Riding Technology to a Triple

Today's headlines are truly newsworthy: "NYSE Now Trades on NYSE," "213 Years Old and Finally Public," and apropos of today's nearly $10 gain, "Stock Soars." Yes, ladies, gentlemen, and Fools everywhere, you can now buy a piece of the New York Stock Exchange. The company is NYSE Group (NYSE: NYX  ) .

A big-time $10 gain. The debut of the NYSE as a stock. This is a great story.

But how could you have made some real money here?

My Motley Fool Rule Breakers service has more than tripled its money thanks to NYX. How is that possible for a stock that's only a day old? Here's the secret: A year ago, we recommended a little company that the NYSE later bought out, enabling it to come public today. In February of 2005, Rule Breakers recommended Archipelago, which was breaking all the rules as an Internet-based stock exchange. Archipelago's electronic platform was eating the stodgy New York Stock Exchange's lunch. In a minute, I'll give you three principles I use to pick stocks like this. But in the midst of the hype surrounding the new NYSE Group, let's spend a moment remembering what the world was like in January of last year.

Troubled times
Turmoil surrounded the once proud New York Stock Exchange. Former chairman Dick Grasso had been exposed as having engineered his salary to upwards of $140 million. (His executive assistant was pulling down $240,000 a year -- you should be so lucky!) He was ousted, and the Exchange had egg on its face. The price of a seat on the New York Stock Exchange had hit a new low: just $1 million, the lowest price in 10 years. And a little upstart Internet trading platform -- ArcaEx, Archipelago's electronic trading platform -- was already doing about 3% of all shares traded on the NYSE, and growing. (Oh, it was doing about 23% of all Nasdaq shares as well.) Three percent of the NYSE may not sound like a lot, but we're talking millions and millions of shares, which didn't take much to make little Archipelago a stock market winner.

I recommended Archipelago in 2005 because it was a company that was creating a revolution within an industry and shaking up the powers that be. In this regard, Archipelago wasn't very different from historical recommendations of mine like eBay, Amazon.com, and Starbucks, all of which I have bought and owned for the better part of a decade. The day we added Archipelago to Rule Breakers, it was trading at $20.42 (versus more than $70 today), and I wrote, "Everything you ever thought about how the Internet can reduce costs, cut out middlemen, increase transparency, increase profits, etc., when applied to the stock market is generally true of Archipelago."

The New York Stock Exchange, with its bricks-and-mortar vulnerability, its troubled brand name, and its low morale, obviously agreed. Months later, it announced it was merging with our Rule Breaker. For Rule Breakers subscribers, it's been strawberries and cream ever since.

Core values
We adhere to seven principles at Rule Breakers. Today, I share with you three that we used to triple our money in what is now NYX:

  1. Buy the top dog and first mover in an important, emerging industry. Archipelago, using the Internet to create a new stock market that traded both NYSE and Nasdaq shares, was just that.
  2. Strong recent stock market performance. Before we bought Archipelago, its stock had already risen from its Goldman Sachs IPO of $11 to $20. To novice investors, that sounds like a bad thing, as if we missed it. Today's NYX closing price of more than $70 per share suggests otherwise. Look for strong growth stocks that keep making higher highs.
  3. A sustainable advantage. Buying stock market winners in important industries won't do you much good if the businesses themselves don't have a moat around their profits. You have to be a student of business models to separate Rule Breakers from Faker Breakers. No one was going to touch Archipelago's positioning.

The Foolish bottom line
I encourage you to apply these principles in your own investing -- and reap the rewards. Or better yet, come learn some more of the principles we use at Motley Fool's Rule Breakers service by taking a free trial. At Rule Breakers, we're looking for tomorrow's great stocks a day early. In just the second year of our service, our 36 recommendations have now averaged a 27% gain each, versus the comparable S&P 500 gain of 6%.

Does quadrupling the market's averages sound like something you'd like to learn more about? Join me and our Rule Breakers team today.

David Gardner is co-founder of The Motley Fool. He owns shares of eBay, Amazon.com, and Starbucks, all of which are Stock Advisor recommendations. The Fool has a disclosure policy.


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