The late (though possibly not lamented) Rule Shaker portfolio would have been 10 years old this month.
Does anyone remember the old Rule Shaker portfolio? It certainly doesn't seem like it to me, but it's 10 years since it was started, back in September 1999.
The Rule Shaker was inspired by our fellow Fools in the USA, and their Rule Maker and Rule Breaker strategies, with all three being borne out of the conviction that there are some great companies out there that always look overvalued when measured using conventional metrics. Some are the established giants, like Coca-Cola who made the rules and whose businesses have such large moats around them that no newcomers can touch them. Others are companies like AOL and Google who, in their time, re-wrote the rules and revolutionized their industries. The best of the Rule Breakers, of course, go on to become the next generation of Rule Makers.
What we were looking for was UK companies that might fit that kind of mould -- though we were well aware that most of the world's business trendsetters generally tend to be from the other side of the Atlantic, so we didn't rule out US companies. So how did we do? Well, I think it's fair to say that if we'd kept it going and held on to our early purchases, we wouldn't exactly be close to a comfortable retirement yet.
But before I ponder the reasons why the portfolio wasn't a shining success, let's just look at a few of our purchases…
Telecoms
We bought shares in BT Group (LSE: BT-A), in November 1999 (our first purchase), and followed that by an investment in Vodafone (LSE: VOD) in January 2000. We paid an eye-watering £12 a share for BT at the time, and today it is languishing around the £1.20 mark. And Vodafone is down from the £3 a share it cost us, to £1.30 today.
We bought both companies mainly because they were the leaders in their fields at the time, and we felt that gave them some competitive advantage over their rivals. But with hindsight, a major mistake we made with BT was not giving enough weight to its status in a heavily-regulated sector. Though it was clearly way ahead of its rivals at the time, solely from having been the only company allowed to operate for so long, the regulator wasn't going to let that advantage stand. Also, internally, BT was still stuck with its old nationalized company culture, the legacy of which it still struggles with today. I think Vodafone deserved its status as a Rule Shaker, even though it was still an investment loss for us, but BT didn't.
We also bought shares in Psion (LSE: PON), in June 2000. Priced at £6.50 a share, Psion was the clear market leader in its business at the time. Its hand-held computers had been favourites for a long time, and its Symbian operating system project looked like taking the mobile phone market by storm. But Psion is a long way from being the market-leader these days, and its shares change hands for just 93p.
Great share, shame about the price
But how about ARM Holdings (LSE: ARM)? ARM really has turned out to be an industry leader. It has gone from strength to strength to this day, and has such a competitive edge with its innovative and productive design pipeline that it seems very unlikely that anyone is going to shake its grip on its market any time soon. But it was a lousy investment for us, costing us £7.28 a share, and now being worth just £1.25.
The best company to make its way into the Rule Shaker portfolio, without a doubt in my mind, was Autonomy (LSE: AU), which I have to admit I turned my nose up at when I was co-managing the portfolio -- it was bought by TMFJimmyC after he took over. I'll come back to Autonomy shortly, when I've pondered the lessons learned.
Lessons
It would be an easy excuse for us to simply say that we were investing at a really bad time, when the technology bubble was frothing away nicely. And as it turns out, it would have been impossible to make a success of the Rule Shaker at the time. But that really was our fault because, in our rush to try out the portfolio, to get some shares bought, and to be able to write about them, we let valuation fly out of the window. (Well, we actually had some quite heated discussions about valuation, but in the end our desire to just get invested won out).
I think we probably had some reasonable defence there, because, had our first three years of writing about the strategy said nothing more than "Nah, these are still too expensive", and we'd sat on cash for years, we wouldn't have had any readers.
But that really is the big lesson that I've learned from the Rule Shaker, and which all private investors need to learn -- to paraphrase the old property investing saw, the three things that matter most when buying a share are Valuation, Valuation and Valuation.
Autonomy?
Autonomy is a terrific company, and one that I've mentioned several times recently -- just look at its five-year share price chart. The problem was, we bought it closer to 10 years ago, before it fell off that huge cliff. Despite great year-on-year growth all the way from 2003 to today, anyone who bought at the peak during the tech boom would still be sitting on a loss of around 65% today.
So while the core Rule Shaker concept really is true -- great shares can often trade on high valuations for many years -- there is most definitely a price that's too high to pay for even the very best.
More from Alan Oscroft:
Alan owns shares in Vodafone.
