When David Gardner developed the now-popular Rule Breakers investing strategy in the 1990s, it wasn't very conventional. Placing a greater value on an innovative company's ability to create a disruptive technology over tried-and-true valuation metrics? Heresy! It was considered outrageous then, but it led David to unearth some lucrative diamonds in the rough like Starbucks
So let's see whether I can demystify the process a little. I'll review what I consider to be the three keys to achieving superior market returns -- without having to whip out a calculator.
1. The toastier the sector, the prettier the Phoenix
Some of the greatest growth stocks have come from the most moribund of industries. Starbucks came out at a time when folks seemed perfectly happy forking over $0.49 for a cup of joe at Mickey D's. It turns out they wanted something more. Amazon launched its site when the public seemed perfectly content to leaf through books in gargantuan superstores. Turns out they were clamoring for something else then, too.
Show me an industry that appears to be running dry on inspiration, and I'll keep an eye out for a real gusher ready to break free. If there's a niche so out-of-favor that it's being neglected by the mainstream market-watchers, be on the lookout for a revolutionary investment.
2. Follow the product cycle, and keep going
When Apple Computer
Traditional investors failed to see how a hit product could invigorate Apple in many ways. The iPod had lower gross margins than the company's flagship desktop and notebook business, but the brand's ubiquity resonated with users; when PC users needed to upgrade their systems, a Mac suddenly made perfect sense. Apple had spent the previous decade losing market share in the computing realm, but one smash-hit product in a somewhat unrelated field was enough to reverse Apple's fate.
3. Be the optimist in a roomful of pessimists
Let it rain. Let the worrywarts fret. There's money to be made when others are obsessed with trailing earnings and industry standards. Does that make Rule Breaker investing a contrarian philosophy? Does it matter?
Putting it all together
It doesn't seem like much of a growth investing strategy, does it? Mature sectors, product cycles with longer-term payoffs, and a contrarian mindset? Yet that's what has often led David Gardner to some of his best investing ideas.
In the early '90s, AOL was entering an online services field littered with lackluster offerings powered by stodgy behemoths like GE, Sears, and H&R Block. Then there was eBay
Few saw hospital operating rooms as a growth industry when David recommended Intuitive Surgical
Not all Rule Breakers have performed that well. Since the newsletter's launch 17 months ago, the average pick is up just 27.2%. However, that's considerably better than the 6.7% average market return in that time.
So are you ready to take the plunge and become an ultimate growth stock investor? Want David Gardner by your side as you attempt to demystify the market? Subscribe for a year or two, or just kick the tires with a free 30-day trial subscription. Act quickly, though. The next issue is now just hours away.
Longtime Fool contributor Rick Munarriz finds that eating, sleeping, and breathing growth stocks will work wonders for your financial health. He does not own shares in any of the companies mentioned in this story. eBay and Amazon.com are Motley Fool Stock Advisor picks. The Fool has adisclosure policy. Rick is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.