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Here's an article that could be seen in MS Money 99:


STREET WISE by Sam Jaffe February 1, 1999

"(More) Motley Advice From the Motley Fools
Picking the next Microsoft may not be as easy as the Gardners suggest

What does the Motley Fool stand for? That's the question that was gnawing at me after reading the new book Rule Breakers and Rule Makers: The Foolish Guide to Picking Stocks, by David and Tom Gardner, the brothers who founded the combination Web site media conglomerate called The Motley Fool.
If you haven't seen these guys before, you probably haven't spent much time surfing the finance section of Yahoo. They're the otherwise reasonable-looking guys wearing the harlequin caps and holding juggling pins, writing about stocks and investing. But what does the "Fool" metaphor mean? The Gardner brothers use it as a euphemism for their supposedly contrarian philosophy, as an appellation for their minions, and as a general catch phrase. It's the first part -- the philosophy, at least the one behind this book -- that I have difficulty swallowing.

I've kept in touch with The Motley Fool over the years as it has grown from a newsletter to a company-specific message board system to an online empire replete with daily news, model portfolios, and even a radio show. During that time I've held a fair amount of respect for these guys, who urge individuals to do their own investing based on logical, value-oriented techniques.

FOLLOWING A HUNCH. Then along comes Rule Breakers and Rule Makers, the Gardners' paean to growth investing. Hidden within their model portfolios are such gems as Amazon (AMZN) and Yahoo (YHOO), and it seems as though this book is an explanation of how those stocks got there. The book is divided into three parts: "Rule Breakers" explains how to pick the next hot growth stocks (such as Lycos (LCOS)); "Tweeners" explains how to tell whether to buy or to sell when a hot growth stock lies in the risk-filled corridor between being just another hot growth stock that is destined for a fall (Books a Million (BAMM)) and a sector dominator (Cisco Systems (CSCO)); and Rule Makers describes how to analyze the sector dominators so that you can own the very best ones Microsoft (MSFT).

The problem with growth investing is that it's a style that it is difficult to quantify and mathematically analyze. Value investing, by comparison, is a much more spreadsheet-intensive endeavor because it compares a current stock price to a set of historical benchmarks that you, the investor, determine hold water. Growth investing, despite all the pretenders who make it out to be more scientific than it is, is an elaborate process of following a hunch. For instance, what calculus could you use to determine that Amazon is worth as many billions as the market says it is today? Anybody -- and many do-- who claims to have the mathematical formula that justifies such a valuation is faking it.

That's not to say that Amazon isn't worth its market cap. Its risks are enormous, but its potential may be limitless. Such a situation leads to strange results in how the market values a stock. Not wrong, just strange.

If you accept the idea that Warren Buffett is the greatest investor of this century, then you must also accept the idea that Buffett is the smartest investor. That's because he employs what are essentially quantitative analytics to come up with the companies in which he invests. The great growth investors, people such as Gary Pilgrim and Foster Friess, while certainly very smart, cannot be automatically assumed to be smarter than the market. Yes, they spend all day poring over ledgers and spreadsheets, just like Buffett. But in the end it is their hunch factor, their gut instinct, that allows them to pick the Cisco Systems over the 3Coms and the Yahoos over the Excites.

140 PAGES TO TELL ME THAT? There are persuasive arguments in favor of both approaches, of course. So when I read a book about growth investing, I want it to convince me that it is more than a game of hunches -- that it's science, and not art.

And that is the biggest failure of Rule Breakers, Rule Makers. The first and second sections of the book make no attempt to tell the reader how to quantitatively differentiate between the next Microsoft and the next Visicorp. In fact, toward the end of the first section, the Gardners concede as much:

"By now, I hope it's evident to the reader that investing in Rule Breakers is something of an art. The subjectivity, the lack of numerical precision, and the vision that rule-breaking investing sometimes demands are all suggestive of art, not science."

After reading that passage, I felt like hurling the book into the fireplace. It took you 140 pages to tell me that you can't really tell me how to pick the next Microsoft, that it's an art that can only be felt in one's gut and not learned?

To be fair, the authors provide a set of six principles for determining which companies are "rule breakers". But these rules are rife with faults, inconsistencies, and pure silliness. For instance, the Fools claim that a sign of a rule breaker is that it has a market capitalization that is far larger than it should deserve when you compare it to its share of the market and its peers' market capitalization. But market capitalization is a factor of how the market feels about a stock, not about something that the company is doing internally to meet its goals.

ABELSON BASHING. Another "rule" is that the firm must have smart management and good backing. While that is certainly a good rule to have in choosing stocks, please point to one money manager or individual investor who disagrees with this point. And tell me how I can quantify the strength of a manager or the quality of the venture capitalists behind an IPO.

The most offensive "rule," though, is the one around which the authors focus a chapter bashing Alan Abelson, the author of Up and Down Wall Street, the front page column of Barron's. They claim that a company isn't really a rule breaker unless it is criticized by a member of the financial press as "grossly overvalued," and that it deserves even more points if that phrase is used about it in the Barron's column. The easiest way to spot a charlatan is when the person starts blaming "the press" for society's ills. Last time I checked, books were still published on printing presses, which would make the Gardners members of "the press." Does that mean that a company is a rule breaker if the Motley Fool calls it "grossly overvalued"? Please explain, because I'm confused.

The second section, "Tweeners," tells the reader little of interest, except to be wary of management change during the tweener stage. That's certainly good, albeit obvious, advice.

If the first two sections of the book lack quantitative measures, the last section overflows with them. Unfortunately, what is being quantified is not very clear. The result is a complicated worksheet in which the reader rates dozens of attributes of companies that are vying for "rule maker" status. These are the Microsofts and the Dells and the America Onlines of the stock market.

The problem here is that I really don't need a book to help me identify such companies. There are very easy methods, besides reading the newspaper, to determine which companies dominate their sectors so completely that they are worth far more than their peers and will continue to supply investors with above-average returns. Some of those simple measures are things like gross margin and net margin, which are mentioned in the book. There are others that aren't, such as the return on equity ratio or a handful of inventory turnover ratios.

THE REAL FOOLS. According to the Gardner brothers, however, you can tell a rule maker by such things as whether it displays a sense of humor in connection with its brand (a company gets one point if it does), and how much fun you have following the stock (again, one point). Yes, anecdotal evidence is important in making an investment decision, but it's ridiculous to try and quantify anedcotes. What are you guys: seat of the pants stock pickers or logical chart studiers? Make up your minds.

This book is not without its merits. It is written in the trademark Motley Fool style: fluid and rhythmic, and filled with cocksure attitude. But reading an online column written in such a way is far different from plowing through a book full of glib slickness. After the first few pages, I got into the habit of counting exclamation marks and rhetorical questions. Exclamation marks are literature's equivalent to a caveman's knotted club. An author uses one to knock the reader over the head with a point. I counted an average of one per page. My head was pretty sore by the end of the book.

Rhetorical questions are an effective tool to keep the readers attention. But the use of frequent rhetorical questions makes me feel like the author is trying to sell me something. At a clip of about two per page, the Gardners left me feeling like I was in a Kia salesroom.

So what are the Gardners trying to sell? Their Web site and advice are free and presumably the reader has already bought the book. Think about this: someday the Motley Fool will probably have an IPO. At that point, we'll know what these guys stand for. And we'll find out who the real fools are. "

Sorry for the long post -- what do you guys think???

Personally, I feel the guy's arguments are foolish (lower-case)...

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