This Is How We Beat the Market

Marketwatch's Peter Brimelow is out with his annual list of the country's best-performing newsletters.

Motley Fool Rule Breakers -- the growth-stock service that I am honored to be a part of since its 2004 launch -- cracked the top five with its 36.5% return. This isn't a fluke. Rule Breakers cracked Brimelow's top 10 list a year earlier with a whopping 68.3% return.

In retrospect, I'm more impressed by our performance in 2010 than 2009. The absolute returns may be lower, but everything was a bottle rocket in 2009. Last year was a more challenging market, and our stock-picking service stands out against many of the winning services that specialize in trendy precious metals that had a blazing 2010.

However, I'm not here to pat my own back or gush over the analyst team that David Gardner has assembled. I want to share the wealth, peeling back the curtain just enough to show you how we beat the odds by scoring market-thumping results in back-to-back years. If just one of the three secrets I'm sharing hits home for you, I'll have succeeded.

I'll also prove my humbling ways by singling out sheepish confessions along the way.

1. Every Warren Buffett needs a Charlie Munger
It may seem out of place for a growth-oriented service to invoke the Benjamin Graham-coached value investing brilliance of Berkshire Hathaway (NYSE: BRK-B  ) , but the teamwork principle is the same.

Investors need like-minded investors to bounce off ideas. There's nearly a half-dozen analysts in David's Rule Breakers team. We may have our individual areas of specialty, but we're all passionate about growth investing. We meet weekly, with at least one monthly session devoted entirely to discussing new stock ideas and the picks already residing on our scorecard.

My first humbling confession is that I have brought up plenty of duds during our monthly stock talk chats. I was bullish on American Public Education (Nasdaq: APEI  ) , Joe's Jeans (Nasdaq: JOEZ  ) , and MakeMyTrip (Nasdaq: MMYT  ) at higher price points over the past year. I liked American Public's marketing emphasis on military personnel for its post-secondary Web-based campuses. I felt that Joe's Jeans' pricey jeans and celebrity-donning allure would be huge heading toward an economic recovery. As India's leading online travel portal, I was hoping it would follow the flight trajectory of the top sites in the United States and China.

Thankfully, the rest of the analyst team was able to poke enough holes into these theories to nix these nominations, while still opening the door to some of my better-performing suggestions that became official recommendations.

Don't get me wrong. Individual investors can -- and have -- beat the market on their own. However, it can only help to have some incremental perspective. Whether it ultimately results in validation or serves up a devil's advocate that you may have missed, there is strength in numbers if you're leaning on sharp investors.

There's a good chance you don't have that kind of team around the house or even by the water cooler. Your spouse, parents, or co-workers may think that cash flow is a plumbing problem or that a P/E ratio is a gym class metric. It's OK. We live in a virtual age, and online discussion boards -- including the dedicated forum for Motley Fool Rule Breakers subscribers as well as the free community hub at Fool.com -- are there to cash in on the wisdom of crowds.

2. Knowing when to sell -- or not to sell -- is as important as when to buy
It's time for a sheepish confession.

Nine months ago, I was having my doubts about Baidu (Nasdaq: BIDU  ) . China's leading search engine had soared 630% since I initially recommended it to Rule Breakers subscribers three years earlier. It was a huge run, and I didn't want to be greedy.

David and the rest of the team talked me off the ledge. There was nothing wrong with Baidu fundamentally. The valuation concerns were real, but nothing that a few market-thumping quarters couldn't tackle. Baidu remains an active pick, and its 1,097% return since being originally singled out is one of the many reasons why the newsletter has made the cut on Brimelow's list for two years running.

Investors spend so much time on deciding what stocks to buy -- and when to buy them -- that they often miss the significance of when to sell -- and when not to sell. Obviously, this is yet another example where having a team to lean on paid off.

3. The uglier the industry, the sweeter the disruption
Some of the bigger winners for the Rule Breakers team have come from upstarts that are shaking up stagnant industries.

Green Mountain Coffee Roasters (Nasdaq: GMCR  ) and Chipotle Mexican Grill (NYSE: CMG  ) are two of my recommendations that have more than tripled since being singled out to subscribers.

Folks had been brewing coffee at home for generations, but Green Mountain's Keurig single-cup system was delivering premium brews in a hassle-free platform. Chipotle rose to greatness as existing quick-service burrito rollers Baja Fresh and La Salsa were being unloaded by fast-food giants. However, the "food with integrity" hook, simple yet tasty menu, and lightning-quick assembly lines kept comps rising at Chipotle even during the recession.

My only sheepish confession here is that I didn't recommend these stocks sooner. I owned a Keurig machine for well over a year before bringing up the stock behind the indispensable appliance.

Roll up those sleeves and dive in with me
Can we turn heads by making Brimelow's list three years in a row? Our strategy remains sound, and the opportunities should only intensify as the global economy improves.

You're invited to get an early jump in 2011 by investing alongside us as part of the growing Motley Fool Rule Breakers community. Even if you decide that it's not for you, don't forget the three secrets to the service's success:

  • Find your own Munger.
  • Spend more time on your sell decisions.
  • The prettiest stocks are often kicking up a fuss in the ugliest of industries.

If you want to see what the Rule Breakers team is up to these days, check out a free report on how a disruptive technology is making Bill Gates -- and other established tech giants -- lose more than just sleep.

Baidu, Chipotle Mexican Grill, and Green Mountain Coffee Roasters are Motley Fool Rule Breakers recommendations. Chipotle Mexican Grill is a Motley Fool Hidden Gems selection. Berkshire Hathaway is a Motley Fool Inside Value pick. The Fool owns shares of Berkshire Hathaway and Chipotle Mexican Grill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Longtime Fool contributor Rick Munarriz leaves no stone unturned. He does not own shares in any of the stocks in this story. The Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (67)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 03, 2011, at 6:56 PM, wpr101 wrote:

    I actually agreed with the Baidu sell at that point you mentioned. I sold a portion but still think it was the right decision.

  • Report this Comment On January 03, 2011, at 11:26 PM, dstb wrote:

    Kudos to Motley Fool but let's remember that picking stocks in a newsletter is not the same as managing an actual portfolio. When you have to manage the various sizes of each holding, decide when to lighten up and when to add, and how much cash to hold or deploy it takes on an entirely different dimension.

  • Report this Comment On January 04, 2011, at 9:22 AM, hiddenflem wrote:

    Nice take, Rick!

  • Report this Comment On January 07, 2011, at 8:38 PM, trejz wrote:

    No sin missing the GMCR/Keurig boat. My parents had one of these 2 years ago and to top it off I live 10 miles from their main office/plant, and I wouldn't buy it. Of course, I wish I had before they began their unwarranted and entirely irrational price jump of their stock, but I certainly wouldn't buy them now. For starters, 1) the coffee isn't good, though it pretends to be premium, it's just instant coffee in a plastic and foil container! 2) the one-at-a-time idea sounds great...for an elderly couple who aren't really coffee drinkers, or for offices, which is a fairly large market, ok, but 3) one cup per plastic container is an environmental disaster! People should be up in arms about this, and once the landfills start overflowing with plastic shot cups, they probably will. It's like a Hummer for coffee drinkers without the superior quality, the stereo system, or the lighter and it isn't a chick magnet. For these reasons I think Keurig's market is severely limited; I doubt it would catch on in Europe, for instance. I also think GMCR rise will reverse once people wake up and stop buying the hype.

  • Report this Comment On January 10, 2011, at 12:43 PM, SUPERMANSTOCKS wrote:

    JOEZ is good to go now!

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