As a child, I was raised on apples.
And Apple Computers (NASDAQ:AAPL). My first PC, bought in 1981, was an Apple II+. My second was an Apple IIc clone (made in Hong Kong). My third computer was a Macintosh.
But I'm typing this column on what, in the dusty tomes of PC history, was once described as an "IBM clone." And to be honest, I haven't touched an Apple-brand computer in close to a decade. Apple always produced machines far superior to its IBM-based rivals. But for many reasons, the things just didn't sell. The IBM clones were always cheaper. The best games always seemed to be written for IBM, or to come out first in IBM-playable format. Despite a series of business missteps, Apple won the battle for the hearts and minds of its fans -- but it lost the war for marketplace dominance.
Veteran investors have a special term for companies that boast whiz-bang technology -- but kerplunk! profits. Such companies, armed with leading-edge technology but failing to produce commensurate profits, get tagged with the moniker "bleeding edge." The pre-iPod Apple was one such bleeder. Take a look at this chart comparing the performance of Apple Computer to the S&P from Apple's first day of trading through the end of 2004, and you'll notice two things. First, Apple's stock has rocketed nearly straight up over the past six months. And second, if you had invested $1,000 in Apple at its 1980 IPO, and on the same day your brother-in-law, Dufus McBoring, had invested an equal sum in an S&P 500 index fund, today you'd both have achieved about the same returns. That's right, after 25 years of enduring near-heart attacks over the company's nosebleed rushes into the stratosphere, followed by harrowing dives into the depths, you'd have barely matched the performance of the plodding S&P.
As if that weren't depressing enough, chances are you wouldn't have even tied Dufus. Consider how incredible the temptation must have been to dump this "dog of a stock" after watching it underperform the S&P through six years of the '90s roaring bull market. Consider the likelihood that, around about 1998, you'd have run out of patience with Apple and finally dumped it for no gain -- to invest the proceeds in the stock of the hour: Enron.
That's the tragedy of bleeding-edge companies like the Apple of old. Even if, after decades of failure, they ultimately do succeed -- by then, their original shareholders have long departed.
How to stop the bleeding
Fortunately, not all the dreamers of the business world underperform as investments. Sure, many "Apples" turn out to be Lisas in disguise. But others evolve into iMacs. And a select few will one day become the corporate equivalents of iPods -- "must-have" stocks that generate outsize profits and exceptional investment returns for their owners. At Motley Fool Rule Breakers -- where we evaluate and track the prospects of the world's most visionary businesses -- we're aiming to pinpoint these winners in a world of also-rans.
How do we do it? How can individual investors, lacking the legions of analysts of an investment bank like Bear Stearns (NYSE:BSC), look at an upstart company and conclude: "Yes, this one is going to make it"? It's not as hard as it might sound -- but it does help to know what you're looking for.
You see, rule-breaking investing isn't an exact science, but neither is it gambling on "moon rockets." We don't just drive down to Vegas, throw all our money onto the roulette table, and let it ride on lucky 7. We're serious investors here, and we research our picks thoroughly, basing our decisions on a marriage of hard facts to probable outcomes, striving to find the winners. When our research uncovers an "iPod," we'll tell you about it. And when we come across a "Lisa," we'll warn you away. Here's one way to tell the difference:
Invest in obviously great business ideas
Consider. If you had to pick just one business in which to invest your retirement nest egg (not that we're suggesting that at all -- this is just a parable), which would it be?
IBM (NYSE:IBM) or Dell (NASDAQ:DELL): Which one would you pick to be the long-term winner in the personal computer market? (Actually, that's a trick question. IBM has already thrown in the towel and sold its PC business to China-based Lenovo Group, beaten soundly by Dell in the very business that IBM started.)
The U.S. Postal Service or FedEx (NYSE:FDX): Who you gonna call?
Sears (NYSE:S) or Amazon.com (NASDAQ:AMZN): Which will it be, the store that first invented the mail-order catalog business, or the store that perfected and digitized it?
Each of the winners up there (and if you haven't guessed, we think the winners are Dell, FedEx, and Amazon.com) had a vision. And in acting on that vision, these companies broke the rules of previous corporate business-think.
- Dell gave consumers the freedom to build and buy the computers they wanted, shipped them out in a couple of days, and charged prices far below what the PC dinosaurs had been demanding.
- Amazon.com enabled shoppers to shop at will, free from the linoleum-tiled, Muzak-filled mausoleums that are America's department stores.
- FedEx took a grade-C college term paper and built it into a business that changed how Americans, and indeed, people all over the world, receive products ordered from Dell and Amazon.com.
And there's one other thing that all three of these companies have in common: head Rule Breaker analyst David Gardner has recommended each of them to subscribers in his Motley FoolStock Advisor newsletter.
After wanting to own the company for years, and waiting in vain for a price drop, David finally recommended Dell in February 2004. Did he wait too long? Was it by then too expensive? Hardly. In under a year, it's climbed 19%, thrashing the 4% rise of the S&P 500. David acted earlier on both FedEx and Amazon.com, and his readers benefited accordingly. FedEx, recommended in February 2003, has appreciated 68% in value. And Amazon.com, picked in October 2002, has leapt an incredible 177%. Collectively, these three companies are beating the S&P's return by an average increase of 66%.
Those are the kinds of outsized returns we shoot for at Motley Fool Rule Breakers. Are they easy to achieve? Absolutely not. What's more, if you subscribe to this service, you're not likely to see the kind of steady climb -- roughly 10.5% per year on average -- of your brother-in-law Dufus' S&P index fund. Rule breakers are a volatile lot, rocketing upward one day, slipping down the next. Which is why, if you do choose to join us on our quest for the next great American business, you need to be certain of two things:
1. With great risk comes great reward. We're aiming to find the best, we're going to pay what it takes to buy the best, and we're going to stick with the best through good times and bad. Not all of our picks are going to work out. But if we can pick enough winners to outweigh a few losers, in a few years we won't be just matching the market's performance, as Apple did, but crushing the market's returns, as our investments in companies like Dell, Amazon.com, and FedEx have done.
2. We're going to have a blast doing it. It may not be for the faint of heart, but rule-breaking investing is undeniably the most fun of all the investing styles we practice at the Fool. If you're up for it, we'd love to have you aboard for the ride. Just buckle up, grit your teeth, and sign up now for a free one-month trial.
If you like it, stay aboard for a full year and you'll become a charter member of the service. And remember -- if at any time you need to stop and get off, we'll gladly refund you for the entire unused portion of your subscription. No questions asked. No strings attached. You have our word on it.
Fool contributor Rich Smith has no position in any company mentioned in this article. The Motley Fool's full disclosure policy breaks all the rules of the investing game.
