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No. of Recommendations: 21
So now there are THREE pharmaceuticals in the Rule Maker portfolio? I confess I have a hard time comprehending that there are three companies in the same industry, each of which is the Rule Maker. Especially when the biggest and most profitable in the industry, MRK, isn't one of the three.

I can sympathize with the RM's desire to load up on pharmaceuticals. Unlike all the other stuff in the portfolio, these stocks have been doing well. Hey, if they'd just bought JNJ instead of YHOO last year, how much better would the portfolio look today?

The trouble is that this is looking backwards. The great time to buy JNJ was last year or the year before. (Yeah, it might do okay from here, but you've lost the easy part of the appreciation.) The time to buy YHOO (assuming that there's ever a time) is probably now (or, even better, after it gets beaten up a little more). But the RM port is tempted by pharmaceuticals now because they look really good. Despite this market, they've all gone up, which is certainly a mark in their favor to people who like to buy stocks when they're hot. JNJ is up almost 30% over the past 12 months. The bear market has barely touched this group. Things are looking pretty good. The Rule Maker always buys when things look good.

If history is any guide, at some point the pharmaceuticals will all tank again. They suddenly won't be looking like Rule Makers. The RM port, having bought them when they're looking good, will watch them sink beneath the waves. They'll see shrinking margins, expiring patents, threatened new regulations -- and they most likely will conclude that these companies are no long Rule Makers.

At this point they'll search about for some other company that's doing very well in a hot industry. Its current numbers will meet the Rule Maker criteria (or at least a couple of them). Everybody will love it. It will have great margins, unlimited horizons. True, it will be very expensive -- but then, you've always got to pay up for quality, don't you? They'll buy it.

And then they'll try to figure out why they're underperforming every single fund that Mario Gabelli has ever run.

There's something fitting about the idea of Buffett buying GAP after the Fool sells it.
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