POST OF THE DAY
Rule Breaker - Strategies
TA and $601,527.00

Format for Printing

Format for printing

Request Reprints

Reuse/Reprint

By albaby1
October 9, 2001

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. How are these posts selected? Click here to find out and nominate a post yourself!

Thanks for the reply, David - always good to see you 'round the boards. You wrote:

I disagree that Millenium does not operate within an important, emerging industry, and I disagree that it does not have 10x/5y possibilities from this present price. Further, we have already discussed numerous times in the past that biotechnology is not going to meet our consumer-slanted bias, but that this is less material in the case of emerging technology. You either are not aware of this or chose to ignore it. Thus, to state categorically that it meets "exactly two" of our criteria (as if this is peremptory or self-evident) is extremely dubious, at least to me.

Hey, don't blame me if you think Millenium operates in an emerging industry - I was just quoting your Portfolio manager, in your own buy report. Here it is again:

"Millennium Pharmaceuticals is focused on drug discovery and development -- not a new industry. But Millennium's entire approach to the drug discovery process is new, a.k.a, Rule Breaking."  

When Jeff popped in to respond to whether the RB Criteria had been met (and the post that I was responding to), he described the most important ones as:

"Top dog and first mover with gusto in an important emerging field, smart management and backing, sustainable advantages"

The emphasis is mine in both quotes. So you can see why I would not regard my conclusions as "dubious" -- they're not mine, they're Jeff's. If you believe that Millenium is operating in an emerging industry, that's fine - but then why does the buy report say that it doesn't?

That's a rhetorical question, of course - but I understand why it's difficult to address the "industry" issue. Right now you have three holdings (AMGN, MLNM, and the once and future RB HGSI) that operate in a much more closely-related field of endeavor than, oh, let's say AOL, Starbucks, and TDFX ever did. It is hard to define the field in which they operate closely enough that they are in different areas (and thus can each be a top dog), but broadly enough to match the common understanding of an "industry" (as opposed to simply a market or product niche).

As for consumer brand - I am indeed well aware of your repeated disclaimer of the importance of consumer brands in biotech. I just don't think that you're doing anyone a service by repeatedly ignoring the consumer brands criteria, even if you have an explanation. At the time the RB Criteria were first enumerated, all of the Port holdings that were deemed Rule Breakers had a consumer brand. Then, starting with the @Home purchase, five of the next six purchases did not have a strong consumer brand. In fact, since the RB criteria were first published, you've only purchased a single company (EBAY) that has been deemed to have a strong consumer brand.

You might have a reason for it - you might think it's a good reason. Heck, I might even agree with you that consumer brands are unimportant for a wide range of companies, well beyond biotech. But your criterion states:

We look for companies with strong consumer appeal. All else being equal, a company that imprints its logo in the minds of the public stands a better chance of surviving than one that does not. A strong brand serves to attract, to habituate, to profit, and to protect.

Is this no longer true? If biotech companies don't have strong consumer brands, why is the RB Port investing in biotech? To me, it smacks of special pleading - you really want to invest in these companies, and you don't want to be constrained by the fact that they don't meet the RB criteria. More on that in a moment. But the simple fact is that even granting every point of your rebuttal, Millemium fails to meet three of your eight requirements, and you never even bothered to do a public 10x/5y analysis.

The biggest problem with the Millenium purchase is exactly that which you deemed unfair: it "detracts heavily from [your] purported educational mission." I apologize that my original post wasn't clear - I did not mean to address TMF's overall educational mission, but rather the educational mission behind the RB Portfolio itself.

The educational mission of all your Ports is to educate TMF visitors by demonstrating, in a real-world real-money portfolio, the investing principles which you espouse. One of the purposes behind the RB Portfolio specifically is to educate investors in the principles of Rule Breaking by demonstrating their application. You detract from that mission by failing to consistently apply your criteria. It is confusing, to say the least. It makes the criteria harder to understand, and the implication that there is an unstated hierarchy of importance within the criteria themselves doesn't help, either.

It's been more than two and a half years since the RB Portfolio purchased a company with a strong consumer brand. Your strategy explication "recognize[s] that some businesses may well be Rule Breaking, but that we would not invest in them due to one or more restraints imposed by our stock criteria" - yet your last two purchases failed to meet two of those three stock criteria.

Let me be constructive by identifying the problem a different way. The RB team identifies various companies that it believes are wonderful investment opportunities, that the Team (and you personally) would love to invest in. However, those companies may not meet all the criteria - but you really, really think they are great companies and great investment vehicles. Biotech is a great example - it may be an important, emerging, exciting industry, but it's not a Rule Breaking industry because there are no consumer brands associated with the participants. You may see tremendous bargains in biotech - but the RB Port doesn't allow you to buy bargains, only expensive stocks that are still worth the investment. Unfortunately, you only have three model ports - and the Drip and Rule Maker Portfolios are inappropriate for high-risk emerging companies.

It's just going to get worse, by the way. You're going to have buckets of cash in the Port every quarter, and you're going to want to invest it in something. It will be tempting to become less and less discriminate in limiting your investments to companies that actually meet the RB criteria.

The solution? Set up Fool Port II.

Give yourself a vehicle to invest in the emerging companies that fascinate you and excite you, but that don't meet all the RB criteria. Give yourself a chance to invest in them publicly, with all the lessons that those companies can teach, but without having to strain the RB or RM criteria to the point of nullity. Remove the temptation to shoehorn exciting companies into an investment philosophy that doesn't fit them, allowing you to preserve the integrity of those philosophies.

It's just a thought. My first suggestion was to limit your investments only to those companies that actually met all six (now eight) RB criteria. If you can't find any such companies, then this is probably the best approach to take.

Best regards,

Albaby

__________________

TMF Money Advisor
Got money questions? Your answers are just a phone call away! TMF Money Advisor puts you in touch with an objective Financial Planner whenever you need it.