The Official Rule Breaker Board FAQ
Latest Version: 01/30/99
By David Gardner and Numerous Other True Fools
All typed-out suggestions for additions may be e-mailed to DavidG@fool.com and JeffF@fool.com

************************************************
Welcome to the Frequently Asked Questions list for the Rule Breaker Portfolio message board. The concept of Rule-Breaking investing was originally dreamt up and iterated by David Gardner in the January 1999 book, The Motley Fool's Rule Breakers, Rule Makers. Not only is it the definitive guide to the subject, but it's a darned fun read as well, so if you haven't already, click on over to FoolMart and get your copy ordered, drop-shipped, and read. Here's the direct link:

http://www.foolmart.com/market/bkrules.asp?mscssid=RLMFWHFVJ...

(By the way, DG is the idiot in the white suit on the left side of the cover.)

Without further ado, our Foolish Q&A:

Q1) How do I start my own Rule Breaker Portfolio, and what if I want to just mimic your picks?

A) Well, this is an important and serious question, and demands both prep work and additional thinking on your part. So first off, please click in and read an excellent post by IFindKarma (#729) that really gets you thinking in the proper Foolish way about this question:

http://boards.fool.com/Registered/Message.asp?id=10300510002...

Next, read Spectacular Bid's post on the matter (#650):

http://boards.fool.com/Registered/Message.asp?id=10300510002...

OK, now do keep in mind again that the Rule Breaker Port is very risky. This idea of consciously taking on high risk is clearly elucidated in the first principle of the portfolio's management. If you haven't already read that, you absolutely must (along with the others after it -- all are key):

http://www.fool.com/portfolios/RuleBreaker/RuleBreaker1.htm

Anyone new to the Rule Breaker Port should NOT be lulled into thinking that the approach will give you high returns for little risk. Actually, we've had some horrendously bad periods that might scare the socks off anyone who doesn't have a good degree of risk tolerance, or someone new to investing. The Rule Breaker approach is suitable only for experienced, aggressive investors who can close their eyes to the short term and think LONG term. Several times in the past, we have picked stocks that lost 50% or more of their value, some of which never came back. That's all part of our approach. Could you stand it for yours?

Most investors should have a well-diversified portfolio (a great place to start is an index fund, followed by the Foolish Four, followed by some Rule MAKERS -- which you could buy through dividend reinvestment plans if you wish) before investing small amounts of money in Rule Breakers. Even the Rule Breaker Port has money in the Foolish Four. But, if you can handle the risk, you can begin by investing your money in Rule Breakers. Just be ready to ride the risk roller-coaster, and don't expect every Rule Breaker Port stock pick to be a winner.

Q2) What is the Rule Breaker Portfolio's goal?

A) As described in the "Foolish Approach" at

http://www.fool.com/portfolios/RuleBreaker/Approach.htm

OUR PORTFOLIO'S GOAL IS the same one that any portfolio should have: to make as much money as possible. The root to maximizing one's returns can be different for different people; some (Fools like us) buy and hold, others trade. We have a lot of confidence in our self-developed investment approach, and expect to whack the market over the long term; part of our point in doing all this is to demonstrate that individual investors who do not get to sit down with the CEOs of the companies they invest in can beat the market by following a Foolish and disciplined long-term approach. We'll see how it all plays out.

It bears reiteration: the Foolish view is always a long-term view. If we're losing to the market at a given moment, we don't sweat it, since we're invested mainly in small growth stocks that beat everything else over time. There are also blue-chip behemoths that add ballast to the portfolio. If we're crushing the Market at a given time, we don't get too fatheaded about it, since we've seen our portfolio drop over 20% before in one month! Our investment approach incorporates above-average risk intentionally, since we believe that greater risks equal greater returns... again, as true of investing as it is of Life. But there is certainly a downside to that risk... that sometimes you'll feel like walking off the unsecured end of a gangplank.

Q3) Is company XXX a Rule Breaker?

A) You tell us! We believe every individual investor is capable of researching and analyzing companies, so now would be an excellent time for you to do some websurfing and some library searching and post the answer to your own question. Any analysis you post we can then help you to improve, and that way we can all learn from both your evaluation and the subsequent comments on this board.

Any Rule-Breaking company needs to fulfill all six of these criteria:

1. The top dog and first-mover in an important, emerging industry...
2. Sustainable advantage gained through business momentum, patents,
visionary leadership, and/or inept competition...
3. Excellent past share appreciation, measured by a relative strength of
90 or higher...
4. Good management and smart backing...
5. The greater the consumer brand, the better...
6. A significant constituent of the financial media is recently on record
for calling it overvalued...

Be sure to address all six of these principles when posting whether you believe the company does (or doesn't) qualify as a Rule Breaker.

Q4) Ok. I understand the Rule Breaker Principles. So which stocks in the portfolio should I buy right now?

A) None. Before investing in any Rule Breakers, you should be overtly familiar with the Motley Fool's philosophy concerning its real-money Hall of Portfolios and the idea of copying our investments. Please see the essay titled "The Spirit of Foolishness" at:

http://www.fool.com/portfolios/RuleBreaker/Spirit.htm

Q5) Why does the Rule Breaker Portfolio's total return not include taxes?

A) The purpose of the Motley Fool's Hall of Portfolios is to teach people how to invest, not how to compute their taxes. Taxes are taught in our Fool's School and Fools and Their Money areas. (Check out those areas come every April 14th!) Specifically, no other portfolio, mutual fund, or investment vehicle includes taxes when its total return is calculated and reported. We show our total return before taxes against the market's total untaxed return with all dividends reinvested. For the sake of comparison, there's no fairer way. For a more specific answer on why the Rule Breaker Portfolio's total return does not include taxes, please see SpectacularBid's post #339:

http://boards.fool.com/registered/Message.asp?id=10300510000...

Q6) When is a company no longer a Rule Breaker, and what happens then?

A) A company is forced from Rule Breaker status when a competitor offers an equal or better alternative to what the Rule Breaker offered. So when a competitor offering a viable and complete business alternative flashes across your Rule Breaker's radar screen, your Rule Breaker has just become... a Tweener.

The state of Tweening is a limbo-esque dance that can lead either to the Death Rattle or to the golden crown: that of becoming a Rule Maker. That is, a company that is Tweening will eventually either cross the revered threshold and become a Rule Maker (one that makes the rules for its industry rather than breaks them, as explained with chutzpah in the Rule Maker Portfolio here: http://www.fool.com/portfolios/RuleMaker/RuleMaker.htm), or the company will lose the magic edge that it possessed as a Rule Breaker and fall into a cesspool of mediocrity as it sheds its past glory to share its market with several other competitors, or even fall by the wayside to them.

Rule Makers are (at the time of this writing) companies like Microsoft and Intel. Both were once glorious Rule Breakers. They Tweened. They prospered. Now they're Rule Makers. Obviously, Foolish investors want to HOLD TIGHT their Tweeners that are Tweening into Rule Maker status. Good golly, yes. However, they want to sell their Tweeners that are lurching into a Death Rattle. Which companies have done that?

Arguably, companies such as Prodigy (assuming it were public), or 3Com, or Apple Computer (although the debate rages on about Apple. Is it a Rule Breaker even now?). These companies were once certainly Rule Breakers and then they Tweened and, arguably, lost their glow. (Prodigy was crushed by AOL, 3Com was relegated to a distant second by Cisco Systems, and Apple Computer lost money for years as the market embraced the Windows platform.) Compare the stock performance and valuation multiples granted these losing companies to the performance of the true Rule Breakers in their industry and you'll see what a Death Rattle can look like. AOL vs. Prodigy (or Compuserve -- that works, too). Cisco vs 3Com? Microsoft vs. Apple?

Youch. Three times youch for the losers.

What are some possible Tweeners now, as of the date atop this FAQ? For one, Yahoo!. It competes with several Internet portals, all of which offer much the same services. Is Amazon.com a Tweener? No, we don't think so. No other online retail site matches the shopping experience that you receive at Amazon. Not yet.

Tweening is an art -- both the act of identifying it and the act of moving beyond it (for a company). Sometimes companies even return from Tweener status to revisit Rule Breaker status by redefining themselves yet again, or by entering or beginning an entire new industry. Anytime that you have trouble identifying between Rule Breakers and Tweeners, remember the six attributes for a Rule Breaker listed above, and then see if your company has viable competitors in its market.

As for what is done about a Tweener: one has to try to determine if it'll move to Rule Maker status or commence to a Death Rattle. That's even more of an art than identifying a Tweener; it's something that we'll discuss much more as we come across the situation. If you believe that you have a Tweener in your hands right now (or will soon), tell us about it on the message board. We can all learn from the situation and the board can give you some opinions as to what the company might do: Tween into death, Tween into a humdrum, or Tween into continued greatness.


************************************************
Specific additional credits for the FAQ go to the following Fools: SpectacularBid, IFindKarma.

I am curious aout something. With the release of your new book and the name change for the Fool/Rule Breaker portfolio, what happened to the Foolish 8 criteria espoused in your first book? It appears that all of the Foolish portfolios are doing there own thing. Why the move away from the Foolish 8? Is there something Wise about the Foolish 8? (I don't think there is but thought I would ask.) I have just read your book and it seems to me I am a little behind on the Conventional Fooldom.

Thanks
Cylar v

Cylar v,

Actually, the Foolish 8 is just our small-cap approach. We have had several Foolish 8 stocks in the Rule Breaker Port in the past, though we have guided that portfolio away from small caps per se and into true Rule Breaking (regardless of market cap) over the past year or two. (3Dfx was a Foolish 8 stock -- a bad one so far -- while there are several others in the past that we've done a bit better with!)

I believe that we will have a more directed Foolish 8 portfolio in future, but for now, we have the spreadsheet and an active Foolish 8 message board. It's our small-cap approach, a screen that enables you to find numerous interesting companies. It's not true Rule Breaking, though.

To close, we're talking about two distinctive approaches (with some crossover), both of which I like.

Fool on,

David G.

This is actually JJHalbleibs sister SueManley1, ( so much for password saving software)Guess that makes me a rule breaker!

If you want to understand more about rule breakers and rule makers read the set of branding and marketing books by Al Ries including "The 22 Immutable laws of Branding", and "The 22 Immutable laws of Marketing".
They are on Amazon and the reviews are good.

I just read them because I am in a start up right now.

Important points they pass along in Branding are : 1) The Law of Expansion: the power of a brand is inversely proportional to its scope. ( companies that use their brand for everything lose market share) 2) The Law of Contraction: A brand becomes stronger when you narrow its focus. DUH! Because it allows you to target the people that are interested in a specific thing and focuses the advertisement to get through and because the message is not muddled its more easily remembered. ( Who remembers that adds from "We're Beatrice".
3 The Law of Publicity: The Birth of a brand is achieved with publicity, not advertising.

Marketing talks about : He who is first in a category is remembered. He who is second but is not advertised as A LOT better or different ( And does not establish a new category to be first in ) is not remembered. Neil Armstrong ( Who was that second guy on the moon), Lindbergh, (Hinkle did the transatlantic faster a couple of years later)BUT Amelia Earhart: New Category to be first in!

The books are highly enlightening. You occasionally find flaws, but if you read through all of the laws you figure out quickly what other laws are at work to give a company/product an edge.

I have been investing for 10 years and initially made some poor choices and fortunately for the past 5 years some really good choices. Finding the Fools ( just in the last few months via Bro JJHalblieb) and a place that encourages intelligent high risk with analysis is awesome.

thanks, Susan