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Author: RonForth1 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 18386  
Subject: Re: The Art of TMF Criticism Date: 3/3/2001 5:34 AM
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TMF truly does provide a valuable service to the public in terms of educating them, amusing them, and hopefully enriching them. Before I learned about TMF I thought that someone should do what it does, which is to encourage people to take control of their finances...a worthy cause.

However, TMF was itself very critical of the investment industry, and pushed very hard on the idea that anyone could beat the professionals, and beat the market consistently, with their brain tied behind their back. One only has to read TMF Investment Guide to confirm that this was the attitude.

So when the RM portfolio falls behind the S&P by 27%, is it not likely that similar criticism will be invited upon TMF? Not only that, but it is if you got in at inception that you would be 27% down on the index - I'm not sure how much you would be down if you were unlucky enough to start more recently, before the latest NASDAQ plummetting, or perhaps in March of 2000?

Thus, I feel it is fair game to question, and criticize constructively the rule maker strategy (despite the rather negative reaction one gets if one says anything bad about TMF or the RM Portfolio). The point being missed is that the rule maker selection criteria should select stocks that will rise to the top in adverse conditions, because the criteria should select excellent companies. So, why is this not the case at the present time? I have some ideas if anyone is open to a sensible debate on the issue, and is able to discuss possible flaws in the RM strategy without taking critical comments as personal afronts.

If I were to propose a possible flaw in the RM theory, it would be that the criteria lead to very good companies indeed...so good in fact, that everyone wants to own them...and the result is that the prices of these stocks get driven up to unrealistic levels, from which they must inevitably plummet. Inevitably.

I mean, look at the companies in the RM portfolio...look at the P/E ratios on some of them, even now (Yahoo!, for example). Stocks can trade at levels where there is no hope of the company ever meeting the expectations, no matter how low its debt or how high its margins. The RM portfolio then becomes a victim of its own success.

The other thing I find rather strange about the RM stocks is that they are the obvious ones, the Intels, Microsofts, Yahoos!, American Excesses, etc. Meanwhile, there are some great companies out there that are reasonably valued, and have many of the characteristics of a RM stock, but do not get selected. (Tellabs for example)

This situation is all too familiar...it parallels the way mutual funds are managed...buy the big names, ignore the less glamorous, but no less financially solid, lesser known companies. In this way TMF seems to have fallen into the same trap as the professionals whom it so eloquently mocked and derided earlier in its existence.

I am in Canada, and believe me, I've seen it happen here too...look at the Nortel fiasco...there is no way that stock should have been trading above about $20 US, even with their growth projections of 25-30%/year...at least not if an investor wanted to see a doubling in value in five years (I'm talking intrinsic value here, not the hype, fear, and greed driven market price value.) Yet it went to about $80 US, and when it dropped to $40 everyone was recommending it as a buying opportunity. No one looked at the fact that the earnings were small to non-existent...

I tend to use discounted future earnings to estimate the future intrinsic value of stocks, along the lines of Warren Buffett's approach as discussed in the books "The Warren Buffett Way" and "Buffettology". Using that approach, there aren't many stocks in the RM portfolio that will double in intrinsic value in five years, given current growth rate projections, if bought at current prices (and if bought before the recent crash, good luck at breaking even). Of course, they may double or go back up ten times in stock market price terms, but if so they will be trading on pure hype and not on the underlying value of the company. If so, there's no need for the Rule Maker rules, just be a momentum investor.

Now, before signing off, let me clarify a couple of things -

- I don't follow the Rule Maker approach, and I know TMF is not holding a gun to my head to do so.
- I can handle the losses I have incurred in investing and am not being critical of the RM due to any losses as a result of using its rules (because I don't use them, have no intention of using them, am actually ahead of the index, and would only touch two of the stocks in the portfolio: Nokia and Intel, anyway)
- I am a fan of TMF, I recommend the books and website to my friends.
- I would enjoy an an inteligent debate on how the RM rules might be modified so that success (defined as beating the index consistently over the long term) might be obtained

Any comments?

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