Motley Fool's Rule Breakers, Rule Makers: The Foolish Guide to Picking Stocks
- Book Review,
by David Gardner
Amazon.com
For the past eight years, the U.S. stock market has been on a bull run the likes of which few have ever seen, making and breaking records almost every quarter. And for the last four of those years, David and Tom Gardner's self-described market-crushing stock portfolios have made the market's own incredible performance pale by comparison. In their third book, The Motley Fool's Rule Breakers, Rule Makers, the brothers reveal the methodology behind their stock-picking success, which is impressive. The Rule Breaker Portfolio (formerly known as the Fool Portfolio on their Web site) has risen some 650 percent since its inception in 1994, thanks to stocks such as America Online, McAfee, and Wal-Mart, while the Rule Maker Portfolio (formerly known as the Cash King Portfolio) has risen 440 percent on the backs of investments in Microsoft, Cisco Systems, and Intel. Fans of the Motley Fool, who with luck have prospered from the Gardners' timely advice, will no doubt love Rule Breakers, Rule Makers. The book is written in their usual humorous and self-congratulatory style--not only educational, but often aimed at making the pros on Wall Street wince, as they should. However, if you're new to the Motley Fool or to stock picking in general, you may do well by first considering one of their earlier books, You Have More Than You Think and The Motley Fool Investment Guide.
Amazon.com Audiobook Review
"Business is as simple as changing the rules at the beginning, and then making the rules at the end," say David and Tom Gardner, creators of the Motley Fool investment web site. Invest in the stock of one company that goes all the way from rule breaker to rule maker, and you get rich. But how do you tell the difference between a company that will follow this model--a Microsoft or a Wal-Mart--and a company that only appears to be a superstar, like Boston Chicken? The Gardners explain what takes a company from interesting maverick to the "default setting" of its industry--the name synonymous with its entire type of product, such as Coke, Kleenex, and Band-Aid. They throw in a little culture, too: readings from Shakespeare's Henry IV, Part One and Henry V illustrate the classical route from edgy rule breaker to regal rule maker. (Running time: 3 hours, 2 cassettes) --Lou Schuler
From Publishers Weekly
The sassy creators of the popular personal finance Web site and authors of the bestselling The Motley Fool Investment Guide (1997) now offer advice on how to evaluate the investment potential of specific companies. Here, the Gardners proffer five key principles by which to judge innovative "Rule Breaking" companies. Among them: "top dog-and-first-mover in an important emerging industry" (e.g., Amazon.com and Whole Foods Market); "sustainable advantage due to business momentum, patent protection, visionary leadership, or inept competitors" (Wal-Mart, Amgen); and "smart management and good backing" (Intuit). Yet, while the Gardners tell readers not to pay attention to analysts' expectations and earnings statements, they proceed to break their own rules, explaining that, as companies get more profitable and grow into "Rule Makers," investors should look to more traditional measurements such as sales-to-debt ratios, growth, etc. The book is certainly more fun than most stock-picking manuals, and the insights into company management are amusing. In discussing the poor performance of Boston Chicken, the authors write, "Rather than being inept, Boston Market wound up playing chicken with companies whose managers were smarter and more experienced hands at this game." However, novice investors may find the advice more difficult to follow than previous Motley Fool books. Author tour. Copyright 1999 Reed Business Information, Inc.
From Library Journal
The title does not exactly inspire confidence, but this tape by these popular and irreverent guides do offer prudent advice about picking stocks. "Rule Breakers" are rising innovative companies moving to a top ranking. Buying those types of stocks early in their rise could be beneficial if those companies come to dominate their field, often with strong marketing and brand recognition. The trick, not adequately addressed here, is for the investor to identify companies that will be strong over the long term and to do so before other investors. The advice is cleverly presented with a bit of humor. This is a worthwhile purchase for libraries that want to expand their stock investment tapes.AMark Guyer, Stark Cty. Dist. Lib., Canton, OH Copyright 1999 Reed Business Information, Inc.
From AudioFile
Tom and Dave Gardner have put together another tongue-in-cheek personal finance guide, this time presenting two approaches to understanding and picking stocks. Interspersed with quotations from Shakespeare, the book uses King Henry V as a model of how great companies break--and re-make--the rules. David reads the first half of the program, "Rule Breakers," while his brother, Tom, reads part two, "Rule Makers." Both brothers have prosaic, flat, unremarkable voices that are surprisingly fitting to their dry wit. Their humor and down-to-earth explanations make this an enjoyable and informative program. S.E.S. (c) AudioFile, Portland, Maine
Book Description
THE NEW YORK TIMES BESTSELLER From the bestselling authors of The Motley Fool Investment Guide and its successful, savvy prequel, The Motley Fool's You Have More Than You Think, here's an engaging, humorous, and practical stock-picking guide, packed with Foolish insights, that caps off this invaluable personal finance trilogy from David and Tom Gardner. The Motley Fool's Rule Breakers, Rule Makers presents the sophisticated, yet easy-to-understand stock-picking methods that have kept the Motley Fool portfolio beating the Standard & Poor's averages by more than 30 percent. The key is investing in small start-up companies that have historically offered the greatest investment returns (the "rule breakers") as well as huge companies that maintain legal monopolies in their fields (the "rule makers"). The Gardner brothers explain * How to identify the best investments in today's public markets: the rule breakers and the rule makers * The definition of a "tweener" -- a maturing rule breaker -- and how to detect the Tweener Death Rattle * When to buy and when to sell, and how to manage your portfolio on a regular basis In their first two books, the Fools got you started in investing and freed you from the fees and worries that Wall Street's Wise Men have been imposing on investors for decades. Now, by sharing their methods for picking rule breakers and rule makers, they guide you through a stock market that has seen company valuations soar to unprecedented heights and that promises to continue providing roller-coaster thrills. The Motley Fools are the ultimate companions to bring along for a safe, fun, and profitable ride.
About the Author
David Gardner and Tom Gardner are the founders of The Motley Fool (www.fool.com), the world's most popular on-line financial site. They reach an audience of millions through their bestselling books, a syndicated newspaper column, and a national radio show. They live in Alexandria, Virginia, where Fool Global HQ is based.
Excerpt. © Reprinted by permission. All rights reserved.
Chapter 1 Rule Breakers Introduction: Evolution I say the earth did shake when I was born. -- William Shakespeare, Henry IV, Part 1 (III, i) As Charles Darwin did before him, the celebrated Harvard paleontologist Stephen Jay Gould has made much ado -- has filled whole books, actually -- about one of our society's common misconceptions regarding evolutionary theory. Namely, that many of us fallaciously view evolution as a process of continual improvement, as if our species -- all species, in fact -- were following a constant upward progression from less complex to more complex, from less intelligent to more intelligent, from weaker to stronger. We tend to think this way because we all tend to place our own species (not without some cause, mind you) at the height of the "evolutionary pyramid." It is we, after all, who have developed selfconsciousness, who are capable of creating tools to build everything from fast cars to junk cereals, who have thought things through enough to touch the moon. And we're the latest thing, as species go, the most recent arrival to the party. (Humanity has only been on the planet for the last 45,000 years, meaning that our character's first appearance comes in the latest chapter, 100,000, of our planet's long-running drama.) Given all this, one can easily see how some might conclude that evolution must involve constant improvement: the most creative species of all has been the most recent development on planet Earth. Everything must have been a prelude to the Coming of Man. Gould counters this fallacy by explaining that evolution doesn't necessarily entail something getting better and better, only that it is continuing to adapt successfully to changing environments. He would argue, for instance, that ff global environmental conditions suddenly made it advantageous to be stupid, only the stupid among us would survive and eventually propagate -- that's just natural selection, the principle at the heart of the theory of evolution, at work. Of course, that's a silly example, but it's useful in distinguishing what is "true evolution" from what isn't. Natural selection simply causes species to evolve in a way that best suits their given environment; it does not by definition result in species that are inherently and progressively "smarter," faster, stronger. If you're wondering just what the heck this has to do with a business-and-investing book, wonder no more. Consider this: Natural selection, the crucial driving force of organic evolution, is the cleanest metaphor I can think of for what drives success in business -- and success is of utmost interest to business managers and long-term investors alike. In the context of this book, the things being naturally selected are not advantageous genetic traits, but, rather, the advantageous characteristics of a business model or strategic plan, as well as those of a particular workforce capable of dreaming up such plans and executing them. The agents of natural selection in business are not, of course, environmental conditions, but customers and their needs. It is customers who naturally select businesses, and thereby cause industries and economies to evolve over time. Some companies will win and some will lose, and what separates the one group from the other will be its ability to adapt to the needs of customers in changing consumer and marketplace environments. If you understand this, you're already well on the way toward understanding what a Rule Breaker is. Before progressing, let's make this really clear: organic evolution = business evolution competing species = competing businesses natural environment = marketplace environment natural selection = customer selection OK, with that said, know that the evolution of the business world has fixed a number of rules that have become so ingrained as part of the status quo that many of us take them for granted. Do these examples feel like rules to you? They do to me: * Typewriters will never come back to displace computers. * By virtue of their sheer global dominance, Coca-Cola and PepsiCo cannot be dislodged as the number-one and number-two market leaders in soft drinks. * What worked yesterday in fashion will be flouted today but could emerge tomorrow as the Next Big Thing. * Home-cooked meals are yielding to eating out, takeout, and delivery. * With its superior technology and near monopoly, Intel cannot be dislodged as the market leader in microprocessors. These truisms and many others form the "rules" of our time; they define the way our world works, the way things are -- the way that business has evolved. Most businesses did not have a part in creating this status quo, but they probably still benefit from it, as in some cases they work to supply the beneficiaries (the Rule Makers), or, in most cases, at least buy from them. But the only constant, as we've heard again and again, is change. And thus the changing needs of customers change the business environment and create opportunity. Indeed, it is when established industries fail to evolve that opportunities arise for the Rule Breakers. So let's make like Scrooge and spend some time gazing back at the rules of Business World Past. Do these sound familiar? * Ma Bell telephony provides consumers with the cheapest, most efficient way to exchange information when not face-to-face. * World markets are best understood by matching them with their political alignments; economies are NATO-aligned, Soviet-aligned, or other. * Superstores are the natural, most profitable, and emphatic endpoint to retail, the final stop in a progression that ran from mom-and-pop to boutique and on through mall. * The bubonic plague is incurable. At one or another point in history, each of these was a rule every bit as unwavering as our previous set of examples. Yet now, they are all in tatters. This list could go on and on, too: the horse-and-buggy -- hello, Ford the candle -- hello, Edison the iceman came, then -- hello, refrigerators! -- the iceman went! How does this happen? Remember the fallacy that Stephen Jay Gould points out in our ideas about evolution: most of these companies or industries are guilty of it. Once-successful companies that ultimately became unsuccessful believed in and focused on constantly improving, rather than adapting. Their research and development money went to upgrade their existing products and their marketing money was spent on promoting these products; they were always looking to cut costs, and their competitive research was confined to the study of industry players who were playing the same game by the same set of rules. Companies like this are doing all the right things, but it may be the beginning of the end. For in such circumstances, the original business solution that brought a company into being in the first place may suddenly be lost. But whether due to myopia, arrogance, fear, or sheer inertia -- or a combination of these -- the company's in too deep and can't turn back. Time for some competitor, some naughty entrepreneur, to come in and kick down the doors, and the one thing you can say for sure about capitalism is that this is exactly what will happen: someone's going to start breaking all the rules. As an investor, you want your money riding on that entrepreneur. As a businessman, you should aspire to be that entrepreneur. (And as citizens and customers, we will all benefit hugely due to that entrepreneur.) This part of the book attempts to define, locate, and illustrate what sets these Rule Breakers apart. Each of the following half-dozen chapters will introduce and examine one of the Rule Breaker's attributes, all six of which must be present in any true Rule Breaker. Why Rule Breakers? Why bother reading on? Two reasons: First, Rule Breakers provide investors with the most dynamically high returns achievable on the public markets -- period. Inspiration enough? OK, if not, consider this (we're thinkin' T-shirt here): Rule breaking investors have more fun. (It's true!) Second, Rule Breakers provide inspiration and guidance to all business people, be they managers, planners, or executors. Rule-breaking is capitalism's special sauce, its tastiest and most necessary condiment. So, let's spend some time together eating like gourmands and studying like chefs. Then, be the sauce. Copyright © 1999 by The Motley Fool, Inc.
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