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Hey Everyone! Hope you are having an awesome Monday!
Today I wanted to share My Learnings and Takeaways from Rule Breaker Investing by David Gardner.
Let us first look at 6 Signs of a Rule Breaker Business, which we can use the analyze the quality of a business.
Let's look at them one by one.
One - Top Dog and 1st Mover
We should look at the leaders in a new industry.
Look for companies with differentiated proprietary technology and a big head start/lead.
High-quality first movers will capture a lot of the market opportunities available in the upcoming industry.
These are high-quality businesses like $AMZN and $NFLX of e-commerce and streaming who were early leaders of their industries.
Out of the six, if David had to choose only one sign, it would be this one.
Two - Ensure the business has a moat
These businesses must have a sustainable/durable/long-term competitive advantage so that we can own these for a long time(at least 3 years).
This advantage can be achieved through business momentum like $CRWD, patent protection like $PFE, visionary leadership like Jeff Bezos from $AMZN, or inept competitors like $SOFI taking on banks.
Ideally, we want to own these businesses forever if we can.
Three - Strong Past price Appreciation
So we want to ensure that the businesses we own keep on executing and even before buying them, we should check their past history and try to find out if they have strong price appreciation.
Don't come up with excuses or rationalizations to try to justify owning a business if it's not doing well.
Maybe it's time to move on.
In the past I have bought some businesses just because they were cheap, I have made tremendous progress on this and I don't do this anymore!
Four - Awesome management team
People and culture are at the heart of the businesses we own and partner with.
Check if the management owns a lot of their own business.
Check if the management is someone with integrity and honesty.
Check if people love working there.
Five - Consumers love them
Check if the business has a strong brand that deeply resonates with people and they can't seem to get enough of it.
Six - Seems overvalued in traditional media
It's awesome if the media thinks that the business is currently overvalued.
It may be overvalued in the short term, but these people fail to see the long-term prospects here.
So, how should a rule-breaker investor manage their portfolio?
Let’s look at 6 Tactics the Rule Breaker Investor should use in their portfolio, Let's look at them one by one.
One - Let your winners run
If you have found a winner, let them run very high, let them be multi-baggers.
Don't trim your flowers and water your weeds - Peter Lynch
Two - Add up
Don't add to a business when its price goes down, Add to a business only when it goes up.
If you have more money to allocate, don't take a new position, instead, add to your winners.
Three - Invest for at least 3 years
Hold your businesses for at least 3 years before re-evaluating them.
Do six-month checkups on them and see if they are winning, if they are you can add more.
Four - Follow 4 tenets of conscious capitalism
You want to partner with businesses that follow the 4 tenets of conscious capitalism which are purpose, culture, leadership, and stakeholders.
A winning business is one that has a definite mission and purpose, a strong culture amongst its employees, partners, and customers has visionary leadership, and takes care of all the stakeholders of the business.
Five - A holding should have max of 5%
Allocate a maximum of 5% of your portfolio to your businesses initially.
This is to prevent you from permanent capital loss if things don't work out.
Six - Aim for 60% accuracy
Aim to have 60% accuracy with your picks. 60% is a lot, so if you are successful, you will have enough winners to substantially carry your entire portfolio and not worry about any losers/underperformers.
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Thanks, take care.
Modern Growth Investing