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Welcome to the Rule Maker Portfolio FAQ


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 (Intel, Cisco, Pfizer, Microsoft, and Yahoo!, to name a few) 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, followed by two deposits of $2,000 during 1998, and monthly deposits of $500 beginning in July 1999. Tom and five Foolish co-managers -- Matt Richey (TMF Verve), Rich McCaffery (TMF Gibson), Phil Weiss (TMF Grape), Rob Landley (TMF Oak), and Zeke Ashton (TMF Centaur) -- provide a daily column ( about all aspects of Rule Maker strategy. 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:

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.

The portfolio's historical returns are available at this link:

1. Where do I start?

The Rule Maker Introduction includes important background info and links to the portfolio's 11 guiding steps. This is a must-read for those who want to fully understand the Rule Maker strategy:

2. Which companies are in the Rule Maker Portfolio?

Rule Makers (with links to buy reports):

American Express (NYSE: AXP)

Cisco Systems (Nasdaq: CSCO)

Coca-Cola (NYSE: KO)


Intel (Nasdaq: INTC)

JDS Uniphase (Nasdaq: JDSU)

Microsoft (Nasdaq: MSFT)

Nokia (NYSE: NOK)

Pfizer (NYSE: PFE)

Schering-Plough (NYSE: SGP)

T. Rowe Price (Nasdaq: TROW)

Yahoo! (Nasdaq: YHOO)

3. 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:

4. 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:

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

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:

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?"

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

5. 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:

Another twist on the concentrated portfolio approach is the “Index Plus a Few” strategy:

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

The starting point for answering this question is to consider the stock market's historical performance versus other investment vehicles, such as government bonds. Consider these average annual returns for 1926-1997:

Stocks -- 10.6%
Bonds -- 5.2%
Inflation -- 3.1%

These numbers are from Jeremy Siegel's outstanding Stocks for the Long Run (a great review: Based on his research, Siegel concludes that for long-term investors, stocks are always the best choice.

As you noodle over stocks' historical outperformance, also ask yourself these important questions:

- Am I only investing money that I will not need for at least 5 years?
- Do I have a really good understanding of this company's business and its future outlook?

If you answered yes to both, 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.

7. 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.

Here's an article about some Rule Makers that offer Drip plans:

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

8. 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:

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

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

This one's open to debate. Some would say you should pare back your winners in order to “lock in a profit.” Here, Tom Gardner offers his somewhat contrarian opinion:

10. What is the Foolish Flow Ratio and how do I calculate the darn thing?!

The Foolish Flow Ratio is an easy numeric that the Rule Maker portfolio uses to assess how efficiently a company manages its cash. For such a simple metric, it's surprisingly telling.

Here's the full story on what the Flow Ratio is and how to calculate it:

Do note that the Flow Ratio's formula has changed ever so slightly since the original publication of Rule Breakers, Rule Makers. These Rule Maker reports detail the change:

Closing the Loophole of Short-term Debt, 3/26/99

We're Making Some Changes, 3/29/99

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

TMF Grape has written two ESSENTIAL reference pieces that will greatly aid you in calculating the Flow Ratio:

Current Assets on the Balance Sheet, 6/27/00

The Many Faces of Debt, 8/4/99

11. Does the Motley Fool provide any tools to help me find Rule Makers?

Glad you asked! We sure do, two spreadsheets are available here:

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 10-K or quarterly 10-Q, which are filed with the Securities and Exchange Commission (SEC).

Here are some good sources of information: – company snapshots and SEC filings - historical stock and index quotes – good company background info – another great source for SEC filings

Here's an article that walks you through the process of finding financial information:

Also, be sure to check out our Motley Fool Research coverage of several Rule Maker portfolio holdings:

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

We believe that you should need no more than a few hours per quarter to review 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. That way, you can spend the bulk of your time on the things that really matter in life, like important relationships, relaxing hobbies, or… whatever floats 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 Merchant King model is best explained in this article by TMF Oak:

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

15. What is a Cash King?

The Rule Maker strategy was originally called the Cash King Portfolio 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)
Here's how it all got started.

Coke and Microsoft (5/28/98)
Tom talks about two of his favorite companies and what makes them special.

Cisco's Greatness (9/30/98)
Tom walks through the networker's financials and expansion opportunities, and comes away impressed.

The eBay Model (1/28/99)
Tom discusses the power of investing in a network.

The Statement of Cash Flows (8/23/99)
Matt explains the incredible importance of this oft-overlooked financial statement.

The Early Warning Flow (9/3/99)
Zeke gives a personal example of how the Foolish Flow Ratio could've saved the day.

A Marginal Opinion (12/8/99)
Matt explains why he doesn't believe in using margin.

Last updated on June 30, 2000

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

Fool on!

Matt Richey (TMF Verve)

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