Rule Breakers vs. Rule Makers. Talk about a dangerous debate. As much as I love young growth stocks, my portfolio is loaded with old Rule Makers.
Why shouldn't it be that way? There's something cozy about holding stocks like Taiwan Semiconductor (NYSE: TSM ) and Oracle (Nasdaq: ORCL ) , both of which have formed steep cliffs around mountains of cash flow. I can't imagine a world without these giants.
When math works against you
Of course, it's when we common investors can't imagine it getting better for our darling cash kings that, almost overnight, the wheels come off. But let's get back to that.
Some Rule Makers, after all, are sustainable. Tom Gardner had more than his share in the old real-money Rule Maker portfolio. Out of nine stocks, five have gone on to become double-digit winners, based on their compound annual growth rates from their adjusted closing prices on Feb. 26, 2003, when the portfolio closed down shop, until March 7, 2007. One of those double-digit gainers, T. Rowe Price (Nasdaq: TROW ) -- more than doubled the market's average annual return of 15.7%. I mean, wow. Perhaps I should simply concede?
But before I do, consider that in its nine years in business, David Gardner's real-money Rule Breaker portfolio returned more than 20% annually versus 9% for the S&P 500, and that's with dividends included. Very few professional investors have ever achieved those sorts of returns. And those who have sport names like Buffett and Lynch.
Why this strategy wins
But it's the math of Rule Breaker investing that I love most. Allow me to explain. Unlike with other forms of stock picking, there are two ways to win really big with rebels. Let's review.
First, there are the newborns. Current Rule Breakers picks iRobot (Nasdaq: IRBT ) and LoopNet (Nasdaq: LOOP ) both aim to capture a massive share of the billions of dollars being created in newer industries.
Then there are the disruptors. It's these firms that -- quite literally -- kill the Rule Makers. Think of Google (Nasdaq: GOOG ) . While no longer a pure Rule Breaker -- it's now setting the rules in the advertising business -- Big Goo has almost singlehandedly put a dent in the newspaper industry and made early investors in its stock rich.
The Foolish bottom line
Rule Makers, like humans, are born to die. Sure, they'll produce great returns for some period of time -- maybe even decades. But at some point, a David will emerge to slay your Goliath.
It's when this occurs that the greatest growth is unleashed. Again, think of Google in its infancy. Or a young Apple (Nasdaq: AAPL ) . Those are the sorts of stocks that I want for my portfolio. Can you really say that you don't want the same?
iRobot and LoopNet are recommendations of the Motley Fool Rule Breakers growth-investing service. Ask for us a free all-access pass to get a closer look at all four stocks that have more than doubled since this market-beating portfolio began two years ago. Your pass is good for 30 days, and there's no obligation to subscribe.
Fool contributor Tim Beyers, ranked 751 out of more than 23,900 in our Motley Fool CAPS investor-intelligence database, is a regular contributor to Rule Breakers. Tim owns shares of Oracle and Taiwan Semiconductor. All of Tim's portfolio holdings can be found at his Fool profile. His thoughts on growth stocks, Foolishness, and investing in general may be found in his blog. The Motley Fool's disclosure policy just wants you to be rich.