Chris Moneymaker was an instant millionaire after winning the 2003 World Series of Poker No Limit Hold 'Em main event. He had luck on his side throughout the tournament, of course. But that's the way it is in tournament poker; you can't win without some degree of luck. You also can't win without skill, and Moneymaker made some very skillful plays during the tournament -- none better than the hand that became known as "the bluff."
A Rule Breaking bet
Moneymaker was heads-up at the end of the main event with veteran pro Sam Farha. About halfway through their duel, Moneymaker was dealt the four and seven of spades -- a modest, speculative hand that you'd typically prefer to play against a lot of opponents. Farha does better, picking up an unsuited king and nine. When the first three cards -- "the flop" -- come two-nine-six with only one spade, Farha has the top pair and second-best kicker. That's a strong heads-up hand. Moneymaker has nothing. He needs either two running spades to make a flush or two running low cards for a straight. He's a long shot, at best.
Predictably, Farha bets. Moneymaker has a big chip lead and thus calls. Silly? Maybe, but 19 of the remaining 47 cards can materially improve his hand. (That is, any spade plus the non-spade fives, eights, and 10s.) He gets one of them with the next card: the eight of spades. Suddenly, he has a huge hand -- good draws to both a flush and a straight. Farha, however, still leads and bets $300,000. Moneymaker raises $800,000, which appears to be about one-third of the chips remaining in Farha's stack. He calls, correctly figuring he still has the best hand. What happens next, however, is the stuff of legend.
The final card is a completely harmless three of hearts. Moneymaker now officially has nothing. First to act, Farha checks. Without hesitation, Moneymaker bets it all. After deliberating for a few excruciating minutes, Farha folds. It was the turning point of the event and led to Moneymaker's $2.5 million victory.
Crazy? How about crazy like a fox?
We simply have no way of knowing what Farha was thinking when he laid down the best hand. Nor can we know what Moneymaker was thinking with the all-in bet. But it would be simply wrong to conclude the affair was a matter of feel. Sure, that played a part. But so did the situation.
The point is: There were dozens of ways for Moneymaker to analyze his position and, especially after the fourth card, his chances to win. It may not look like it on TV, but every great poker player -- especially the odds-calculating No Limit expert -- has an analytical side. And so does the Rule Breaker investor.
A science and an art
Indeed, failing to think through all of the potentially profitable scenarios can cost you at the poker table. It can be equally costly in Rule Breaker investing. For example, loading up on shares of Ballard Power (Nasdaq: BLDP ) , Plug Power (Nasdaq: PLUG ) , or worst of all, Hoku Scientific (Nasdaq: HOKU ) because fuel cells could be the Next Big Thing is not Rule Breaker investing. It's more like roulette or, worse, lotto.
The Rule Breaker instead imagines likely scenarios under which a speculative stock like Sirius would make enough moolah to handsomely reward shareholders, and then discounts the likelihood of each coming to pass. In that sense, he's like Moneymaker betting his four and seven of spades on a flop offering nothing more than a pair of long-shot draws.
Short-stacked and all-in but with lots of outs
Developing a valuation thesis for a Rule Breaker is a lot like counting your "outs" -- that is, the cards that can improve your hand -- in poker. Often, they're hidden. Go back to Moneymaker's four and seven of spades. With two-nine-six on the flop and only one spade, most players would throw away that hand to any bet. They'd probably conclude they were too far behind. And they'd be right from the standpoint of immediate outs. The three remaining fours and sevens probably wouldn't help much. But this is also very short-term thinking, especially when it doesn't cost much to see another card.
Now consider Motley Fool Rule Breakers recommendation Blue Nile. The online jeweler faces a mountain of skepticism that has led to market underperformance since David Gardner picked it for our inaugural issue. It probably doesn't help that nearly 30% of the shares available are sold short. Those betting against the stock probably figure newer dot-com retailers such as Overstock.com (Nasdaq: OSTK ) and RedEnvelope (Nasdaq: REDE ) will go the way of the dodo.
They may be right, of course. But that's hard to imagine with the number of outs available to Blue Nile. First, the company nearly doubled its profit during the second quarter. That beat Street expectations and led to higher guidance for the full year. Second, projections call for online sales of jewelry and luxury goods to grow by 28% to $3.2 billion this year. (In case you're wondering, Yahoo! Finance pegs Blue Nile's trailing-12-month sales at $186 million, or less than 6% of the 2005 forecast.) Third, a check of the proxy statement filed in April shows that fund managers at Baron Capital and Fidelity have loaded up on shares since late March. That includes Baron Growth (BGRFX), a five-star fund that has beaten the market every year since 2001. And, finally, management still holds close to 30% of shares outstanding, which it wouldn't do unless there was a good reason to believe there's more profit to be had.
In sum: The shorts must be absolutely correct in their doomsday predictions for Blue Nile's stock to not see at least some upside from here. That's why the company is a Rule Breaker. Not because it's the Next Big Thing.
Go all in
Rule Breaker investing is for the advanced stock market student who isn't afraid of some volatility in his holdings. It's demanding, but it can also be richly rewarding. Just ask David Gardner. His bets on eBay (Nasdaq: EBAY ) , Activision (Nasdaq: ATVI ) , and many others have paid off in multibagger fashion. Our Rule Breakers portfolio has also walloped the market by more than eight percentage points to date.
The same information that is available to our analysts is also available to you. You can find the next ultimate growth stock. But you needn't be alone in your search. Take a risk-free 30-day trial to Motley Fool Rule Breakers and we'll give you immediate access to all of our stock picks and Rule Breaking tools. There's never, ever an obligation to buy, and everything is backed by our ironclad money-back guarantee. So, go ahead, go all in. Your portfolio will thank you.
This article was originally published on Aug. 12, 2005. It has been updated.
Fool contributorTim Beyersnever check-raises the flop, only the turn. And if you believe that, you're invited to play poker with him. Tim owned none of the stocks mentioned in this story at the time of publication. You can find out what is in Tim's portfolio by checking his Foolprofile. Activision, Amazon, and eBay are Motley Fool Stock Advisor recommendations. Overstock.com is a Motley Fool Rule Breakers pick. RedEnvelope is a Motley Fool Hidden Gems selection. Blue Nile is a recommendation of both Rule Breakers and Hidden Gems. The Motley Fool has an ironcladdisclosure policy.