To earn high returns on your money, there are plenty of rules you could follow. We all read the same books and heed the same legendary investors. But breaking rules can be more fun. Maybe breaking the rules can take you out of your investing rut and help you find highfliers for your portfolio. Outlined below are three rules most investors follow. I, however, think you should break them. And I'm going to tell you why.
Rule 1: Buy low, sell high
This rule could work well for established companies. But for an up-and-coming growth stock with a new technology or product, this line of reasoning just doesn't measure up. Take a look at Bluefly
Instead of buying penny-low growth stocks, try buying high. Companies with growing stock prices usually have some mass appeal, and they're more likely to be improving their businesses along with their products. Take a look at eBay
Rule 2: Pay for profit
A mainstream investing rule that people commonly advocate is to not pay up for a company until it proves itself with profits. But guess what? Accounting profits can be manipulated. So instead, pay for proven prospects. A company with a growing subscriber base in an industry that it has taken by storm would have growth potential. For example, let's take a look at satellite-radio providers SiriusSatellite Radio
These prospects are one of the reasons Rick Munarriz singled out XM in the Motley Fool Rule Breakers newsletter. And if XM can achieve its target of reaching 20 million subscribers in a few years, all we have to do is sit back and wait for the profits to roll in.
Rule 3: Buy the traditional value-creators
Many investors look at traditional companies and industries for valuable investments. Dividend-paying stocks such as Coca-Cola certainly add to long-term returns. These stocks provide a foundation for your portfolio. But you can take your portfolio to the next level by devoting a portion of it to companies that disrupt the traditional way of doing things.
Let's return to eBay for a prime example of a disruptive technology. This is a company that created the online auction industry, and it has successfully captured enough of the market that no new competitors have been able to penetrate. eBay's value disruption was extremely profitable to its investors as well -- more than doubling the returns for people who saw its potential early.
But you don't want to buy the obvious with a growth stock -- by the time eBay's disruption was obvious and apparent to the market, the value had been priced in. That's why eBay's returns have been fairly flat over the past few years. On the other hand, look at a company like Intuitive Surgical
The Fool rule: Make your own rules
Although there are many components to my portfolio -- including some traditional value-creators like high-yielding dividend-payers and mutual funds -- I certainly have the most fun finding companies that break the rules with their incredible growth prospects. The returns from the latter can really supercharge a portfolio. But if you're a little shaky when it comes to growth investing, there is help. With a subscription to the Motley Fool Rule Breakers newsletter, you get two recommendations each month from Fool founder David Gardner and his team. You also get an active community membership to discuss the pros and cons of each pick and potential picks.
The newsletter has been helping its subscribers beat the market by an average of 24% since its inception. Take a free 30-day guest pass, and start making your own rules today.
eBay and Amazon.com are Motley Fool Stock Advisor recommendations. Fool research analyst Shruti Basavaraj owns shares of Intuitive Surgical, and she tries to break at least one rule a day. The Motley Fool's disclosure policy is ironclad.
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