Profiting by Breaking the Rules

Many, if not most, investors will be best served by a low-fee broadmarket index fund or two. But if you’d like to try to juice your portfolio’s growth, you might add a few shares of carefully selected fastgrowing stocks — aiming to hold them for many years. Choosing the most promising potential high-flyers is easier said than done, though, and some will fall in value rather than rise. Motley Fool co-founder David Gardner developed a “Rule Breaker” investing approach to focus on innovative companies breaking the rules in their industries. To identify great companies early in their high-growth stages, he suggests: • Look for the top dog or first mover in an important and/or emerging industry, such as business-to-business software, biotechnology, cloud computing, robotics, cybersecurity, social media and e-commerce. • Seek sustainable competitive advantages, such as business momentum, patent protection or visionary leadership. In the biotechnology world, patents are an advantage, while retailers can benefit from economies of scale. • Don’t be afraid of strong past price appreciation. The best investments can often appear overvalued, but they keep growing over long periods. • Demand good management and smart backing. Companies with smart, visionary leaders and some of the best venture capital firms behind them often do well. • Know that strong consumer appeal is important, too. Rulebreaking companies tend to have great brands and deliver products or services that improve the quality of people’s lives. Rule Breaker investing is a more aggressive approach than seeking dividend-paying blue-chip stocks, so don’t park more than a modest portion of your assets in these companies, and prepare for volatility and some flame-outs. Learn more and see our recent recommendations at Fool.com/services.