By David Gardner
updated February 3, 1999

This page unveils the first of what will likely be six official principles of this portfolio, principles which will occupy a permanent place in this space. Each of these principles serves as an overt statement of our methods and approach as we invest our own real money right here before you. In many ways, of course, we lay out our methods and approach every day in this space and in all of our buy and sell reports. But heretofore, we had never laid out an explicit description of the Rule Breaker portfolio's mission and its "truths," the truths we may hold to be self-evident but nevertheless need to make explicit! So without further ado, here is one of the six:

We consciously take on lots of risk, believing that for experienced and Foolish investors, high risk will lead to high reward.

For this reason, copy this portfolio at your own risk. Of all the portfolios at The Motley Fool, this is the most aggressive, the most suitable for those who can afford to lose lots of money in pursuit of lots of money. Mimic any aspect of this portfolio at your own risk, because we're taking lots of risk with it.

How do we measure risk? We don't really; it's only intuitive. We have little interest in the traditional measures of risk used mostly by the Wise -- things like "beta" that purport to measure risk based on the volatility of a stock or a portfolio. A better measure of risk might just be market cap -- the higher the cap, the lower the risk. We often buy small-to-mid-cap stocks in this portfolio, so that's one evident example of conscious risk. That's OK -- the smaller the acorn, the larger the oak. (We hope!)

We also take risk in our portfolio allocations. At various points in this portfolio's history, one or two stocks have represented huge slices (30%+) of the overall pie. This has been used by the Wise as a criticism of the portfolio, the idea being that (1) we got lucky with one good stock in the first place, explaining our outperformance, and (2) we're being irresponsibly risky in allowing such stocks to occupy as much of our holdings as they do.

Answering these, we have never put more than 10% of our portfolio into any single holding. The only way a given stock begins to look overweighted is because it appreciates at three times the rate (or more) of the rest of the portfolio. Why did that happen in the first place? Ask yourself. Our own answer is that we found a good investment, and we are loath to start selling off portions of it in order to fund what will most likely be lousier investments. That's poor pinochle. Warren Buffett, the self-made multibillionaire who is the richest investor in the world, has had upwards of 30% of his money at various points in Coca Cola. Crazy, eh? To some, we suppose. Another word we might choose instead is "Foolish."

Finally, if you want to beat the market as a private little-guy investor, the way to do it IS through your best one or two stocks. Those who buy and hold a single great company for a decade or more will almost always outperform the market in their investing. This remains one of the great secrets -- a secret that will remain hidden by the institutions who simply cannot and will not do this. Note again, if you will, the example of the greatest market outperformer of all: Warren Buffett.

From time to time we have balanced the portfolio by selling off a portion of a big winner, but we generally do that much later than most people expect and only when we believe that the money will be equally or better invested in some new selection.

There you have one of our six principles: an explicit statement that we are taking on risk consciously in the belief (demonstrated effectively so far) that greater risk will lead to greater reward. This approach is not for everybody -- indeed, it is not for most. That's why we offer numerous other portfolios here at The Motley Fool. For many investors, it may be enough to choose to investigate just one or two stocks out of this portfolio as they look to round out their own portfolios.

For those who are familiar with our latest book, Rule Breakers, Rule Makers (now available for online purchase), please note that the attributes of a Rule Breaker that I lay out there are not to be confused with our portfolio principles. Those attributes describe a Rule Breaker; these principles are simply our guides to managing our Rule Breaker portfolio. Hope I've made that clear!

Finally, each of our six portfolio principles is not an immutable piece of sculpture. We purposefully offer them here in flexible form in order to gauge and garner your reaction. We would love to receive e-mail about the principle above (and each one), particularly from those who enjoy engaging in the thinking that underlies what we're doing here. If you have appreciated the explicit statement, let us know. If you see some way to improve on it, please let us know. If it's not clear, let us know about that, too! We're here for ya! In fact, without you, we wouldn't be here. That's at the core of Foolishness.

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