Disrupted industries are rife with chaos. Old leaders are pushed aside, as new ones take their place, claiming the mantle “Rule Breaker” in the process.
But, eventually, all disruptions end, and chaos subsides as order returns. When this happens, Breakers that were responsible for the earlier upheaval vie to dictate the new rules of the market. We call the ones that succeed Rule Makers. Our long-term goal as investors should be to hold as many Breakers as we can through this gloriously profitable plateau.
We aren’t alone. Superinvestor Warren Buffett told those attending last month’s annual Berkshire Hathaway shareholder meeting that he’d much rather spend time valuing and investing in healthy, growing businesses that trade for a discount.
“I would never spend a lot of time valuing declining businesses,” Buffett said during a multi-hour question-and-answer session. “The same amount of energy and intelligence brought to other businesses is just going to work out better.”
Identifying the chasm crossers
While he didn’t say so specifically, Buffett alluded to the idea of investing in top businesses that dominate their respective niches. He wants Berkshire to own Rule Makers.
And you know what? It does. Here’s a closer look at just a few of the category killers you’ll find in the Berkshire Hathaway portfolio as of this writing:
- Coca-Cola, a Rule Maker whose dominance of the carbonated beverages market is so complete that we use “Coke” and “soda” interchangeably. And while it would be laughable for some to market their product as “the real thing,” Coke has done it for decades, and no one questions the authenticity of the message.
- Procter & Gamble, the biggest name in consumer products is also home to some of the biggest product brands in the world. You see them every time you shop the top shelves at your local grocery store.
- IBM, a Rule Maker, not just because it generates billions annually from a rich portfolio of patented innovations, but also because it was the first of its computing peers to combine selling gear with professional services. Today, Big Blue is the go-to consultant for large-scale, technically-sophisticated projects.
When do you know a Breaker has become a Maker? Think about Apple. Back in 2007, the Mac maker was breaking the rules with a proposed smartphone that had no built-in keyboard, and which could only be made to work with AT&T’s network here in the U.S.
Fast-forward five years. Apple is now the world’s most valuable company; its legendary iPhone carrier subsidies have led to huge gains in profits and cash flow. Competitors have yet to figure a way to extract similar terms, while some former highfliers, such as Research In Motion, appear to be on the path to extinction.
Apple is making the rules in the smartphone market here in the U.S., as its influence grows worldwide.
5 stocks with big potential
Which stocks are poised to become the next Apple? Here’s a closer look at five in the Motley Fool Rule Breakers portfolio that are starting to look like Rule Makers in progress:
1. Baidu (Nasdaq: BIDU ) . Any company that dominates its market has a chance to be a Rule Maker. Baidu, China’s top search engine, already controls more than 80% of the market, and is positioning itself to expand in new areas. A deal with Apple puts the search engine on Chinese iPhones. All signs point to continued dominance of its home market.
2. Google (Nasdaq: GOOG ) . Just as Baidu dominates search in China, Google dominates search here in the U.S., and many other territories around the world. What’s more, the company is activating 900,000 Android devices daily, the Chrome browser has eclipsed Internet Explorer, and Google Apps is finally proving itself a legitimate alternative to Office. Add it all up and you’ve got a digital network that serves hundreds of millions of people daily. Their clicks have made Google owner of the world’s most valuable online marketing database.
3. Intuitive Surgical (Nasdaq: ISRG ) . The company that Fool co-founder David Gardner calls the “Breaker of Breakers” is responsible for roughly 80,000 prostatectomy procedures annually via its daVinci robotic surgery system. Thanks to this success, doctors and hospitals are considering daVinci for other surgeries, including gall bladder removal, and more advanced heart and lung procedures. This is a classic Breaker-to-Maker move in which a valuable disruptive technology gains mainstream acceptance.
4. Salesforce.com (NYSE: CRM ) . The cloud-computing king has long since proven that delivering business software over the Web is a viable strategy. Now the company wants to expand its offerings to include social media as a business communications tool. In both cases, salesforce.com is attracting huge customers to its platform -- including a nine-figure deal signed in the first quarter.
5. Tesla Motors (Nasdaq: TSLA ) . A more forward-looking pick, I’ll admit, but there’s something to be said for how Tesla is designing electric powertrains for the likes of Toyota and Mercedes-Benz. At the very least, it suggests that Tesla has set a standard for electric vehicle design that the rest of Big Auto is now obligated to live up to.
The power of potential
Do you believe any of these five can become Rule Makers? Either way, it’s worthwhile paying attention to disruptions in the making, because the market tends to reward rebels well before they become rulers. These are the sorts of companies that we look for in our Rule Breakers newsletter service. Want in? Check out a 30-day trial subscription. If that's not up your alley just yet, you can still check out a free special report detailing the next trillion-dollar revolution.