Post of the Day
February 18, 2000
Rule Breaker Strategies
Posts selected for this feature rarely stand alone. They are usually a part of an ongoing thread, and are out of context when presented here. The material should be read in that light.
What have Gardner's kids ever done for me?
If it's possible to like someone whom you've never met, I like David Gardner. When it comes to doling out gratitude to the set of all people with whom I've never even shaken hands, David gets a much larger share than almost anyone else that comes to mind. I've obtained a pretty decent free education compliments of his efforts.
But, hey, I'm a finite vessel. And I have a lot of gratitude to dole out - to my wife and kids, my parents and other loved ones, not to mention past teachers, co-workers and so on and so on. And then there's my creator, whoever that might be, and all the people who've stopped at red lights throughout my life, as opposed to running them and crushing me in my car. You get the idea.
I'm sorry, but I just don't think I'll have any gratitude left over for David Gardner's kids. And come to think of it, why should I save any for them. I mean what have David Gardner's kids ever done for me? From what evidence I have, it appears that David was already motivated to get out of bed and educate me, free of charge, long before his kids came along.
I've been a willing participant in recent evaluations of David's Rule Breaker Portfolio performance. I admit it. No one dragged me into the fray. But it occurs to me, suddenly, that the performance of David's portfolio is really of little concern to me. Heck, I'm not even sure it's all that big a deal to David. The folks who really ought to be concerned are David's kids. And, again, what have David's kids ever done for me?
You see, it's David's kids who are taking on the risk and it's these same youngsters who'll some day get to spend the money, or not, depending on whether the risk pays off. With this lousy attitude, you might ask why I bother following the Rule Breaker at all? My answer: Because I learn from the process, and this is where the potential benefit lies for my own kids.
OK, you say, all this "learning" stuff sounds noble and all, but don't I eventually have to put the learning into practice if I want my kids to have some dough of their own? Otherwise, how can I send them to prestigious universities, with David's kids?
Indeed, I do have to act, eventually. In this context, then, does the past performance of the Rule Breaker Portfolio become relevant? I would answer just "sort of." Why only "sort of"? Because my kids won't ever get to spend David's returns, only the returns I can obtain by employing what he (and others) have taught me. Indeed it is the performance of David's strategies, particularly as they are employed in the future by me that is most relevant, to me anyway. Err, I mean to my kids (with maybe just a little something nice for me thrown in the mix? I mean what about me, anyway?��Oh�. I didn't see you there. Sorry. Back to the point�.).
As a follow-up to my risk measurement proposal yesterday, I thought I might look at past RB Port results in the context of the metric I laid out. When I went back to research the RB Port transaction history, though, boy was I in for a surprise. What I found, at first, upset me. But the more I thought about it, the more it all made sense. Before I get to the rationalization, though, here's a brief snippet from what I found. It's from the '95 Sell Report for RIDE:
The reason we are selling the stock is that it has now comfortably exceeded our target price, and we expect to find better values among the universe of 9000 other U.S. stocks. Does this mean we think RIDE is going to drop? Not at all. We honestly have no idea (as usual) where this stock is headed in the coming months. But purely from the standpoint of valuation, this one now looks more than fully valued according to our Fool Ratio, and we are going to find cheaper stocks. That's the sole rationale behind the cash out. (Fool Sells RIDE)
Target price? Valuation? Cheap Stocks? Could this possibly be the same guy who brought us Rule Breaker Principle #3:
Valuation is overrated. Valuation is, at best, a secondary or tertiary concern. To many long-term investors, valuation should not be any concern at all. (Rule Breaker Information and Principles)
This decision really came from the guy who first caught my attention on the radio by claiming that he doesn't pay any attention to stock price? The same guy who's uses marriage metaphors when discussing his buy and hold philosophy?
In a word, Yes. It's the very same guy. The reality is that, if you look at the past history of the Rule Breaker Portfolio, it's just a tangled mish-mash of value plays, shorts, Foolish 8, Foolish 4 and, most recently, Rule Breaker selections.
Even if we decide to focus on the Portfolio history only since the Rule Breaker principles took shape, it's tough to make any firm conclusions regarding the strategy. Based on my reading of past buy reports, I think the first stock purchased according to RB principles was Starbucks. Here's the history since this selection:
Date Purch 2/14/00 Yrs Annual RB Pick Purch Price Close Held Return SBUX 7/2/98 28 34 1.6 13% ATHM 12/4/98 28 33 1.2 16% AMGN 12/16/99 21 65 1.2 158% EBAY 2/26/99 100 54 1.0 55% CRA 12/17/99 80 248 0.2 80867%Clever how I've managed to not only remove AOL, but AMZN as well, eh? But more seriously, I think any sensible person would conclude that, while impressive so far, there isn't enough evidence in this table to conclude one way or another yet regarding the effectiveness of RB stock-picking, as outlined in the Portfolio Principles. With a maximum holding time of 1.6 years, there just isn't enough information to cull through at the moment.
Getting back to the earlier history of the Portfolio, however, should we find it troubling that the Rule Breaker Portfolio has taken on so many different personalities in the past? I think the answer depends on how you look at the mission of the Fool's public portfolios. Consider this quote from Rule Breaker Principle #1:
Finally, each of our six portfolio principles is not an immutable piece of sculpture. We purposefully offer them here in flexible form in order to gauge and garner your reaction.
And this brings us back to education. The value of the RB portfolio, in my mind, is in the manager's willingness to bend and change in full public view, and to explain all the thinking behind this evolution and to admit that some past decisions have been pretty dumb. Most of us learn best via experience, not concept. If you want some instant experience, compliments of The Motley Fool. Go back and live the RB history via the archives.
(One thing you'll notice early on is that, although there is constant reference to 6 principles of Rule Breaking, as far as I can tell, there are only 5 principles discussed on line. Yes, folks, it's emerging in real time!)
To those of us who have arrived lately, the RB managers may seem a little inflexible in their views. But with a longer-term perspective, someone might argue that they've been wishy-washy! Personally, I think I'll take the middle ground. I'll take what I can learn from their experience and add what I can from mine. I guess I've lost interest in the past performance of the portfolio. I'll leave that for David's kids to worry about.
I am interested in the long-term success of the RB principles as stock picking guides, but it's way too early to conclude anything meaningful on this point. Besides, the principles will probably evolve again before enough data is in the vault to judge them. And even the Wise have to remind us that past results are never a perfect predictor of future returns anyway. In the end, the most we'll be able to say is that overall portfolio has done very well.
But before we get back into discussion of whether the RB Port has really done all that well or not, allow me to say again: What have David Gardner's kids ever done for us?
Still learning and worrying mostly about my own kids,
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