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OK: Clearly, companies scoring 59 will tend to be better businesses than companies scoring 29 - but (?) does an 55 tend to outperform a 45 ? Over one month ? Over one year ? Over 5 or 10 years ? Should we use the numerical results as predictive quantitative indicators or qualitative discriminants (huh ? I mean does it make a difference if I get 52 or 47, or are only BIG differences of more than 10 or 15 or 20 points really relevent ?)


The Rule Maker scoring system is meant to focus us on the value drivers (e.g. high gross margins, low Flowie, etc.) that are indicative of a Rule Maker. Will a company that scores in the 30s underperform a company that scores in the 50s? Not necessarily. Dell is a good case in point. But, then again, I personally do not believe Dell's business model has nearly the barriers to entry that Rule Makers such as Microsoft, Coca-Cola, and Pfizer offer.

We could spend tons of time back-testing this system, but it wouldn't necessarily mean jack. I may well post some old numbers this weekend from the annual reports of Coca-Cola, Pfizer etc. to prove that the Rule Maker criteria have long identified top-notch businesses. But for the most part, I'll leave the back-testing to Long-term Capital Management.

We're not trying to box-up Rule Maker investing into one number. No, not at all, never. This quantitative system is meant to capture a number of key variables that are indicative of businesses with sustainable competitive advantages. Metrics such as high gross and net margins, cash outgrowing debt, and efficient working capital management as shown by the Flowie tell us quite a bit about a business's competitive position.

The Rule Maker Portfolio's goal is to identify, buy, and hold the best businesses. That's it. We make no claims as to the near-term returns of such businesses. My only prediction is that these businesses will outperform the market as a whole over long periods of time, especially beyond a decade.

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