...some truth. [This is going to be long.]One of The Motley Fool's core values is "civil and open debate." Another is "uncompromising honesty." Believe it or not, we do our best to live by these as a corporate entity. I'm going to do my best to live by them here.As way of context for those who read this but haven't been reading every Rule Maker article and discussion board thread, we've recently been discussing some potential changes to the Rule Maker strategy. At the end of a recent article, I conducted a poll that asked what people thought of the current Maker criteria and whether we should change them, keep them as they are, etc. One person, lmsmedley, wrote the following in response [bold emphasis mine]:~~~~~~~~~~~~~~~~~~~~lmsmedley: The Fool has patted itself endlessly on the back with regards to its RM and RB strategies. At least....it did when the bull market was roaring. Now it seems they have discovered that their "buy and hold" strategy just doesn't work in bear markets and are trying to rejigger their perspectives and plans to make us forget the crappy returns the portfolios have provided as of late.~~~~~~~~~~~~~~~~~~~~Referring specifically to the part in bold above, I responded:~~~~~~~~~~~~~~~~~~~~TMFBogey: All due respect here, but this is one of the great myths that if enough people say it, you start to believe it. While I admit there were many times when we celebrated our good fortune, I think saying that we ever "endlessly patted ourselves on the back" is a little bit of overkill. I'd love for someone to pull out 30 examples of us patting ourselves on the back, aka unduly praising how great and smart we are (which is different from being happy that things were going well.) I'll recant if someone can actually do it.~~~~~~~~~~~~~~~~~~~~Elann (former TMFElann) entered the conversation and quoted two passages from our books that taunt Wall Street and say that the Foolish approach promises that "individuals will, on average, spend less time worrying about money, have greater control over their destiny, and substantially improve their results if they choose common stock over mutual funds." Elann is making a larger point that we've been brash in our bad-mouthing of Wall Street and bold in our assessment of our own methodologies. In some ways I agree with Elann, and in some ways I don't. But, that's not the point, and Elann misses the mark with his comments. My reaction was to Lmsmedley's comments that "The Fool has patted itself endlessly on the back with regards to its RM and RB strategies. That's all I was reacting to, nothing more, nothing less.Allow me to break that down for you into two parts:- endlessly (at least during the bull run, as lmsmedley put it)- patting ourselves on the backObviously "endlessly" means that we do it (did it) all the time, ad nauseum, without end. Agree?Patting ourselves on the back means that we unduly praised our own abilities with arrogant and self-congratulatory language. Agree?Now, let me stop here to draw an important distinction between "patting ourselves on the back" and celebrating our good fortune. There is a big difference, and if you don't buy the notion that the two are very different, then you should stop reading right now.It's one thing to be happy that things are going well and quite another to wax arrogantly about it. If you don't get the difference, we have little to discuss.Assuming you DO buy the difference, and still want to accuse us of patting ourselves on the back, let's press on.[WARNING - ADMISSION OF GUILT] - I went back and looked at most of the Rule Maker columns published on this site since inception. I did NOT look at Rule Breaker. Since the charge was levied at both Rule Maker and Rule Breaker, and because this is the Rule Maker board, I thought it enough to simply disprove the Maker part of it. That said, at the end of this post, I will comment on the line about David Gardner being the best portfolio manager in America. I'll also comment on the Foolish 4 "Crush" language.]The single largest body of work having to do with the Rule Maker portfolio is found right in the regular columns we've produced for more than 3 years now. You can browse the archives yourself, as I did tonight: http://www.fool.com/portfolios/rulemaker/2001/rulemaker2001.htmFrom those archives, I've chosen a fair number of passages from the actual text of the reports that I think is fairly representative of the managers' attitude towards this portfolio. I invite you to also look back if you so choose. The comments range from self-deprecating to tempered enthusiasm, long-term outlook, and downright humility.2/25/98 - Referring to Warren Buffett's 1996 letter to shareholders, I wrote "Mr. Buffett is infinitely more capable of teaching you than I am"2/26/98 - Rob Landley wrote: <<According to yesterday's closing numbers, three of our four Cash-King positions are already solidly trouncing the market. Admittedly this is pure noise in statistical terms: what any stock or set of stocks does over any short-term period of time is more or less random. It takes months or years for a clear picture to emerge>>12/28/98 - In Tom Gardner's year-end review, he wrote this, with a noticable lack of arrogance or trash talking:"the Rule Maker Portfolio has risen more than 31% since our launch in February, resulting in a ten-percentage-point lead over the S&P 500. Pfizer, Intel, Gap, Cisco, and Microsoft have each risen more than 40%. Microsoft, what I consider to be the principal Rule Maker on the planet, has climbed more than 80% since February. I hope you view these Foolish gains as having come not through a series of "hot picks" but rather through reason, logic, and a little Foolish glee." 12/31/98 - A few days later, Tom comments again on 1998 returns. Again, no arrogance, and an appropriate nod to the community that constantly contributes great stuff:"Its first eleven months have brought us 30 percent gains, beating the S&P 500 by more than eight percentage points and nosing out the Nasdaq. More than short-term gains, I hope and believe that the Maker portfolio has, with your help, brought to Fooldom a unique look at public companies and portfolio allocation. I can honestly say that my study this decade of overdog businesses has totally convinced me that owning the likes of Microsoft, Gap, Intel, and Pfizer is safer than owning managed mutual funds. And it's a heckuva lot more rewarding, with fees and taxes factored in."2/23/99 - After purchasing shares of Yahoo!, Tom wrote this in a report:"Yahoo! finished strong again today, up $7 to $152. That means that in less than a week, we've made 21% -- or more than $430 on our investment. But so what? As you can imagine, I consider the relationship between the stock's run-up and our recent purchase to be nothing more than a wonderful coincidence, a stroke of pure luck. Some may say that -- by reading charts, studying trading-volume patterns, and following the alignment of the planets -- they knew, with near certainty, that the stock was prepped for a 21% rebound in the days that followed our purchase. I can't make those claims, though."Patting ourselves on the back?3/25/99 - Even in the face of solid performance, Tom writes these cautious words:"And yet, though I am supremely confident about the performance of equities in America over the next twenty-five years, and though I love the ten companies we hold in the Rule Maker/Tweener portion of this portfolio, nevertheless, I can always worry about this account. After all, there are no guarantees in the public markets (and just as few in life)."Wait, shouldn't he have been promising market crushing returns in here somewhere instead of casting a cautious eye? Hmmm. 6/30/99 - Another thing you'll find littered through the Maker reports over the past three years are columns devoted entirely to the ways in which we've screwed up. Go back and look, there are at least 20 humbling pieces about how stupid we've been at various points. Here's one, which is one of the better pieces I've ever seen Tom write:"We fail so often that English can't create synonyms fast enough for us." http://www.fool.com/portfolios/rulemaker/1999/rulemaker990630.htm11/29/99 - Bill Mann enteres the Fool picture and talks about why we're so critical of some of the companies in the portfolio. Cheerleaders? Hardly. Tough Love, baby.http://www.fool.com/portfolios/rulemaker/1999/rulemaker991129.htm12/3/99 - Talking about Rule Maker gains, Matt Richey tempers enthusiasm with the following:"That's an average gain of 22.0% for Rule Makers, versus a comparable gain of 11.2% for the S&P 500. For Rule Maker, that kind of two-month gain is far better than what we can typically expect for an entire year."12/15/99 - I cheated here and pulled this from the Fool on the Hill, written by Bill Mann. Bill was a Maker manager at the time, so I thought it was fair to do. In one of the finest and most prescient pieces ever written on this site, Bill details the Anatomy of a Bubble. Don't say we didn't warn you, or that we were constantly touting the markets and patting our own backs.http://www.fool.com/news/1999/foth991215.htm12/31/99 - After a fantastic year, Phil Weiss recapped things this way:"For the second year in a row, we successfully beat the S&P 500, the leading large-cap benchmark, which returned 19.1%. All in all, it's been a pretty good year for our portfolio, and we have much to give thanks for. One thing that I can be sure of is that whether the market -- or more importantly, our Rule Makers -- are up or down next year, we'll be sticking with this same investment strategy."No high-fives. No trash talk. No arrogance. Just "we have much to give thanks for" as well as a shout out to staying the course, regardless of returns over the short-term. Bravo, Phil.2/16/00 - Bill Mann offers this advice about self-reliance. Did you listen? Did anyone? Are we all just lemmings?"Look out for yourself. You don't need The Motley Fool or the Wise analysts or the media to tousle your hair and tell you that your investment decisions are good. That proof will be in the long-term appreciation, or if you have made bad decisions, the long-term underperformance of your portfolio. Our agreement with you, or the agreement of a Wise analyst, will not help you to your goal, nor protect you from failure, for this simple reason: We don't work at Nokia. We don't manage Celera's research & development. We don't have any way of telling you whether Excite@Home (Nasdaq: ATHM) is going to reign supreme in the broadband access battle. Our opinions are just as valid as yours, but they are based only on our own due diligence, which we choose to share freely. But as far as you are concerned, your opinion is the only one that should matter."4/4/00 - The day that marks the Maker's best returns at any one time, 83.46%, you didn't read about how superior we are. You didn't read promises of incredible returns. You read the same message we've given since the beginning of Maker - "we're buying shares to hold for years, not minutes." How easy would it have been to scream from the rafters how much we were killing the market? We didn't.6/2/00 - In response to one of Bill Mann's columns, Tom offers his thoughts on market valuation and what we should do. In some of his musings, he ends up being wrong, but that's not the point. The point is that he's tempering enthusiasm and managing expectations:"Okay, I've gone on long enough. I'll conclude by saying that the market may still be overvalued. But even if it is, what should we do now? Sell and take a 30% local, state, and federal tax hit on our gains -- then try to get back in at the right time? Or should we hold our $500 a month in cash and let inflation beat it up? Or should we now let valuation guide our decisions rather than performance? Not from my vantage point. I say we continue adding money to the greatest companies available to us. And once someone provides a valuation tool -- with substantial accompanying evidence that it works over ten- and twenty-year holding periods (e.g., just saying it's a discount cash-flow model doesn't count!) -- then we can work to reduce the valuation risk together. Until then, I see nothing wrong with 1) continuing to enjoy 99% of what Bill Mann writes while 2) continuing to pursue the Rule Maker's labor-light, tax-deferred, commission-free growth -- whether that's 8%, 10%, 13%, or 15% a year. I think it'll beat the market's average return."Notice, no promises. Just "I think."6/15/00 - Matt Richey makes it plain as day:"Learning from past successes and mistakes is a great and very Foolish exercise. In fact, that's the whole point of our real-money portfolios, too. We expect to do some things right, some things wrong, but it's all instructive. That's why you shouldn't copy us. We're still learning, ourselves!"6/21/00 - On a day where Maker was still pounding the market by more than 10% annualized, here is Tom Gardner's pitch for an upcoming Rule Maker Seminar:"It is with that spirit that Matt, Zeke, Bill, Rob, Phil, and I will teach a Rule Maker Seminar in the month of July. We want to help you continuously improve as an investor. We want you to find the best large companies around which to bolster all of your financial plans. And I think we can achieve that, and more. If you're interested in signing up, click this link: Rule Maker Seminar Information and Sign UpPlease remember that we guarantee your satisfaction. If at its end you didn't like the seminar (how dare you!), let us know and we'll refund you in full -- no questions asked. That's the way we like to keep it: No buyer's risk for Fools."Where's the arrogant touting of returns? Why didn't he try and sell it by mentioning how much we were beating the market? Instead he emphasizes self-improvement.9/19/00 - On one of the last days that Maker was actually beating the market, Rich had this to say - "If we get pounded for losses one year, two years, or even more, yet believe the companies are among the world's best, we'll take our beating and continue holding. Personally, I don't expect the Rule Maker to beat the market every year. In fact, I expect it to lose, perhaps for an extended period. Overall, however, I expect to beat the market by a few percentage points, and for those gains to compound handsomely without the high costs of churn."If you're going to hang on his comment about expecting to beat the market by a few percentage points, don't bother. He DOES expect to, else he wouldn't be trying. Statement of fact and goal, not arrogance.------------------------------------------------------------------------------------Okay, I stopped there because that was the last period of time when Maker was beating the market and I'm reasonably sure we weren't talking any smack after that. I could be wrong.If you're this far, congrats. Before I move briefly to some topics unrelated to Maker, let me extend an invitation to you to do exactly what I have done and go back and find examples of hubris and patting ourselves on the back. I won't claim that we've never done it, but to say that we've endlessly patted ourselves on the back, at least as far as Rule Maker goes, is rubbish. In fact, a pretty good case can be made that we've done just the opposite as this compilation is pretty representative of the tone and composition of the larger body of work.Now, outside of the actual claim that lmsmedley made, some other folks widened the discussion to include examples of Foolish hubris, the two most damning being:"How to Crush the Market in 15 Minutes a Year" and..."Is David Gardner the best portfolio manager in America?"I said in an earlier post that if there were a single marketing line I could have back, it would be the one about crushing the market in 15 minutes a year, specifically the word "crushing." If we had just stuck with the original verb "beating," we'd have been fine. Even with all of the studies and backtesting, the Foolish 4 approach still beat the market by 1.74% and is probably advantageous for many tax-deferred accounts. Again, we made a mistake with that and most folks at HQ wish we could have a do-over on that one.As for asking if DG is the best portfolio manager in America, I have a few thoughts. For those who don't know, this marketing line came as we promoted our first ever Rule Breaker interactive seminar. We wanted to make a splash and we absolutely pushed the envelope. That said, unlike the "Crush" line, I don't wish I had this one back. If you remember at the time, the Rule Breaker portfolio was up a STAGGERING 1700% since inception, or 70.82% annualized. This compared to the Nasdaq up 38& annualized and the S&P500 up 25% annualized. Folks, that's insane. And, while I agree it might have pushed the envelope, it wasn't the craziest question ever asked. Someone puts up those kinds of numbers over 5 1/2 years and it might even be a fair question. Does the fact that the market got hammered change anything? No, Rule Breaker investing may still be the best strategy in America and DG might still be the best manager (though we should note that Jeff Fischer, Briand Lund, and others have been solid contributors to the Breaker portfolio management). I'll meet you in another 5 years and we'll see where we stand.Conclusion: Yes, we've done some taunting in our 7 years. Yes, we've made plenty of mistakes, both as a company and as portfolio managers. But to say that we've endlessly patted ourselves on the back is simply incorrect and ignores the true body of work we've produced, at least in Maker land, and I'm pretty sure Breaker land too. It's easy to throw out pithy one-liners and walk away. Don't do it. If you're going to stake a claim, then examine the whole body of work and judge it accordingly. If you still come to a different conclusion than I do, then at least we can shake cyber hands and agree to disagree without being disagreeable.Best,Bogey
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