Innovate Your Way to Higher Returns

Microsoft (Nasdaq: MSFT) must be concerned about its $240 million investment in social-networking site Facebook. According to a fictional obituary in a recent issue of Esquire magazine, Facebook's "street cred" has passed away:

The street cred of Facebook, a popular social-networking site, died Wednesday in St. Louis. It was four years old. ... It turned seriously ill in 2006 when it became open to anyone from corporate America, and finally expired when Josh Kimberling, a successful optometrist from St. Louis, created a page that included photos of his wife's dressage horse and a quote from George Will.

It's funny because it's true.

Big Brother times 6 billion
Facebook once required a college ".edu" email address to register with the site, and it was thus a sanctuary for self-glorifying college students to freely post beer-party details without fear of grown-up consequences. But now that everyone can read it -- including prospective employers -- Facebook has lost its "edge." Here's why.

In his seminal 1962 book The Diffusion of Innovations, Everett Rogers argued that innovations spread through society in a predictable "S curve" pattern, segmented into five stages of adoption: Innovators, Early Adopters, Early Majority, Late Majority, and Laggards.

In the case of Facebook, a small initial group of "hip" college students began using the site (the innovators) and then told other "hip" friends (early adopters) to join. Eventually, word got out to the "un-hip" masses (early/late majority), and Facebook's popularity surged. In September 2006, Facebook opened its doors to adults (laggards), who didn't want to miss out on all the fun, and it peaked in popularity. Facebook's S curve was complete.

The edge eventually gets dull
The surge in popularity that innovative products enjoy can take the parent company -- and the early-adopter investor -- for quite a ride. But once the laggards come on board, that wild ride often turns into anemic growth as the parent company copes with market saturation or new competition attracted by its success.

Look at what's happened with Starbucks (Nasdaq: SBUX) and Dell (Nasdaq: DELL) in recent years. Both companies were extremely influential innovators that began by reaching out to small, loyal followings. They were both so successful in diffusing their products to the general public that competition eventually arrived in the form of McDonald's (NYSE: MCD) and Green Mountain Coffee (Nasdaq: GMCR) for Starbucks, and Hewlett-Packard (NYSE: HPQ) and Apple (Nasdaq: AAPL) for Dell.

While both Starbucks and Dell could deliver solid returns to shareholders going forward, their days of high-growth glory are largely behind them.

Coming full circle
So, when searching for growth stocks, to get the highest returns possible, you want to get behind a company during its innovator or early-adopter phase -- so you can profit when the masses catch on.

That's why Motley Fool co-founder David Gardner and the Motley Fool Rule Breakers team search for companies that are the top dog and first mover in an important, emerging industry. Their best pick to date has been Intuitive Surgical, a medical-products company that is reinventing the way surgery is performed. Since it was first picked in April 2005, the stock is up 560% for subscribers.

If you'd like to get full reports on the other stocks the Rule Breakers team is recommending right now, a free 30-day trial is available. Simply click here to begin your free trial.

Fool contributor Todd Wenning's favorite innovation of the decade is Coke Zero. He does not own shares of any company mentioned. The Motley Fool owns shares of Starbucks. Starbucks and Apple are Stock Advisor picks. Dell is a former Stock Advisor selection. Starbucks, Dell, and Microsoft are Inside Value choices. The Fool's disclosure policy doesn't hesitate to innovate.