The portfolio is looking for two types of company. First, Rule Makers - the big movers in their industries, the ones who can earn big profits by commanding the highest margins in their sector. We bought BT, the only company in the portfolio so far, on this basis. BT is not a perfect Rule Maker, but we feel it is close enough.
Second, we want Rule Breakers - those companies casting aside the old rules and making a whole new set for themselves. We've been thinking about them a lot this week. Rule Breakers operate in important and emerging markets; the most obvious one at present is ecommerce. The huge success of the US Fool's Rule Breaker portfolio is due largely to the impressive performances of three big internet names. Their share-price rises were possible as they were bought early in their lifetimes - when their potential was only just being recognised.
At the UK Fool, we've always thought we'd have an internet firm or two in our Rule Shaker portfolio, so what about those big three chosen by our Foolish American colleagues? Is there still room for Rule Breaker profits, or have we missed the boat?
By far the best performer in the US Rule Breaker portfolio is America Online (usually known as AOL), an internet service provider (ISP) and a big pioneer of the online revolution in the US. When the US Fools bought AOL back in August 1994, the price they paid, adjusted for subsequent stock splits, was the equivalent of just 46 cents today. Last week they traded at $84 dollars a share, for a gain of over 18,000 per cent. Not bad for a planned 15-year investment.
Online retail giant Amazon. com, which has come a long way from its early days of just selling books, comes in second. Bought in September 1997 at a split-adjusted price of $3.19, last week's price of $87 makes for an increase of 2,600 per cent.
The third member of the internet triumvirate takes the form of online auction house eBay. A relative newcomer, eBay was bought at $100 a share in February this year and now stands at $179, a gain of 79 per cent. Not quite up to the stellar rises of the other two yet, but it is still early days for eBay and 79 per cent so far this year makes it no slouch.
So do any of these three count as possibilities for the UK Rule Shaker portfolio? The real secret of success for Rule Breaker investing lies in recognising great new Rule Breaking companies as early in their lives as possible, and holding on through the following years as other investors begin to realise their future potential and start buying into them. Eventually, our Rule Breakers will either be beaten by new upstarts and their stars will start to fade, or else they will be so successful that they will become the Rule Makers of the next generation, but that's a story for another day.
Amazon may well be on its way to becoming a Rule Maker of tomorrow, but the absence of any profits yet puts that heady day some way off for now. As far as Rule Breaker profit goes, we've certainly missed out on the big rises so far, and the share price has been moving in no overall direction for quite some time (one of the Rule Breaker criteria is, you see, a currently rising share price). We'll pass on Amazon for the time being.
What about AOL? While AOL was certainly a strong Rule Breaker in the US, it is not calling the shots in the rest of the world. AOL's software and its email communications protocols are non-standard and are different to everyone else's. AOL's email functionality is quite inferior too, and so we have grave doubts about AOL's chances of becoming the next century's ISP Rule Maker. We'll pass on AOL then.
And eBay? Perhaps more interesting, eBay's share price rose to a high of over $200 earlier this year and fell back quite dramatically afterwards. It is back on the up again though, and the company does appear to be the trend-setter in online auctions. We'll come back to eBay again in the future: it might have potential for us.
But just following one of the US Rule Breaker purchases is not very educational, and education is what we are really after, so our attention is turning homewards. Can we find any great British or European Rule Breakers in the internet world?
We hope we can, and one of our Foolish crew has recently suggested that online security expert Baltimore might be worth a look. We will be analysing Baltimore in some detail shortly, so stay with us.
Any other suggestions are always welcome on our online message boards, to which all Independent on Sunday readers are cordially invited.
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An old British electronics company, which has spent the last couple of years refocusing itself, reported results last week. It is in the process of changing its name too, so who is it and what is its new name?
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Last week's answer: Vodafone AirTouch and MannesmannReuse content