YWR: Own the Rule Breakers
I’m frustrated with myself.
Amazon, Apple, Tesla, Nvidia, Intuitive Surgical, Netflix, Mercado Libre, Palantir, Axon Enterprise, Costco, Monster, TJX.
How did I miss so many home runs over the years? Yes, I owned some of them for a while, but never for the full run, and missed many others completely.
That’s what I was thinking to myself while reading Rule Breaker Investing by David Gardner. Gardner is the founder of the Motley Fool and has been picking one growth stock/month since the late 1990’s. When David finds a good company he holds on forever.
How did Gardner get it so right when so many professionals didn’t? The professionals would always complain these stocks were expensive the full way up and find a cheaper alternative.
Well, they say when the student is ready the teacher appears.
And I’m ready. Because I need to do better. I need a couple of these home-runs in my portfolio going forward.
We all do.
Six Rule Breaker Traits
David Gardner describes his custom framework for what the next 10-bagger probably looks like. As he says these aren’t rules, they’re guidelines.
The Top-Dog (First mover in an emerging industry). Amazon with internet retail, Apple with smart phones, Nvidia with GPU’s. Netflix with streaming media. Pay attention to companies which become #1 players in a new growth market. That’s a big deal. It’s natural advertising. As the market grows and attracts more customers these customers will want to do business with the #1 player. It’s a flywheel. And it’s a big signal that these firms can see opportunities, move quickly and establish leadership.
The Snap Test: If you snapped your fingers and this company didn’t exist anymore, would their customers care? You want to own companies which customers would truly miss.
The Cola Test: Is this company the only one doing what they are doing? Or, is there a Pepsi to their Coca-Cola? It’s highly attractive to find a Top Dog with no real competitor (Intuitive Surgical).
The Snap-Cola Test: 1) They have early on achieved huge importance and relevance 2) They are the only ones doing what they are doing.
Sustainable competitive advantage: Is there something which protects the business when imitators start to move in? These competitive advantages could be:
Network effects where customers beget more customers (like Facebook),
Scale effects (like Amazon with logistics),
Technology patents (like with Qualcomm),
Corporate culture
Trusted brand (like Coinbase in Crypto).
Stellar Prior Price Appreciation: This is counter-intuitive but we want stocks which have already gone up a lot. It’s a sign they can do it again. We want to buy winners. We want to buy greatness. You don’t shy away from a stock because it has gone up 60% while waiting for a dip which never happens.
Talent hits a target no one else can hit.
Genius hits a target no one else can see.
Good management and backing: Who is running the company and do they have shareholder support? It takes years for a 10 bagger to unfold. During that period there will be lots of industry changes and unexpected challenges. There will need to be pivots and adjustments. Whole new businesses might need to be created. The best growth companies have visionary founders. Jobs, Bezos, Zuckerberg, Huang, Musk… They can also have good CEO’s (like Jamie Dimon at JP Morgan or Andrea Orcel at Unicredit), but really good founders are better.
Strong consumer appeal: Long-term multi-bagger growth stocks usually have great brands. Their customers love them. And the brand stands for something. Typically good brands have the following attributes:
Bright: They are positive and inspirational (Southwest Airlines). There aren’t many ‘dark’ brands that are a huge success.
Responsible: They usually have a positive purpose (Tesla and energy transition or Patagonia and preserving nature).
Dependable: you get the same great product and service every time (McDonalds, Starbucks)
Overvaluation: David Gardner says it’s actually a good thing if everyone says a stock which has a great brand and is dominating a new growth industry with great management is ‘overvalued’. In fact it’s a key attribute. You are buying greatness, not mediocrity. The great home-run stocks were always ‘over-valued’. The whole time. I love this because it’s so completely the opposite of institutional investing.
Rule Breaker Investing Habits
Identifying 10-baggers requires an unconventional framework (buying expensive stocks which have gone up a lot), but it also requires different investing habits.
Minimum-3 year investment horizon: These ideas are going to take years to play out. They are investments around winning business models and management, not short-term stock chart patterns. You are playing a different game and the most important skill is to sit and do nothing. There are going to be 40% drawdowns which will make you look stupid, but sit tight. It’s a marathon. All the great stocks have lots of massive drawdowns along the way. The greatest stock of all time did nothing for 12 years.
Nvidia Add on the highs: You have to be able to keep adding to stocks even after they’ve gone up a lot. There is still tremendous value to unfold. Yes, it’s great to buy when there are dips, but with great companies the dips are shallower and less frequent. Most of the time you will be adding on the highs.
Lose to Win: Expect lots of mistakes. You are investing in new companies in emerging, not well understood industries. You are going to get some things wrong and have wipeouts. But think more like a VC fund. The few 10-baggers you get right are going to more than make up for the few you got wrong. This isn’t saying to be careless, but understand you aren’t trying to pick 10 stocks which go up 10%. If you can find 3 which 10x then you don’t care about the rest. The inverse is that within those 10 stock there will also be 3 duds.
Ignore the Macro: This isn’t in Gardiner’s book. It’s my own. Think about Amazon from 1999-2025. Did you need to know whether the US was going to invade Iraq in 2003? Or, whether there would be a financial crisis, or the level of US interest rates? No. You had to understand the potential of what Amazon was building. 1% of the world was focused on what Bezos was doing and where it was going next while 99% were reading the daily news and focused on the ‘macro’.
Rule Breaking with YWR Characteristics
I’m on board with everything David is saying except buying on the highs even though he is probably correct on that too. For me, yes find the great growth companies which everyone says are overvalued, but get into them after some kind of a correction, or after some unexpected problem has arisen, when sentiment is negative and everyone thinks the story is over (like we did with Tesla last year). It just helps for your long-term holding to have a good entry point where you’re in the money.
How do I get started?
Finding the top-dogs in emerging industries, analysing the management, knowing the strength of the brand, assessing the corporate culture..
It sounds exhausting. I have a day job. How am I supposed to cover this much ground on hundreds of stocks?
We have a solution for this…
And I’ll give you a hint.
I bolded the key word in paragraph 2.
I’ll wait here while you look.
David Gardner provided us his Rule Breaker ‘framework’.
And you know what we can do with ‘frameworks’.
We did it once already with the Blue Ocean framework.
The YWR Rule Breaker Dashboard
Yup… we did what you think we did.
We used AI to run David Gardner’s Rule Breaker framework across 500 stocks in the US then created scores for each attribute. You can now sort and filter stocks based on his key attributes. When you click into each stock you get a narrative analysis for each score.
Now we have a screen of the top 500 stocks in the US using the Rule Breaker framework.
Below is a link to your new YWR Rule Breaker Dashboard.
Let me know which stocks you like.
Let’s find some 10-baggers! And please put some tickers in the YWR chat.