businesses in which we've become part owners. Rich is currently a Level 1 candidate in the CFA Program.
Todd Lebor, our most recent addition, joined the Rule Maker team late last year. Todd spent the early part of his career surrounded by old-economy minds in the real estate industry where five-year discounted cash flow analyses are king and estimates change once a year rather than once a week. He passed the CPA exam in 1994 but traded in the accounting books for investment books and joined The Motley Fool in 2000. His investment style is grounded in a few simple Rule Maker principles like diversification, patience, and consistency. Expanding possibilities, another fundamental Rule Maker criterion, is the driving force behind most of Todd's personal investments.
And I, Matt Richey, joined the Fool almost exactly two years ago as manager of the Rule Maker platform. It took quite some convincing and begging on my part to get the job considering my only other "real world" experience was as a, ahem, consultant -- and that for only nine months! What I did bring to the table was a truly fanatical love for the Fool and its mission to educate, amuse, and enrich the individual investor. Ever since my first investment in 1996 in America Online (NYSE: AOL), I've gravitated toward companies that are just beginning to show Rule Maker promise. To me, strong competitive advantages, great management, and a long growth cycle ahead are the signposts most indicative of a Rule Maker worth owning for a decade or longer. (I just wish I hadn't sold my AOL.)
So that's our team. I can confidently say that Tom, Rich, Zeke, Phil, Todd, and I are not sitting on our hands. We've witnessed firsthand the mistakes that have led to our underperformance heretofore, and we're seeking to learn from those mistakes and thereby improve our strategy. We've always said the Rule Maker Portfolio is a living, breathing teaching portfolio. Thankfully, this is only the beginning of year four of our strategy, not year fourteen -- we're just getting started.
Yes, we've done quite a few things wrong (e.g., downplayed the importance of valuation and paid lofty initial prices for Coca-Cola (NYSE: KO), Schering-Plough (NYSE: SGP), Nokia (NYSE: NOK), and JDS Uniphase (Nasdaq: JDSU); mis-judged the changing landscape of Yahoo!'s business; mis-timed the sell of Gap (NYSE: GPS)). We've done a few things right, too (e.g., innovated on the frontier of financial analysis with concepts like the Foolish Flow Ratio and Cash King Margin; stocked our portfolio with a collection of great companies; smartly added and continue to add $500 of savings to these companies monthly; and we now look at investment opportunities from a 2x/5y point of view that incorporates business analysis as well as valuation assessment).
All in all, we're still building something that I think is incredibly valuable here in the Rule Maker Portfolio. It'll take another seven years before any reasonable assessment can be made. I've been on board the ride now for three years -- first as an avid reader and follower, now as TMF staffer and RM Port manager -- and I'm looking forward to what we'll all learn in the next seven years.
Lastly today, an announcement about something we have cooking for next week: Next Tuesday, we'll begin a two-week series on the basics of the Rule Maker investing approach. We'll walk through the six core metrics that allow you to separate the Rule Makers from the Fakers. This series, which we're calling The Craft of Rule Maker, is the perfect jumping-off point if you're new to the Maker approach or if you just need to brush up on the basics.
Matt Richey is a co-manager of the Rule Maker Portfolio, a Yahoo! shareholder, and an ISTJ (with some INTJ tendencies). All of his portfolio holdings (and more personal info) can be discovered in his online profile. The Motley Fool is investors writing for investors.