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Welcome to the Rule Maker Portfolio FAQ

Background:

Founded by Tom Gardner, the Rule Maker Portfolio invests in dynamic, cash heavy, market-dominating giants -- companies that make the rules for their respective industries. Investors in Rule Makers are comfortable enough with investing in individual stocks for the long-term that current valuation is not incredibly important. In fact, Rule Maker investors argue that the stocks of leading Rule Makers (Microsoft, Coca-Cola and Pfizer, for example) always appear overvalued, so too much of a focus on near-term valuation can be a detriment to would-be investors. Tom's model portfolio of this approach, the Simpleton Portfolio, trumped the market since 1995 before the Rule Maker opened with real money on February 3, 1998. The real money portfolio opened with $20,000, and $2,000 is added every six months. Tom and four Foolish co-managers (Matt, Al, Phil, and Rob) provide a daily column (www.fool.com/rulemaker). The philosophy behind the portfolio is most fully explained in Tom and David Gardner's 1999 book, Rule Breakers, Rule Makers, available at this link:

http://www.amazon.com/exec/obidos/ASIN/0684844001/motleyfool-pick/002-3423036-5905650

Mission Statement

The Rule Maker Portfolio aims to outperform the S&P 500 over time by buying and holding a basket of the best companies in the world. Each company is purchased with the intention of holding for at least five to ten years, so as to minimize commissions, taxes, and time spent worrying about investments. Ideally, this portfolio will provide education, amusement, and enrichment as we together focus less on daily stock prices and more on enduring business quality.

1. Where do I start?

The Rule Maker Introduction includes important background info and links to the portfolio's 11 guiding steps:

http://www.fool.com/portfolios/RuleMaker/RuleMakerIntroduction.htm

2. What companies are in the Rule Maker Portfolio?

Rule Makers (with links to buy reports):

American Express (NYSE: AXP)
http://www.fool.com/portfolios/RuleMaker/Trades/RuleMakerTrade_axp980521.htm

Cisco Systems (Nasdaq: CSCO)
http://www.fool.com/portfolios/RuleMaker/Trades/RuleMakerTrade_csco980622.htm

Coca-Cola (NYSE: KO)
http://www.fool.com/portfolios/RuleMaker/Trades/RuleMakerTrade_ko980220.htm

Gap (NYSE: GPS)
http://www.fool.com/portfolios/RuleMaker/Trades/RuleMakerTrade_gps980428.htm

Intel (Nasdaq: INTC)
http://www.fool.com/portfolios/RuleMaker/Trades/RuleMakerTrade_intc980212.htm

Microsoft (Nasdaq: MSFT)
http://www.fool.com/portfolios/RuleMaker/Trades/RuleMakerTrade_msft980129.htm

Pfizer (NYSE: PFE)
http://www.fool.com/portfolios/RuleMaker/Trades/RuleMakerTrade_pfe980202.htm

Schering-Plough (NYSE: SGP)
http://www.fool.com/portfolios/RuleMaker/Trades/RuleMakerTrade_sgp980820.htm

T. Rowe Price (Nasdaq: TROW)
http://www.fool.com/portfolios/RuleMaker/Trades/RuleMakerTrade_trow980203.htm

Yahoo! (Nasdaq: YHOO)
http://www.fool.com/portfolios/RuleMaker/Trades/RuleMakerTrade_yhoo990216a.htm

Foolish Four (with link to buy report):

Chevron (NYSE: CHV)
Eastman Kodak (NYSE: EK)
General Motors (NYSE: GM)
Exxon (NYSE: XON)
http://www.fool.com/portfolios/RuleMaker/Trades/RuleMakerTrade_fool4RP980309.htm

3. Why are the Foolish Four (FF) companies part of the Rule Maker portfolio?

The Foolish Four is a time-tested mechanical approach to investing in four value-oriented Dow heavyweights.

For more details on this 15 minute per year strategy, click into our Dow Dividend investing area:

http://www.fool.com/ddow/FoolishFourInfo.htm

3a. Why didn't the portfolio make its annual rotation to the new FF on 3/12/99?

We will make the switch around the beginning of next year because historical backtesting indicates that starting the cycle in late December or early January produces the best returns.

For more on this decision, check out lrobinso's post:

http://boards.fool.com/Message.asp?id=1030058000067001&sort=postdate

3b. What is the RP Foolish Four method?

There are many variations of the Dow Dividend strategy. The RP method utilizes a special ratio (the RP ratio) that measures dividend yield and stock price.

In this post, lrobinso explains further:

http://boards.fool.com/Message.asp?id=1030058000018001&sort=postdate

3c. The Foolish Four stocks have really underperformed lately. Why would I want to bother with this strategy?

The FF strategy has historically walloped the market averages, especially during flat-to-down market periods.

For a more in-depth explanation, see this post:

http://boards.fool.com/Message.asp?id=1030058000016003&sort=postdate

4. Is it necessary to buy all of the stocks in the Rule Maker portfolio?

Not at all. It's not necessary to buy any of the stocks in our portfolio when starting your own Rule Maker portfolio. We operate this portfolio in full view of the public to teach our principles so you'll be able to identify Rule Makers on your own. To borrow an old cliche, we want to give you the fishing tackle, not the fish.

Here, TMFVerve examines the process of getting to know companies one-by-one, en route to building a portfolio that fits you:

http://boards.fool.com/Message.asp?id=1030058000012001&sort=postdate

5. Which stocks should I buy?

You should only buy the companies that you've researched and determined have excellent prospects for years to come.

Stock ideas are all around you. In this post, TMFVerve discusses a handful of investment ideas that you might stumble upon in your very own home:

http://boards.fool.com/Message.asp?id=1030058000015001&sort=postdate

Here, TMFVerve discusses the advantages of the “buy what you know” strategy:

http://boards.fool.com/Message.asp?id=1030058000008001&sort=postdate

There are a number of potential Rule Makers to consider that are not in the Rule Maker Portfolio; lrobinso names a few worth consideration in this post:

http://boards.fool.com/Message.asp?id=1030058000054002&sort=postdate

In thinking about potential long-term investments, TMF Verve suggests asking this question:

“Does this company have some sort of edge that will allow its business to thrive for decades?"

http://boards.fool.com/Message.asp?id=1030058000100001&sort=postdate

When buying stocks, Angussb concludes that a Fool simply must do her own research:

http://boards.fool.com/Message.asp?id=1030058000037001&sort=postdate

6. How many stocks should I buy?

There are several considerations here. One is that as a general rule of thumb, it's best to avoid paying more than 1% of your purchase in commissions. So, if your discount broker charges $10 per trade, then you'd want to make minimum purchases of $1,000. It's also important to only own a number of stocks that you can allot time to follow on at least a quarterly basis. For these reasons, most Fools endorse holding between 5 and 15 companies, which is sometimes called a “concentrated portfolio” strategy.

Here are a few more ideas from TMFVerve on the advantages of a concentrated portfolio:

http://boards.fool.com/Message.asp?id=1030058000058001&sort=postdate

7. When should I buy Rule Maker stocks? Is now a good time?

This question actually depends as much on you as it does the companies, themselves. Try asking yourself these three questions:

- Am I only investing money that I will not need for at least 5 years?
- Do I believe the stock market is the best place to have my long-term investments?
- Do I have a really good understanding of this company's business and its future outlook?

If you answered yes to all three questions, then now is as good a time as any to enter the market. The stock market's twists and turns next week and next year will always be a mystery. Waiting for a big drop before getting in will oftentimes find you missing out on years of profitable ownership. When you're ready to commit your money for the long-term, now is as good a time as any to buy high quality companies.

8. Is there a way to invest in Rule Makers even if I only have a few hundred dollars per year to save?

Absolutely! In fact, it is when you only have a little to invest that it's the best time to develop a life-long habit of saving. Several Rule Makers have no fee dividend reinvestment plans (Drips) that allow you to invest as little as $10 per month – commission free!

For all the ins and outs of Drip investing, check out the Fool's Drip Portfolio:

http://www.fool.com/DripPort/DripPort.htm

9. How should I divide up my portfolio among the various investment strategies such as Rule Maker, Rule Breaker, Index fund, etc.?

According to Foolish poster the LanceMan (lrobinso), the answer depends on your tolerance for risk, your time horizon, and the amount of money you have to invest. Lance examines this tricky question in a couple of posts:

http://boards.fool.com/Message.asp?id=1030058000077001&sort=postdate
http://boards.fool.com/Message.asp?id=1030058000120004&sort=postdate

Focusing specifically on Rule Makers vs. Rule Breakers, Tom Gardner offers this advice for divvying up your bucks:

http://boards.fool.com/Message.asp?id=1030058000108001&sort=postdate

10. Should I let my winners run or rebalance my portfolio every so often?

This is a very debatable question. Some would say you should pare back your winners in order to “lock in a profit.” Here, Tom Gardner offers his somewhat contrarian opinion:

http://boards.fool.com/Message.asp?id=1030058000030001&sort=postdate

11. What is the Flow Ratio?

The Flow Ratio is an simple metric that the Rule Maker portfolio uses to assess the current portion of a company's balance sheet. For such a simple metric, it's surprisingly telling.

Rule Maker Step 7 has a full explanation of our beloved “Flowie”:

http://www.fool.com/portfolios/RuleMaker/RuleMakerStep7.htm

Recently, we slightly modified the Flowie. These Rule Maker reports detail the change:

Closing the Loophole of Short-term Debt, 3/26/99
http://www.fool.com/portfolios/RuleMaker/1999/RuleMaker990326.htm

We're Making Some Changes, 3/29/99
http://www.fool.com/portfolios/RuleMaker/1999/RuleMaker990329.htm

The Flowie is now defined as:

(Current Assets – Cash & Equivalents*)
- - - - - - - - - - - - - - - - - - - -
(Current Liabilities – Short-term Debt**)

*Cash & Equivalents = Cash, Marketable Securities, and Short-term Investments
**Short-term Debt = Loans Payable, Notes Payable, Short-term borrowings, and current portion of long-term debt

12. What are some good sources of financial info and company research?

For reliable financial information, there's simply no substitute for a company's annual 10K or quarterly 10Q, which are filed with the Securities and Exchange Commission (SEC).

In this post, lrobinso walks through the steps for getting this information at quote.com:

">http://boards.fool.com/Message.asp?id=1030058000043002&sort=postdate

Here are some other good sources of information:

http://quote.fool.com – company snapshots and SEC filings
http://chart.yahoo.com/d?s= - historical stock and index quotes
http://www.hoovers.com – good company background info
http://excite.transium.com/ - searchable index for business and trade publications
http://www.freeEDGAR.com – another great source for SEC filings

13. Will diligent study of my investments force me to sacrifice my free time?

We believe that you should spend no more than a few hours per quarter reviewing each company's financial results. Rule Maker investing is meant to require minimal on-going maintenance and maximum peace of mind. The buy-and-hold approach allows you to focus your few hours per quarter on reviewing the company's business performance, rather than its 5 minute stock chart. Then, you can spend the bulk of your time on the things that really matter in life, like important relationships, relaxing hobbies, or whatever might float your boat.

14. What is a Merchant King?

Ahhh, the Merchant Kings. The name Merchant King came about as a term to describe the great companies that have businesses based on efficient distribution – companies like Wal-Mart, Dell, and Home Depot. The discussion of Merchant Kings developed over a series of Rule Maker reports, as detailed in this post:

http://boards.fool.com/Message.asp?id=1030058000111001&sort=postdate

To see how the Merchant King model stacks up against the Rule Maker model, check out this post from TMFVerve:

http://boards.fool.com/Message.asp?id=1030058000010001&sort=postdate

15. What is the Cash King?

The Rule Maker strategy was originally called the Cash King until December 1998. At that time, the Cash-King Portfolio's name was changed to the Rule Maker Portfolio. This new name best reflects this portfolio's investment strategy. Nothing else has changed. Just the name.

Best of the Rule Maker Reports:

Cash King Launches (1/29/98)
http://www.fool.com/CashKing/1998/CashKingPort980129.htm

Coke and Microsoft (5/28/98
http://www.fool.com/CashKing/1998/CashKingPort980528.htm

Pfizer's Income Statement (6/9/98)
http://www.fool.com/CashKing/1998/CashKingPort980609.htm

Pfizer's Balance Sheet (6/10/98)
http://www.fool.com/CashKing/1998/CashKingPort980610.htm

Cisco's Greatness (9/30/98)
http://www.fool.com/CashKing/1998/CashKingPort980930.htm

The eBay Model (1/28/99)
http://www.fool.com/portfolios/RuleMaker/1999/RuleMaker990128.htm


Last updated on April 12, 1999

Ideas and suggestions are always welcome -- post them here.

Fool on!

Matt (TMF Verve)

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