On the afternoon of July 2, 1863, Union Brigadier General Gouverneur Kemble Warren stood on the west face of a hill called Little Round Top, a mile or two south of Gettysburg, Pennsylvania. As a West Pointer who had graduated second in his class some 13 years earlier, Warren was immediately aware that the ground on which he stood was the key to the entire battle that was coming into shape as opposing armies moved into position. Whoever controlled Little Round Top, Warren knew, would be able to dominate the landscape. But that opportunity was coupled with an urgent danger: If the hill fell to the Confederates, the Rebels would be able to shell the entire Union line to a distance of up to two miles. General Lee's forces would be able to outflank the Union Army and bring its full weight to bear on the Union's weakest point.
As he gazed across the landscape, General Warren ordered a shot fired toward the enemy line to see if he could rouse them into revealing their position. Immediately he saw the sun glinting off the bayonets and rifle barrels of the Rebel soldiers as they reacted to the fire. The Confederates were advancing on Little Round Top, and the hill was undefended.
One does not wish to be too glib when drawing metaphors between commerce and war. Blood is one thing, and dollars are quite another. And yet, the lesson of General Warren can enlighten Rule Breaker investors because it illustrates the risks at stake in business, and the tremendous advantages that fall to those who act quickly. Had General Warren not been there to recognize both the threat and the opportunity that confronted him, the Battle of Gettysburg might have had a decidedly different outcome. Had he not acted promptly to move a brigade forward to occupy the hill at that crucial moment, the shape of our nation might be very different today. At the very least, any fighting to claim that hill after it had been occupied by Confederate soldiers would have been extremely costly, and an already bloody battle would have been made far bloodier. For his quick action, General Warren is remembered in the lore of America as the Savior of Little Round Top.
Which brings us to the first criterion for selecting Rule Breaker stocks: A Rule Breaker must be the top dog and first-mover in an important, emerging industry.
I'm thinking about Steve Case, chairman of America Online (NYSE: AOL), circa 1993, surveying the landscape before him. There is any number of rivals vying to dominate the nascent online space emerging at that time: CompuServe, Prodigy, eWorld, GEnius, and many other names we have already forgotten. Like Gouverneur Warren, Case knew that the ground on which he stood needed to be fortified, and quickly, at whatever cost. In the months and years following, America was carpet-bombed with AOL marketing materials. The omnipresent AOL floppy disks became a national joke, and existing customers were frustrated when new subscribers signed on so fast that members were more likely to hear a busy signal than a modem handshake. Worse, critics attacked the company for spending too much on customer acquisition -- cash flows suffered, and the stock was punished.
It was an extremely dangerous and crucial moment for the company. But just as Gouverneur Warren needed to secure the dominant ground, AOL needed to secure the dominant subscriber base. Today, thanks to the action that was taken then, AOL prevails in its industry.
The same story is told again and again: An opportunity is recognized, and a capable leader moves with speed and conviction to seize that opportunity before another can claim the ground before him. It is clear that the costs of dislodging an entrenched foe are far greater than that of simply stepping into an opportunity that had not yet been exploited. Think of Howard Schultz's move to create an entire new category of coffee retailing with Starbucks (Nasdaq: SBUX). Or Jeff Bezos creating Amazon.com (Nasdaq: AMZN), recognizing the opportunities of online retailing long before the bricks-and-mortar behemoths of retailing had even an inkling of what was at stake.
All analogies fail, of course, if you stretch them far enough. Armies in the field do not issue shares of common stock, and there is no marketplace for trading them based on their performance. If there were, perhaps their prices would soar on news of their victories and fall on their reversals. But when you research companies in search of the next Rule Breaker to add to your portfolio, you might want to search for a bit of the spirit of Gouverneur Warren in them.
If you can sense that aura of decisiveness, that quickness to seize opportunities before the costs of claiming them become too dear, you might find yourself close to a winning investment.
And if you ever do get the chance, please take yourself on a tour of the Gettysburg Battlefield, which is still largely unchanged from that July day almost a century-and-a-half ago. Stand at the rock where General Warren stood, gaze at the scene that he saw, and perhaps you will know a little bit more of the ways of creating victory.
P.S. Amgen (NYSE: AMGN) fell after saying last night that sales will be modestly lower than expected in 2000. Fool News covered the story today, and we'll have our thoughts on the news Monday. Opportunity? Or risks ahead?