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Author: TMFTardior Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 20179  
Subject: The Official Rule Breaker FAQ Date: 5/1/2001 2:28 PM
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The Official Rule Breaker FAQ
Latest Version: 5/1/01
By David Gardner and Numerous Other True Fools

************************************************
Welcome to the Frequently Asked Questions list for the Rule Breaker Portfolio discussion 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/Shopping/Product_View.asp?PRODUCT_ID=MF139_10

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

You can also find a great deal of information about us and our portfolio on the "About the Rule Breaker Investment Strategy" page: http://www.fool.com/portfolios/rulebreaker/about.htm

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) This is, has been, and will continue to be one of the most frequently asked questions in Fooldom. If you're an enthusiastic new investor just seeking advice about starting your own investment portfolio, please read The 13 Steps to Investing Foolishly (http://www.fool.com/school/13steps/13steps.htm), our systematic educational series written for new investors.

OK, now you've read through our Foolish Steps and you still have interest in buying some of the stocks we own. You have a few options.

First, as you'll already have picked up clearly from The Fourth Step, you should consider investing your savings in an index fund. We recommend it; it's safe, logical, profitable, and easy to implement. We think it should be everyone's first step out of Wisdom into Folly. You're never wasting time/money waiting. There will always be money to be made in the stock market. The worst thing an investor can do is be impatient. It's much more important that you establish your risk tolerance, your future needs, your time horizon, and all the other elements that are particular to you. Take you time and watch the market.

Second, you could (we suppose) just buy the stocks in our portfolio. If you're doing so for any reason other than that you've researched them yourself and feel comfortable making trading decisions on your own, then you don't have our blessing. Again, Folly is as Folly does... translated in this case to mean, you ain't a Fool if you're mindlessly taking other peoples' tips.

Keep in mind: we never put "Buy," "Hold," "Sell," or any other "recommendations" on stocks; we're not a brokerage firm interested in rating securities so that you'll trade them through us. We're just little-guy investor types who are showing you what we're holding. Again, 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 an unavoidable element of our approach. Could you stand it for yours?

Once more, we're fellow private investors, showing you what WE'RE doing and WHEN. Your portfolio is completely up to you. As long-time Fools know, the whole heart and soul of Folly is to make up your mind yourself, and accept the responsibility for your own successes or failures. That's the only way any Fool will ever learn and take true satisfaction from investing.

Q2) If you don't want people to mimic your picks, why did you start a real-money portfolio?

We set things up that way from Day One expressly so that anyone who wanted to COULD duplicate us, although we didn't do it because we want you to. We did it because virtually no other investment newsletter or magazine at the time made it in any way possible to duplicate -- we mean literally duplicate -- approaches or performances they espouse. Our reason for establishing portfolios simply comes down to our reformatory zeal regarding the somewhat questionable practices of the investment-advice industry.

Q3) What is the Rule Breaker Portfolio's goal?

A) As described in the "Rule Breaker Principles" at

http://www.fool.com/portfolios/RuleBreaker/RuleBreaker1.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 with the intention to hold, others buy to 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 in growth stocks that we think will beat everything else over time. Some of our picks have become 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 tend to produce greater returns over time... 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.

Q4) 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 web surfing and some library searching and post the answer to your own question. Members of the Foolish community can help you to improve any analysis that you post, 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 eight of these criteria:

Business Criteria: The business must...
1. Be in an important and emerging industry.
2. Be the top dog and first-mover with gusto in that industry.
3. Have a sustainable advantage.
4. Have good management and smart backing.
5. Have strong consumer appeal.
Stock Criteria: The stock must...
1. Have a relative strength of 90 or better.
2. Have the potential to appreciate ten times in five years.
3. Have been called overvalued by a significant constituent of the financial media.

(For more discussion of these points, see our Strategy in Brief page: http://www.fool.com/portfolios/RuleBreaker/strategyinbrief.htm)

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

Q5) 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. It will then fall into a cesspool of mediocrity, as it sheds its past glory to share its market with several other competitors, or even lose market share 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 business 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 its 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.

Q6) 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 intimately 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 "Don't Mimic Us" at:

http://www.fool.com/portfolios/dontmimicus.htm


************************************************
Specific additional credits for the FAQ go to the following Fools: SpectacularBid, IFindKarma, JimiH3ndrix.

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