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Who says you can't consistently beat the market?
When Marketwatch's Peter Brimelow pointed out that Motley Fool Rule Breakers was one of the 10 best performing stock newsletters of 2009 -- according to scoreboard tracker Hulbert Financial Digest -- no one around here felt it was a fluke. As part of the analyst team David Gardner assembled to smoke out disruptive growth stocks with market-thumping potential, I knew we were onto something special.
I was right. When Brimelow wrote about us again a year later, it was because we had cracked the top 5 list of the best performers in 2010.
But this story apparently doesn't end with back-to-back years of success.
Brimelow came back with even sweeter news last week. According to Hulbert Financial Digest, our 22.3% return in a challenging 2011 through May lands us at the very top of all tracked newsletters. I'm psyched!
I'm not here to brag, though, so I apologize if my excitement comes off that way. I'm actually here to share some of the tips that I have used since the newsletter's inception in 2004 to find winning investments. If just one of my suggestions makes you a better investor, then I'll have something worth bragging about.
1. A perpetual earnings beater is your best friend
A market thumper in motion tends to stay in motion. One of the easiest paths to beating the market is to load up on stocks that are doing exactly that.
Apple (Nasdaq: AAPL ) has been consistently beating Wall Street's guesstimates for years. It shouldn't surprise anyone to see tech's most valuable company thrive in what has been "the lost decade" for many of its peers.
Quite simply, behind every smart investor, there are a bunch of slow analysts.
Quick-service Mexican eats didn't seem like much of a growth industry at the time. The Colorado company was spun off by McDonald's (NYSE: MCD ) of all things. However, I was immediately drawn to its bottom-line performance.
"Chipotle has blown away most Wall Street profit targets in all four quarters as a public company," I wrote in the original recommendation.
Save for a brief slip during the recession-seasoned summer of 2008, this is exactly what Chipotle has continued to do. Try on the past year for size.
Source: Yahoo! Finance.
Blowout returns are joined at the hip to blowout quarters.
2. Don't be afraid of something new
I know a lot of perfectly capable investors that sidestep IPOs. After all, there are plenty of potential pitfalls among the freshly traded:
- There isn't any kind of track record when it comes to my first tip of consistently surpassing Wall Street expectations.
- Some companies go public as an exit strategy.
- Even when successful, trigger-happy debutantes come back with dilutive secondary offerings at higher price points.
- Roughly six months after an IPO, the expiration of lock-up periods allows insiders to sell.
The shortcomings are real, but these are things that great companies can easily overcome.
I recommended shares of OpenTable (Nasdaq: OPEN ) the month after it went public two years ago. The online dining reservations leader has gone on to nearly triple on our scorecard.
Yes, there has been plenty of insider selling at OpenTable over the past two years. Tech companies that rely on stock options for compensation will get a lot of that. OpenTable also filed for a secondary offering just four months after going public. It's still been good for a 199% return in two years, baggage and all.
You don't want to overpay. I pity the person that paid $122.70 for white-collar social networking site LinkedIn (NYSE: LNKD ) the day it hit the market last month. However, if the company is right -- and the price is right -- don't let that new stock smell dissuade you.
3. Patience pays, especially for growth investors
My biggest winner on the Rule Breakers scorecard is Baidu (Nasdaq: BIDU ) . It's up a whopping 1,370% since I singled it out for the newsletter service's subscribers in the fall of 2006.
There have been plenty of ups and downs along the way. I've had my valuation doubts. There was a trying scandal involving unlicensed medical advertisers three years ago. China will always be risky, but there have been plenty of accounting implosions out of some of the country's smaller public players lately.
David and the rest of the team -- Tim Beyers, Karl Thiel, and Sean Sun -- have had to talk me off the ledge once or twice. Holding on has clearly paid off.
Obviously the "buy and hold" mantra deserves a meaty asterisk. You're not going to cling to a company that is crumbling fundamentally. My own strategy is what I call "buy and scold," where I'm always playing devil's advocate, perpetually poking holes into the buy thesis of every stock I own.
However, if the only thing broken is the stock price, don't fix it. If you're able to take a step back to see what the market sees wrong -- and then take another step back to see what the market has wrong -- hold on.
Roll up those sleeves and dive in with me
It's too early to tell if we'll make Brimelow's list three years in a row. The market's been cruel in June, and we're not even halfway to the finish line for 2011.
You're invited to join us to see if we can continue our winning ways as part of the growing Motley Fool Rule Breakers community. Even if you decide that it's not for you, don't forget the three secrets to the service's success:
- You can't beat a market beater.
- Don't fear freshly public disruptors.
- Buy and scold, my friend. Buy and scold.
If you want to see what the Rule Breakers team is up to these days, check out a free report on how a disruptive technology is making Bill Gates -- and other established tech giants -- lose more than just sleep.