Finding Rule Breakers, IRL Investing, and Making Mistakes

Travis Hoium (0:02)

What makes a Foolish stock? Motley Fool Hidden Gems Investing starts now.

Welcome to Motley Fool Hidden Gems Investing. I'm Travis Hoium. Joined today by Lou Whiteman and Rick Mignares. Rick, you are our resident for this week. Foolish rule breaker. Motley Fool has hidden gems, which Lou works on and Rick works on rule breakers. I wanted to talk about the investing philosophy of a lot of the Foolish investments that have done extremely well over time. Companies like Amazon, Tesla, Netflix, I think you're involved with. Let's go back in our time machine. I wanted to ask you, what makes a Foolish stock? What makes a rule breaker stock in your eyes? Because it does seem very different than a lot of the things that we talk about as investors, price to earnings multiples.

What are margins doing? What did a company beat or miss expectations? How do you think about finding rule breakers long-term?

Rick Munarriz (1:04)

Yeah.

David Gardner has these six traits of a rule breaker, and I won't dive into all of them, but there are a lot of the stuff you'd expect from David's thinking, which is an emerging company and an emerging industry. You want momentum, you want strong leadership, you want all these things. But then again, there's also the overvalued, the kind of thing you wouldn't expect someone to say, wait, the stock's overvalued, that's one of the six traits. But yes, so there's some conventional and some rather non-conventional traits to a rule breaker. But it's basically finding a company that's either a disruptor or eventually will become a disruptor, or so dominant that it can't be disrupted. So it's a lot of the same quality stocks that you find over the hidden gem side, of course. It's just different ways to get there.

Travis Hoium (1:48)

When you look back on those companies, what are the things that are consistent between them? Is it that disruption angle? Is it that this was a completely new industry and you were defining what the future is going to look like, and you're just riding that wave?

What do you think about when you think back on those big hits?

Rick Munarriz (2:07)

Yeah, I think obviously being first is great, but again, history shows us that that's not. It's not whoever plants the flag first, it's whoever plants it the firmest. I mean, before Mark Zuckerberg did Facebook, or I guess the Facebook, you obviously had Friendster and MySpace, and eventually they just faded away.

So you don't necessarily have to be the first one to think of this great idea that's never come up before. You just have to be, timing also helps. Instead of standing on the shoulder of giants, sometimes you have to stand on the shoulders of failed companies, and you just happen to be lucky at the right time, but execute it well enough to the point where it takes off. And then once that momentum is going, once it's so hard to catch up to you, that is the quintessential rule-breaker. If you can catch it early, great. If you wait a little while, you didn't miss too much because the ceiling is always far higher than the floor sometimes with some of these stocks early in their defined cycles.

Travis Hoium (3:02)

Yeah, Lou, that is the thing that over 16 years or so working with the Motley Fool seems to stand out to me, is that it's more about slugging percentage and hitting those massive, massive homeruns, the 10X stock, the 100X stock. Hopefully, we all have an NVIDIA in our lifetime, but those are going to overwhelm any sort of mistakes if you're building a portfolio in this kind of way.

Lou Whiteman (3:27)

Hopefully, right. And yeah, you do have to find them, but if you find them, I mean, the old saw, but it's true. If you would have picked Amazon and four other dot coms in 1999, you might have gone for bankruptcies and a market success. So you can do that. I mean, the thing is though, and the hard thing about it is, is that there are only so many Amazons out there. It's very rare to find a company that has the ability to outgrow its own market.

Most companies are confined to the world that they live in. Amazon is a special breed. Amazon has just created new worlds and expanded into new worlds, and there's others like that. I'm not saying it's unique. But look, you can find great investments in more traditional categories that can work for a long, long time, but just kind of hits the critical mass of their industry. And I don't know if I find a really undervalued aerospace company, I can get a great return on that, but I don't necessarily want to hold it forever because they're unlikely to launch a cloud business.