Rule Breaker Investing is a podcast created by the co-founder of The Motley Fool, David Gardner, where he shares his insights into today’s most innovative and disruptive companies – and how to profit from them by following his signature “Rule Breaker Investing” principles. Below you will have 6 tips on how to invest according to Rule Breaker principles.
Usually, when we invest we have to answer two questions: What do we invest in? And how do we invest?
The “what we invest in” is: what kind of company do you invest in? Do you invest in innovative companies? Market-leading companies? Traditional companies? Companies that pay good dividends?
What to invest in from David is as follows:
My “what do I invest in”? I like to find the most innovative companies of our time, and I like to make sure that aren’t just R&D companies or aren’t just hope and dreams. Companies that are real and that offer excellent solutions, often create disruptions in the industries in which they are participating; they are really innovative;
As for “how do we invest?” it is linked to the criteria that guide our decisions when it comes to investing.
How we invest is about you, how do you invest? What principles does it follow? What rules?
6 tips on how to invest according to Rule Breaker Investing
Below, see 6 tips on how to invest that David follows in Rule Breaker Investing.
“How” #1: Let your winners rise. Rise High
In David’s experience, the most important thing as investors is to maintain. Keep companies in your portfolio. You should buy the companies you believe in and keep them in your portfolio.
It’s a simple idea, but when we have a company that has grown more than 100% in our portfolio, we start to think about selling it to realize the profits. David advocates against this.
He comments that you have to let it rise, and rise high.
An example is that if you had sold Netflix in your second year or Amazon in your third year of trading, you would have lost a 150 times multiplication in price.
The amount of money you leave on the table in these situations far exceeds the 100% loss in a lot of other positions.
In short, the idea is: Find good companies and hold those positions tenaciously over time to produce multiples and multiples of your original investment.
“How” #2: Increment instead of doubling down
The second is linked to not adding to the losers, but to the winners.
We always hear that we should buy low and sell high. The danger here is in the selling part. When we sell, we are violating “how” #1.
Another danger is “buying low”, this makes us tend to add money to companies where the position is lower than when we bought it, that is, the current value is lower than the price we paid. This is the downward bend mentioned at the beginning.
The tip here is to always add money to the winners, those companies that are going up, and not add money to those that are going down, that is, with the lowest value.
In short, it’s trying to find excellence, buy excellence, and increase excellence over time. And blindfold mediocrity.
“How” #3: Invest for at least three years
Buy a company and hold it for at least 3 years.
This rule is linked to investing in the long term and not speculating in the short term.
This is because companies in the short term are subject to market variations.
Over at least 3 years you will have less influence on the market mood on the company’s price and more on the company’s fundamentals.
“How” #4: Remember the Four Principles of Conscious Capitalism
Conscious Capitalism is a philosophy that states that companies must serve all key stakeholders, including the environment. It does not minimize the pursuit of profits but encourages the assimilation of all common interests into the company’s business plan.
The four principles are:
Principle #1: Look for purpose-driven companies.
Principle #2: Look for companies that value all stakeholders. Companies that are oriented to make everyone win. Customers, certainly. Customers always come first for companies. Your employees. Your partners and suppliers. Your shareholders too.
Principle #3: Conscious or Servant Leadership. You should be able to detect this among company executives.
Principle #4: Conscious Culture. The culture of the companies in which we are investing. These must be really good. Employees must love working there.
Make your portfolio reflect your best vision of the future.
In David’s experience, when you have companies that are going to make the world better, that’s one of the best reasons to keep holding on to them and hope they do well over time.
So think and actively ask, “What is my best vision for the future? Does my money line up with that?”
“How” #5: Maximum starting position of 5%
When starting to build a portfolio for yourself, never start a position in a company with more than 5% of the total amount you have to invest.
This means that when you build a well-structured portfolio you will have at least 20 companies in your portfolio.
Of course, initially, when you start investing with little money, it is not easy to diversify into 20 companies. But as you build your portfolio you will have to diversify.
The main idea of this principle is to avoid focusing too much on a position that seems to be a very good opportunity, and after a while you discover that it actually wasn’t.
The principle also doesn’t stop you from starting with 5% and over time the company is doing well, you can’t add to it following principle #2.
“How” #6: Focus to achieve 60% accuracy
But what is meant by precision? In David’s case, accuracy is the number of companies that are above the market. For example, if you have 10 stocks and 8 of them are above market, and two are below market, then I would say that’s an excellent accuracy of 80% [8 out of 10 companies].
The market can be considered the S&P 500 indicator.
Even if you don’t get this precision right, the good news is that you can still earn on stock market averages.
Studies show that most companies in the market lose to the market average. So if you’re hitting 50% accuracy, you’re probably outperforming a lot of fund managers.
Achieving 60% accuracy also means you will lose at 4 out of 10 companies. And some of those losses will be very big. So you should be comfortable with perch, it’s a natural on the market. But you should always aim for 60% accuracy.
“You must be willing to lose to win,” comments David.
If you want to listen to the full podcast that contains 6 tips on how to invest directly from David, you can access it here.
Happy investing!