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This Is How We Beat the Market

Rick Aristotle Munarriz
January 3, 2011

Marketwatch's Peter Brimelow is out with his annual list of the country's best-performing newsletters.

Motley Fool Rule Breakers -- the growth-stock service that I am honored to be a part of since its 2004 launch -- cracked the top five with its 36.5% return. This isn't a fluke. Rule Breakers cracked Brimelow's top 10 list a year earlier with a whopping 68.3% return.

In retrospect, I'm more impressed by our performance in 2010 than 2009. The absolute returns may be lower, but everything was a bottle rocket in 2009. Last year was a more challenging market, and our stock-picking service stands out against many of the winning services that specialize in trendy precious metals that had a blazing 2010.

However, I'm not here to pat my own back or gush over the analyst team that David Gardner has assembled. I want to share the wealth, peeling back the curtain just enough to show you how we beat the odds by scoring market-thumping results in back-to-back years. If just one of the three secrets I'm sharing hits home for you, I'll have succeeded.

I'll also prove my humbling ways by singling out sheepish confessions along the way.

1. Every Warren Buffett needs a Charlie Munger
It may seem out of place for a growth-oriented service to invoke the Benjamin Graham-coached value investing brilliance of Berkshire Hathaway (NYSE: BRK-B  ) , but the teamwork principle is the same.

Investors need like-minded investors to bounce off ideas. There's nearly a half-dozen analysts in David's Rule Breakers team. We may have our individual areas of specialty, but we're all passionate about growth investing. We meet weekly, with at least one monthly session devoted entirely to discussing new stock ideas and the picks already residing on our scorecard.

My first humbling confession is that I have brought up plenty of duds during our monthly stock talk chats. I was bullish on American Public Education (Nasdaq: APEI  ) , Joe's Jeans (Nasdaq: JOEZ  ) , and MakeMyTrip (Nasdaq: MMYT  ) at higher price points over the past year. I liked American Public's marketing emphasis on military personnel for its post-secondary Web-based campuses. I felt that Joe's Jeans' pricey jeans and celebrity-donning allure would be huge heading toward an economic recovery. As India's leading online travel portal, I was hoping it would follow the flight trajectory of the top sites in the United States and China.

Thankfully, the rest of the analyst team was able to poke enough holes into these theories to nix these nominations, while still opening the door to some of my better-performing suggestions that became official recommendations.

Don't get me wrong. Individual investors can -- and have -- beat the market on their own. However, it can only help to have some incremental perspective. Whether it ultimately results in validation or serves up a devil's advocate that you may have missed, there is strength in numbers if you're leaning on sharp investors.

There's a good chance you don't have that kind of team around the house or even by the water cooler. Your spouse, parents, or co-workers may think that cash flow is a plumbing problem or that a P/E ratio is a gym class metric. It's OK. We live in a virtual age, and online discussion boards -- including the dedicated forum for Motley Fool Rule Breakers subscribers as well as the free community hub at -- are there to cash in on the wisdom of crowds.

2. Knowing when to sell -- or not to sell -- is as important as when to buy
It's time for a sheepish confession.

Nine months ago, I was having my doubts about Baidu (Nasdaq: BIDU  ) . China's leading search engine had soared 630% since I initially recommended it to Rule Breakers subscribers three years earlier. It was a huge run, and I didn't want to be greedy.

David and the rest of the team talked me off the ledge. There was nothing wrong with Baidu fundamentally. The valuation concerns were real, but nothing that a few market-thumping quarters couldn't tackle. Baidu remains an active pick, and its 1,097% return since being originally singled out is one of the many reasons why the newsletter has made the cut on Brimelow's list for t