Wouldn't it be great, not just to have a plan, but a full-fledged fiendish plan? "What are my goals in investing? Why, I'm trying to take over the world."
No, we're not really trying to break people to our iron will. However, it is true that The Motley Fool has not been afraid to turn over a few apple carts. Heck, earlier this year, when it became clear that the Rule Maker Portfolio and strategy were broken, we came in here and turned over our own apple cart. And if this new strategy turns out to be no better, we're going to turn the darn thing over again.
We're willing to eat our own cooking. But as we have said many times in the past, we're not trying to pick stocks for people. The goal of this portfolio is to teach. This gets lost sometimes, particularly after a period in which we have made several transactions -- so whenever I start getting emails about our latest "recommendation," I figure it's time to revisit our goals.
So, what are we seeking to achieve?
We want to help you make better decisions. The Holy Grail for us is to help people make money. The Rule Maker is thus designed as a framework for analyzing large-capitalization stocks; it is neither a screen nor is it mechanical. Most importantly, companies that sit in the official Rule Maker Portfolio are not recommendations.
Rather, they are companies that I (and my predecessors) have chosen as good investments using the questions posed by the Rule Maker criteria. I am consistently asked why I don't think Microsoft (Nasdaq: MSFT) is a Rule Maker. Of course, it's a Rule Maker! It's just not going to reside in a stock portfolio I manage, because I do not like the risk/reward proposition of being a minority shareholder in Big Softie. I am thrilled when someone disagrees with me and has valid reasons for taking the opposite view. Foolish investing doesn't try to define what you think -- we're far more interested that you think.
Part 1: Be an independent thinker
We want to help investors become independent thinkers. From its inception, the Fool has steadfastly maintained that you are the best steward of your financial future. Unfortunately, many interpret it to mean that anyone can pick stocks. Well, it's just not true, and it's not as we intended.
Sometimes the best decision you can make is that stock picking is not for you. Taking care of your financial future can be as simple as putting some of your long-term savings into an index fund. In some ways, the rigidity built into the Rule Maker criteria is meant to provide a sufficient hurdle to those who may not have the time or inclination to do the requisite homework before picking stocks. I'd rather have 100 people read one column and leave than have a single person blindly mimic our portfolio.
We also want you to be self-reliant. When you forego the excitement (and angst) of analyzing companies in favor of an index fund, we think you've made an intelligent decision. Self-reliance, however, doesn't mean you ignore potential sources of useful information. Analyst reports, for instance, often contain excellent research that gets to the essence of a company's business. But you've got to be able to discern helpful information from the useless.
Part 2: Don't let TV talking heads play you like a fiddle
Question everything talking heads say. For example, I find that most words out of Maria Bartiromo's mouth are unhelpful. When she babbles about an analyst meeting where a company "may have positive comments," she is not giving you useful information. When she says a company is "expected to report better-than-expected earnings," just walk away from the TV.
The securities industry has played Bartiromo like a banjo. If they want stocks to go up, all they need to do is feed her some claptrap, and she sends it straight to an audience ready and willing to believe. If you unquestioningly act on information fed to you by CNBC, you deserve to lose money.
Part 3: Call a spade a spade
Finally, we get to the fiendish part. At the Fool, we've come to speak our minds. Fools are not destroyers. But we do tilt at things that put private interest above the overall vitality of the public markets. You saw it live and in living color this summer when we talked about the lack of proper accounting for stock options, particularly by technology companies. I sold the Rule Maker stakes in each company -- Microsoft, Intel (Nasdaq: INTC), and Cisco (Nasdaq: CSCO) -- in no small part because of their membership in the American Electronics Association, which led the charge against stock option accounting when it was on the table in 1994, and promises to do so again.
Treating stock options as compensation, in some ways, creates moral hazards and perverse incentives that run counter to outside shareholders' interest. For example, several companies, such as XO Communications, went into prepackaged bankruptcy this past year, hoping to emerge as stronger entities. In XO's case, the former management team will stay in place, and once the company emerges from bankruptcy, these executives will simply start receiving stock options once again. Who's to say they didn't push the company into bankruptcy so they could get through and start receiving stock options in new company equity that much faster? This was a prepackaged bankruptcy, which means that the company did not really have to file just yet.
Think about this, though. Much of WorldCom's management team, one of the biggest frauds in corporate history, has remained intact. It looks more likely that the company itself will emerge from bankruptcy, and the same people will again generate substantial wealth from massive stock option grants -- as if the company's previous collapse and the billions in equity lost never happened. I find that scandalous.
It is awfully hard to avoid companies that are outright frauds. It is far easier to stay away from those that have capital management and financial disclosure policies that attempt to defy public scrutiny. American International Group's (NYSE: AIG) executive compensation structure fits this definition, as do programs by companies to buy back shares in the open market to offset dilution caused by stock option grants. There's nothing illegal about it, but it doesn't mean you have to own these companies, either.
In the end, our goals are pretty simple: We want to help you to make money in the stock market, even if you decide that your best move is not to play. Investing and financial analysis are pursuits with infinite complexities, especially when one considers that each decision a participant makes causes the entire landscape to shift by a tiny bit. It would be pretty cool to be able to assign our motivations to some fiendish master plot, but one look at the headlines in the business section over the last several years will show you that fiendishness already abounds.
Bill Mann, TMFOtter on the Fool Discussion Boards
We're sorry; the word that we were looking for is "sibilance." Bill Mann owns shares of Cisco. He is the managing editor of The Motley Fool Select, where you can find his best Foolish stock ideas you won't find anywhere else. The Motley Fool has a disclosure policy.
The Rule Maker Portfolio has had a cumulative investment of $43,500. As of Nov. 12, 2002, its current value of all cash and equities is $28,917.64. This equals an internal rate of return of ï¿½13.1% since the launch of the portfolio in February 1998.