We want the best of everything. We want quality companies that will be market leaders for decades, beating the market averages handily and grossly surpassing T-Bill returns without taking on more risk. We want to own these companies forever, or at least until we need the money, to not only escape taxes now and reduce them when we finally do sell, but to let our winners run and run and run. We are buy-and-hold investors, focused on the longest-term investment success -- achieved quietly, simply, and without anxiety.

Sound crazy? Taking a look around the stock market, you'd think it would be impossible. Even successfully ignoring the hype, the educated investor might reasonably suppose that, before investing, a deep understanding of each company is required -- its products and personality, the right metrics that define the company, and how it measures up to its competitors, just for starters.

To do this, you must also have a firm grasp of a company's industry and how that industry is positioned relative to other industries. And so on and on, until you find that, to properly understand a single lemonade stand, you must know every facet of the global economy. Indeed, there's no shortage of financial institutions with hundreds of experts on staff analyzing just about everything in the world, just so they can achieve this sort of perspective. Individual investors can't do this, can't even come close. How can we compete?

Very easily, actually. No amount of research, no number of financial departments can catch up to the few straightforward principles we explore here in the Rule Maker. I thought I'd take a moment to look at how it's possible for little David perhaps to beat big old Goliath through just one of the elements of Rule Maker investing: brand.

My example is a study of investment returns taken from an extraordinary book, a summary of which can be found here. For expediency's sake, the study was carried out over just six months, starting in December of 1996. It was conducted to explore a bizarre paradox: Quick and basic decision-making based on limited data often proves equal or even superior to a complex decision process based on much more complete data.

The investing study used only one criterion: did people recognize the company, yes or no? It's hard to imagine a simpler method of stock selection, or one that so bluntly stresses the impact of brand. Folks right off the street and investing experts alike were polled, 480 people in all from downtown Chicago and Munich, Germany, all of whom were asked which of some 800 American and German stocks they had heard of.

At the start of the study the researchers invested their own money in those stocks that the laypeople, not the experts, most often recognized, because earlier studies along similar lines had led them to believe that this would be best.

They were right. Stocks that were recognized by 90% or more of those polled climbed 33% over the six months, while stocks known to only 10% or fewer people in the study went up less than 10%. The results are unambiguously in favor of brand recognition.

If we dig further into the data, however, we find that the greatest performance of all was found when laypeople were asked about the stocks of foreign markets. The 10 stocks most recognized by experts gained 44%, but the 10 stocks most recognized by the guy on the street shot up almost 50%. Brand again: People know far fewer brand names from foreign markets than they do their own (too few, in fact, for 90% of those polled to recognize more than a couple of stocks, which is why the top 10 stocks were chosen instead of a percentage). Knowing fewer brands means knowing only the most potent brands, and it is these best brands that gave by far the best returns over those six months, beating representative mutual funds and the stock indexes, and even giving the individual investor an edge over the experts. All because of the humble power of brand.

Why is brand so powerful? People purchase what they know, and not just products on store shelves, but also the stocks of companies -- we'd all rather own a familiar name than a strange one, whether we park our investment in our garage or in our portfolio. Since everyone does much the same, the future success of stocks with great brands gets a boost year in and year out.

Every year, more people figure out that hot-shot mutual funds aren't doing them any favors, and index investing gains popularity -- which doesn't hurt Rule Maker companies, either. Strong brands also tend to belong to companies that dominate their industry or niche, companies that make the rules. The well-known brands tend to have been well known for a long time, indicating a company that is focused on patience, not greed -- companies that do what's needed to win long term, instead of propping up earnings at the expense of the future.

The best-known brands typically also offer a product or service that makes our lives simpler and more convenient. We might even get more familiar with a brand because of lawsuits brought against the company, which in turn is also often a sign of strength -- if the competition is reduced to suing, it is often because they have nothing left. A strong brand can mean many or all of these things and more. It's core to Rule Maker investing, and it's why we don't like it when American Express (NYSE: AXP) hurts its brand, and why we applaud when Coca-Cola (NYSE: KO) starts building its brand again.

Watch your companies to see how they are growing or neglecting their brands. It may be the single most-important indicator of their success over the long term.

Until next time, cheers!