"Rule Breakers," Explained

One of several Fool-designed investing approaches is the aggressive Rule Breaker strategy, which aims to invest in market-outperforming stocks.

In David and Tom Gardner's book, The Motley Fool's Rule Breakers, Rule Makers, the Fool co-founders discuss two powerful kinds of investments: companies that break all the rules, changing the status quo -- and the kinds of companies they sometimes grow into, ones that make the rules for others to follow. Here's a look at some Rule Breaker characteristics:

First, the company should be a "top dog" and first-mover in an important, emerging field. In other words, being top dog in the left-handed scissors industry isn't enough. A company like (Nasdaq: AMZN  ) fits the bill, though, as it has long led the online consumer retailing industry.

Next, the company needs to demonstrate a sustainable advantage gained through business momentum, patent protection, visionary leadership, or inept competitors. Examples of these include Amgen (Nasdaq: AMGN  ) (enjoying patent protection of its drug formulas for many years) and Microsoft (Nasdaq: MSFT  ) (with visionary leadership that benefited from Apple Computer's (Nasdaq: AAPL  ) regrettable decision not to license its operating system technology).

Look for good management. Like the steel (yes, steel!) company Nucor (NYSE: NUE  ) , which former CEO Ken Iverson turned into a world-class powerhouse by revolutionizing steel production processes.

Also important: a strong consumer brand. Consider Starbucks (Nasdaq: SBUX  ) , and how its name recognition is so much stronger than competitors, such as. um. (get the point?).

Those who invest in Rule Breakers consciously take on lots of risk, believing that for the experienced and Foolish, high risk will lead to high reward. Rule Breaker stocks should make up only part of any portfolio, at most, as it is a risky approach. If you invest in several Rule Breakers, one or two might or might not do very well, while others might go belly up. The expectation is that winners will more than make up for losers, but it's not guaranteed.

You can learn more about a variety of fast-growing companies in ourRule Breakersnewsletter, which delivers promising ideas each month. Our other newsletters do, too! Check out afree sampleof one or more.

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