Tulsa World: Follow tips for 'Rule Breakers'

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Follow tips for 'Rule Breakers'

By MOTLEY FOOL
Published: 11/9/2009 2:21 AM
Last Modified: 11/9/2009 5:02 AM

How can we ordinary investors find the next great blockbuster stocks? Train your eyes to spot innovative companies breaking the rules in their industries, and you'll increase your odds dramatically. Investing in companies early and then holding them for a long time can provide the highest possible returns.

Motley Fool co-founder David Gardner has outlined several signs of potential "Rule Breakers." Here are a few:

Sign No. 1: The top dog and first mover in an important, emerging industry. Think of America Online in the early 1990s, for example. These companies come from emerging industries — like biotechnology today or e-commerce a few years back — because it's unlikely that the railroad or meat-packing industries will be rapid growers.

Sign No. 2: Sustainable advantage gained through business momentum, patent protection, visionary leadership or inept competitors. Can the company protect the advantage it obtained from its first-mover status?

Sign No. 3: Strong past price appreciation. Sometimes, the best investments appear overvalued. You can buy into companies after they've doubled, or quadrupled, and still make huge profits.

Sign No. 4: Good management and smart backing. This is the most important attribute — and sometimes the most difficult to get right. Seek visionary leaders and look into a company's backers, too. If the best venture capital firms are behind a firm, maybe you should be, too.

Sign No. 5: Strong

consumer appeal. Rule Breaking companies provide products or services that improve the quality of people's lives — perhaps by delivering movie DVDs to their door or by offering surgical robotic equipment.

Investing in the right Rule Breakers can deliver a bonanza. This is aggressive investing, though, as many contenders will flame out. So don't park more than a modest portion of your assets in these companies. By MOTLEY FOOL

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