Investors Bid Archipelago Adieu

What a difference 11 months can make! Back in April 2005, I wrote about the announced merger between Rule Breakers selection Archipelago Holdings and the New York Stock Exchange; the now-combined entity is known as NYSE Group (NYSE: NYX). That news shot Archipelago shares up more than 50%, which was a welcome relief for investors who had watched the stock struggle for months.

NYSE Group, initially valued at $10 billion, closed today up 25%. Investors who bought shares when we first recommended Archipelago, a fully electronic exchange, for our Rule Breakers investment service have witnessed a 270% return in barely more than a year. We see this as an excellent case study in Rule Breaking investing. Better yet, it's not even our biggest winner since we launched the service back in the fall of 2004.

Technology wins
According to The Wall Street Journal, New York Stock Exchange Chief Executive John Thain believed strongly that electronic trading would have to play an important part in the Big Board's future. But many of the exchange's seatholders were likely to be resistant. Seeing the future and bringing it about are not quite the same thing. Ultimately, Thain was successful in convincing the naysayers, but the process was long and arduous.

When Fool co-founder and chief Rule Breaker David Gardner first found Archipelago, he noted that "everything you ever thought about how the Internet can reduce costs, cut out the middlemen, increase transparency, increase profits, etc., when applied to the stock market is true of Archipelago." In this case, picking a winner had nothing to do with price-to-earnings ratios and betas. It had everything to do with business insights gained from a profound understanding of the online industry.

The rewards of innovation
Archipelago's rapid rise shows that the market has a difficult time valuing innovation and vision. Those who have a vision of the future of an industry often expose themselves to considerable risks in the short term. Over the longer haul, however, outstanding business models will dominate competitors, and investors will be rewarded accordingly.

We've seen this already with some of our Rule Breakers selections. When Charly Travers selected Vertex Pharmaceuticals (Nasdaq: VRTX) the same month Archipelago was nabbed, the drug company's stock was floundering, and some observers felt it was failing to live up to its potential. But when weighing that investment (which is now up more than 280% for subscribers), Charly focused on its deep pipeline and the quality of its scientists.

The Foolish bottom line
Stocks fluctuate, earnings vary, analyst reports quickly grow stale. That's why David Gardner has repeatedly said that growth stock investing is about searching for great businesses, above all else. So the next time you're searching for great, growing businesses, ask yourself three things:

1. Does the company offer products or services that have strong consumer appeal?
2. Is it a first mover or major player in that industry?
3. Does the company have a sustainable advantage over its competitors?

Of course, there will be some clunkers along the way. One of our first picks was Overstock.com (Nasdaq: OSTK). At the time, we believed that the online retailer could transform its dramatic revenue growth into solid profits in the fashion of Amazon.com (Nasdaq: AMZN), which created loyal customers and (eventually) solid profits for investors. Amid nonexistent profits and CEO Patrick Byrne's battle against naked shorts, this vision has not yet panned out. Our service has recently closed out our position in the company.

We're confident that our winners will outweigh the losers by a long shot, and that our returns will justify the short-term volatility. The numbers support this view. Since inception, our selections have outperformed the market at large by 22 percentage points on average. If you'd like to join us in finding outstanding, world-changing companies like Archipelago, we're offering a free 30-day trial. We think we're just getting started.

John Reeves owns shares of Vertex Pharmaceuticals. Amazon.com is a Motley Fool Stock Advisor recommendation. The Fool has a disclosure policy.