Great rivalries always raise the level of competition in sports. Who could forget the Thrilla in Manila, where Muhammad Ali and Joe Frazier staged one of the greatest heavyweight fights of all time? Ali later said of his rival, "He brought out the best in me, and the best fight we fought was in Manila."
Or what about the Red Sox-Yankees rivalry, particularly over the past few seasons? The intensity of the competition between these two teams in the American League Championship Series produced some of the finest baseball ever -- and was able to reduce a grown man (me) to a nervous wreck as he watched Alan Embree close out the Yanks in Game 7 last October.
At Motley Fool Stock Advisor, we have our own great rivalry. This matchup is between two brothers, David and Tom Gardner. Like the two great rivalries above, this one is a contrast in styles. Tom keeps his head down and seeks out small, underappreciated companies in steady, growing industries. David swings for the fences and hunts for well-known market leaders that possess sustainable advantages. Despite the contrast in styles, both brothers have been able to outperform the market by more than 30 percentage points since the newsletter's inception in 2002. Surely the power of rivalries alone cannot explain this outperformance. Can it?
The market takes a beating
No, it can't. Since Stock Advisor was launched, David's total average returns are north of 50% and Tom's are almost 67%. This compares with a total for the S&P 500 of 17% for the same period. These guys are not just beating the market, they're throttling it. How?
I don't think it's in their DNA, and I don't think they've discovered secret theories that allow them to succeed where others fail. But I also don't think they're just lucky either, so let's consider some of the factors that might explain their investing success.
One aspect of their investing strategies that might contribute to their outperformance is that they both tend to select smaller companies. There is some evidence to suggest that small caps tend to outperform large caps over the long term, and this trend has been particularly pronounced over the past few years. Don't get me wrong -- the Gardners don't limit themselves solely to smaller companies. David's personal portfolio runs the gamut and includes such large-cap stalwarts as Microsoft
In Tom's case, his value-oriented strategy also helps explain his returns, as the historical outperformance of the master investors from Warren Buffett's fabled town of Graham-and-Doddsville has demonstrated the success of this strategy. This could not be said of David, however, who favors a high-growth strategy that Graham-and-Doddsville devotees would abhor.
S o market cap and, for Tom, style are possible explanations, but I think there is something far more important going on here that cannot be duplicated by most investors. In addition to being investors, David and Tom are both entrepreneurs who have founded and managed their own company. Like Warren Buffett, who is much admired by the brothers, these guys know how to assess a small, young company because they run one themselves.
et's get ready to rumble
The insights the brothers have gained from managing their own business are very much reflected in what both look for when selecting stocks. As a result of his experience during the lean years at the Fool, Tom looks to invest in companies with high insider ownership. He also demands that firms are run on behalf of shareholders. David takes a slightly different tack by looking for strong brands with outstanding marketing strategies, which makes sense coming from someone who has worked hard to build The Motley Fool brand. Both brothers focus on companies that possess the key attributes present in all great businesses. David and Tom are similar in this respect, and it's my belief that this best explains their remarkable investment returns.
nd the returns have been remarkable, few would deny that. David, who was an early investor in AOL, now a division of Time Warner
Y es, there have been a few sluggish ones along the way. David realized a 20% loss on Tenet Healthcare, and Tom lost 14% on Hypercom. All told, however, the winners have far outnumbered the losers as the total average returns for both Gardners indicate.
B ut don't take my word for it. Why not take a 30-day free trial to Motley Fool Stock Advisor today? You'll have access to all our past issues -- which includes more than 50 stock recommendations spanning more than three years. You'll also receive the two latest picks straight to your inbox. If for any reason you are not 100% satisfied, just let us know within 30 days and you won't pay a dime. So pull up a ringside seat to what is turning out to be an extremely profitable investing clash.
T his article was originally published on Aug. 1, 2005. It has been updated.
J ohn Reeves does not own any of the companies mentioned in this article. Time Warner is a Stock Advisor recommendation. Pfizer is a Motley Fool Inside Value recommendation. The Motley Fool has adisclosure policy .