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 best 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 2004 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.
At Motley Fool Stock Advisor, we think we have a pretty good rivalry going. 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 nearly 50%, and Tom's are almost 76%. This compares with a total for the S&P 500 of 20% 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. The following excerpt from a past Stock Advisor issue reflects Tom's value-based investing style in relation to his pick that month, Corporate Executive Board
The last two years in the stock market have renewed my love for companies that grow steadily. Companies that aren't manic -- irrepressibly sprouting in the sunshine then falling apart in rain. No, I want inchmeal success, spread over years. Plants that don't need constant funding of water and sunlight every day, or even week, to survive and grow. Haven't we seen enough companies blossom when financing is available only to choke when they actually have to operate their businesses?
Lucent. WorldCom. Enron. Global Crossing. Qwest. Countless others that haven't even been hit with the taint of accounting problems. Most important for investors is to find businesses with sustainable growth in cash flows. Never forget this.
When David recommended Electronic Arts
May I humbly point out that most great companies command high prices? Buy a few of your own some time and see. As you know, I accept more risk than the average investor, which usually takes the form of paying up for shares of a great growth stock, not wanting to miss the boat. The key is to select truly great businesses, Rule Breakers, not Fakers. Electronic Arts is no faker. I see clear sailing ahead for this one.
Both the Gardner brothers were right on the boat with these two recommendations. With a solid management team, recurring revenue streams, outstanding renewal rates, and highly attractive growth prospects, Corporate Executive Board has been a sterling performer. Its stock -- up 208% since Tom recommended it -- has been trouncing indirect but more established competitors in the consulting and business services realm. Just look at IBM
Since David recommended Electronic Arts in 2002, it's returned 90% for subscribers. It has $3 billion in cash and no debt, and it's a leader in a great growth industry -- interactive entertainment -- that should only improve in the near future with next-generation consoles. And the company's stock has done much better than competitors like Take-Two Interactive
Tom's 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.
So 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.
L
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 companies 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.
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 average returns indicate).
B ut don't take my word for it. If you'd like to check out Tom and David's research and returns for yourself, you can try out the service on us with a 30-day free trial to Stock Advisor. You'll have access to all of our past issues, which cover more than 50 stock recommendations over three-plus 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.
This article was originally published on Aug. 1, 2005. It has been updated.
John Reeves does not own any of the companies mentioned in this article. Accenture is a Motley Fool Inside Value recommendation. The Motley Fool has adisclosure policy.
