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Back in October, I wrote a column that asked if Rule Maker was a valid strategy any more. I'd like to revisit that question with some new thinking and a finer point.

I believe that many investing methodologies follow a three-tiered hierarchy that goes something like this:

School of Thought - The philosophical body of work that describes an approach to investing. Call it an ideology or a philosophy. I call it a school of thought. Buffett followers have a quasi-understanding/definition of what Buffett's approach is. There is a "Buffett School of Thought." Lynch is the same way. Even Mechanical Investing, which might be perceived as very formulaic, has philosophical and logical underpinnings.

Strategy - For the sake of this, a strategy is an operational or tactical plan to put the tenets of the School of Thought into play. Maybe it's a particular screen you use, or a step-by-step checklist you have to make sure you're staying true to the School of Thought. Whatever "recipe" you happen to follow, this is your strategy.

Individual Ideas - These are the fruits of your labor. The individual investment ideas are the result of a sound School of Thought and a diligent strategy. Hopefully, if the first two are solid, you'll get solid ideas as well.

Now, back to the validity of Maker. I think the answer to the question of Maker's validity is largely going to be a personal one. I don't believe there is a "right" answer. How you personally answer it will dictate how you decide to proceed in terms of paying attention to it.

I believe that many people looked at Rule Maker only as a strategy, a formula, a recipe with specific rules to follow and ingredients to put in. Playing around with the ingredients in this recipe, depending on how radically you do it, can make for a very different outcome. If you take the chocolate chips out of chocolate chip cookies, well, they ain't choco chip cookies anymore. Right?

So, in many ways it's understandable to me that some people are frustrated/betrayed by the changes that have been made and even the rules that weren't followed. It's very understandable that some people will speak out and say "This is not Rule Maker." I totally sympathize and won't tell you that you're wrong. For you it is most definitely NOT Rule Maker anymore. And, in some ways, you have to decide whether you want to embrace or abandon the new "recipe" and the new "cook."

The alternate camp, and the one I find myself in, is that Maker is and has always been a School of Thought. The basic premise of this SOT is that it can be very profitable to invest in industry-dominating, large cap companies with excellent financials, particularly the balance sheet.

For sure, this is not an original idea. I don't think Tom Gardner would try and convince anyone that he came up with this bad boy. What Tom DID do is to put a friendly face on this school of thought and introduce a lot of people to the idea that it's okay to invest in large cap, market dominating companies. The emphasis on excellent financial statements was also refreshing because it did a lot (in my mind) to take people's focus away from simply P/E ratios and EPS growth rates. Those are important, but certainly not the whole story.

There were two major problems with Maker, one with the school of thought and one with the strategy. These are problems I believe Bill Mann is rectifying. First, the people managing the portfolio didn't really follow the strategy. That's going to screw you up right away. JDSU and YHOO are the poster children for not following the strategy (or even the school of thought). Time will tell whether Bill falls prey to these same mistakes.

The second major mistake, and one where I believe the school of thought was flawed from the start, is the fact that there really was no attention paid to valuation. Tom has admitted many times lately, in print and in person, that his largest mistake has been in not constantly revisiting valuation of the companies he owns. I don't think he'll make that error again. We'll see. Bill Mann is definitely considering valuation now, and it's a good thing.

So, where some people gave up on Maker because it no longer followed the recipe they came to know as Rule Maker, I almost gave up on it as a school of thought because it didn't consider valuation. I'm back on board as a proponent of the portfolio because I now believe it has solid philosophical underpinnings. I don't expect that the strategy will stay exactly the same. Some of the screening criteria may change in terms of how Bill finds the companies, but I'm hoping that the end resulting individual ideas will continue to be large cap, market-dominating companies with excellent financials, bought at a reasonable price. If not, I'll stop paying attention to Rule Maker.

Bottom line is this: your mileage is going to vary depending on how you view(ed) Rule Maker. For those who looked at it as a recipe that is no longer being followed, it's completely valid to say that it's not the same any more and that you're not buying into it. For those who view it as a larger school of thought with an ever-adapting strategy, then you might still be in the game.

I am.

Bogey
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