Do You Have the Guts to Buy?

Rule Breaker. I'll never forget the day I heard those two words.

It was Christmas 1999. I was on the phone with an old pal. That summer, he'd tipped me to a local scientist who was boasting that he could crack the human genome. There was an IPO. I bought in and forgot it.

What the heck is going on here?
Yes, biotech was on fire. Amgen (Nasdaq: AMGN) had nearly doubled since June. Lesser-known drug plays such as MedImmune and ImClone (Nasdaq: IMCL) had done even better than that. OK, but this was something else.

By New Year's, my genome stock was doubling every week. As it turns out, some Fool named David Gardner had bought it for his online Rule Breaker portfolio. In December 1999, I had no idea what that meant, but I had to find out. This guy was moving the market.

You may have heard that Rule Breaker investing is back. But I warn you, it's probably not what you think. It's certainly not what I thought it was when I heard those two words on the phone from my parents' kitchen in Canton, Ohio.

For one thing, it's not all tech
Yes, there was some technology in the original Rule Breaker portfolio -- including my genome wonder. But as it turns out, it's not so much disruptive technologies David Gardner and his "Rule Breaker" disciples were after as disruptive businesses. I'll explain.

Southwest Airlines (NYSE: LUV) is a Rule Breaker. Yet founder Herb Kelleher didn't invent the airline, rather a no-frills, low-cost structure and gave a darn about his customers. Of course, you could pay similar compliments to JetBlue (Nasdaq: JBLU). Both were Rule Breakers at one point.

Dell (Nasdaq: DELL) didn't invent the computer, either. It just redefined the way computers are sold. In fact, David Gardner argues that low-tech Starbucks is the consummate Rule Breaker. Who better than Starbucks, he asks, sensed a need, met it, branded it, and then spread it like wildfire from coast to coast?

Hardly high-tech, right? But you know what really made Starbucks a Rule Breaker in 1998? There was no second fiddle. If you bought Starbucks along with David in 1998, congratulations: You're a Rule Breaker, too.

So just what makes a Rule Breaker investor?
To find out, I caught up with David Gardner himself and asked him. His reply might surprise you: "It's an investor who can embrace the contrary nature of paying up for great growth stocks." This is an important point.

As David points out, great growth companies rarely look "cheap," at least when measured by traditional valuation metrics. So you have to pay up. They can also be volatile, but Rule Breakers are typically worth the gamble. Should you take David's word for it? I would.

When David shuttered his real-money Rule Breaker portfolio, he'd managed a 20.1% annualized return. That was in mid-2003, after the bear market. Compare that with 9.1% for the S&P 500 and 7.3% for the Nasdaq over the same period. That's the kind of performance that made legends of Peter Lynch and Bill Miller, and rightfully so.

This stuff is not for everyone
Growth investing can get hairy. I learned that myself when the genome stocks blew up in 2000, and more recently when David and his team recommended another biotech, Encysive Pharmaceuticals, and closed the position at a loss.

Then again, Vertex Pharmaceuticals (Nasdaq: VRTX) is up 79%, while BioMarin Pharmaceutical (Nasdaq: BMRN) is up 116% since David's team told us about it -- one of 10 recommendations that have doubled in value or more. That's pretty decent, especially in this market.

The trick, of course, is spotting opportunities like these and having the guts to buy when you do. It certainly helps to get your information from someone you can trust -- someone who does the legwork. In other words, not from some wahoo on the phone.

So why not go straight to the source?
If you have an eye for innovation and think high-growth investing may be for you, try this: Take a 30-day free trial to David Gardner's Motley Fool Rule Breakers newsletter. You can check out the complete service and see exactly what David's analysts are digging up now.

I promise you won't be hounded to subscribe. And while I can't guarantee you'll get rich, I'm fairly certain you'll learn something new and get some great stock ideas -- including the team's top five stocks for new money right now. If you want to learn more about taking a no-risk free trial, click here.

This article was originally published on Dec. 16, 2004. It has been updated.

Paul Elliott owns shares of ImClone. Starbucks, Dell, and JetBlue are Motley Fool Stock Advisor recommendations. Dell is also an Inside Value recommendation. Vertex and BioMarin are Rule Breakers recommendations. You can view all the picks with your free trial. The Motley Fool has a disclosure policy.