Finding companies with sustainable competitive advantages is a key step toward accruing market-beating returns. That makes the Ruler Maker's guide to successful investing worth knowing.
Rule Breaking is also worth knowing -- assuming it can be defined. Sure, you may hit a home run or a grand slam to offset a number of speculative losses, but how does one ensure that a portfolio will contain enough of the latter and not too many of the former? An investor can know a company inside and out, including how many patients will benefit from Genzyme's (Nasdaq: GENZ ) Renagel for the control of serum phosphorus in patients with kidney disease. But determining a company's intrinsic value is what really matters, and Rule Breaker investing is too vague to help me do that.
To me, the Rule Maker strategy helps make investing less uncertain. If we can see that a company has dominated its industry for a decade or more, we can be more confident that it will dominate for years to come and earn well in excess of its cost of capital. Since I started the biotechnology example, let's stay on it. I am much more certain that Amgen (Nasdaq: AMGN ) and Genentech (NYSE: DNA ) will be around for the next decade since they have already established industry dominance and solid financials. Next I can focus on estimating their intrinsic values and finding an appropriate margin of safety with which to buy the underlying stock.
Overall, Tim is right: Investing is done best when it is well informed. Benjamin Graham did admit that there is room in one's portfolio for speculating. He recommended an approach of "the smaller the better," but he did concede that there is such a thing as intelligent speculation. A reasonable amount to devote to such speculation, he said, was 5% to 10% of a portfolio, which means 90% to 95% should be committed toward securities that qualify as investments.
It's settled, then: Devote 95% of your time on Rule Maker investing and 5% on Rule Breaker speculating. Focus most of your energies on Coca-Cola (NYSE: KO ) , UnitedHealth Group (NYSE: UNH ) , or Wal-Mart (NYSE: WMT ) , but also consider devoting some time to finding the next beverage giant, health-care home run, or retail titan.
And be sure to keep those percentages in mind when weighing who you think should win this round of Dueling Fools.
Coca-Cola, UnitedHealth, and Wal-Mart are Inside Value picks. To see what other great stocks have been recommended to subscribers of the market-beating newsletter service, take a free 30-day trial today.
UnitedHealth is also a Stock Advisor pick.
Fool contributor Ryan Fuhrmann is long shares of Amgen but has no financial interest in any other company mentioned. The Fool has an ironclad disclosure policy. Feel free to email him with feedback or to discuss any companies mentioned further.