First, let's have a little fun, OK?
Since Seinfeld is one of history's highest-rated TV shows, I'm guessing just about all of you will recognize the following exchange. The scene, from episode 86, shows George and Jerry seated at their favorite table at the local diner. An attractive blond woman shoots a glance George's way. Generally, the balding and shy George would conclude that this vixen was way out of his league. Not today. Today he's discovered that all of his instincts are wrong, so the opposite must always be right. Henceforth:
George: "My name is George. I'm unemployed and live with my parents."
Blond: "I'm Victoria. Hi."
Not only does George land a new girlfriend, he moves out of his parents' house and scores a job by telling off New York Yankees owner George Steinbrenner in that same episode. It seems so surreal, until you realize, of course, that this is exactly how the Rule Breakers among us succeed at investing.
Indeed, when others say sell, the Rule Breaker buys. When others lament depressed profits, a nascent market, or an incomplete product, the Rule Breaker imagines a future leader of a multibillion-dollar industry. Like Costanza, Rule Breakers have the courage to do the opposite, and occasionally they profit hugely from the risk.
Yeah, I know, I've made it sound too easy. Sorry about that. But it's not like Rule Breaking is terribly difficult, either. All George had to do was transform himself into "Opposite George." All you have to do is find sources that are consistently wrong. Fortunately for you, there is a very big and obvious source in the world of investing.
Wall Street analysts are frequently wrong
We all know the stories of how analysts issued what were effectively fairy-tale "buy" ratings on stocks they really didn't believe in during the boom. Indeed, bogus reports from broker Merrill Lynch (NYSE: MER ) recently contributed to a million-dollar judgment in favor of a Florida couple that claimed it was victimized by poor analyst coverage.
I know what you're thinking: Haven't analysts learned from debacles like this? Isn't the research more sound today than it ever was? Sure it is. Wall Street analysts are actually exceptionally good at coming up with earnings and cash flow estimates. But they're also notoriously wrong when it comes to those buy, sell, and hold ratings. Ask yourself: How many times have analysts changed their tune on a stock you own? How many times have they upgraded that same stock only after the price rose? How many times did they raise the per-share price target for your company only after the original price target was blown away?
Take potential Rule BreakerSirius Satellite Radio (Nasdaq: SIRI ) , for example. Look at the analyst ratings we've tracked at Fool.com and you'll see a consistent pattern of inconsistency. In December, analysts at Smith Barney told investors to sell Sirius. A month later, the rating changed to hold. Sure, the stock dipped during that time, but if you followed the advice you're out probably $20 in commissions. Further, over the same period, analysts at Merrill Lynch set a 12-month price target of $5.25, and then upped it to $7.50. You'd be hard-pressed to find a political candidate that flip-flops as much as analysts following Sirius.
Maybe we need a more concrete example. How about this: Almost a year ago, Bank of America was thinking that the recent run-up in Apple's (Nasdaq: AAPL ) stock price was overdone. This, by the way, was at roughly the same time I thought about buying stock in the Mac maker. Had I had pulled the trigger I would today be sitting on a three-bagger. Whoops.
Don't follow the instincts of analysts
If you're going to earn market-beating returns for your portfolio, you're going to have to occasionally forget the so-called rules. Emotion can't play a part, either. Listen to the master on this subject, Warren Buffett, taken from the preface to Benjamin Graham's The Intelligent Investor: "To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What's needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework."
Buffett goes on to say that Graham's work provides that framework, and he reminds us that we must supply the emotional discipline. What he didn't include in his list -- and what I think is equally important -- is guts. After all, it's gutsy to loudly proclaim that you're doing the opposite. But only in doing so, dear Fool, will you earn your stripes as a Rule Breaker. Will you swing and miss? Undoubtedly. But when you connect, boy, will you ever connect. That's how it has turned out for the leader of the Rule Breaker team, Motley Fool co-founder David Gardner, with his early investments in Marvel Enterprises (NYSE: MVL ) and Netflix (Nasdaq: NFLX ) . In channeling Costanza, David fattened his portfolio geometrically.
So what do you say? Do you have the guts to be George Costanza? Click here for a free 30-day trial to join our team of Rule Breakers.
Much as Fool contributorTim Beyerslikes George, he has a soft spot for Newman. His favorite supporting character, though, was FDR, if only for the name. Franklin Delano Romanowski? That's genius, baby. Pure genius. Tim didn't own stock in any of the companies mentioned in this story at the time of publication. To see what stocks are in Tim's portfolio, check out his Fool profile, which ishere. The Motley Fool isinvestors writing for investors.