Stocks breaking the rules

Here’s a very interesting article from Motley Fool about identifying rule breakers. The focus is on defining “rule-brekaer” and giving examples.

Starbucks is one of the stocks mentioned. Sure it’s not a new company, but who is #2? When there’s no clear competition you might be looking at a rule breaker. Taser is another stock mentioned in the article. It’s not a safe investment but it’s another example where there is no clear #2.

While the potential returns are enormous, this is not a safe place for a big chunk of your portfolio. However rule breakers should be considered:

Researching this column, I ran some numbers. Turns out, when David officially shuttered his real-money Rule Breaker portfolio, he’d managed a 20.1% annualized return. That was in mid-2002, after the bear market. Compare that with 9.1% for the S&P and 7.3% for the Nasdaq over the same period.

Put another way, the $87,500 invested in the real-money portfolio between August 1994 and April 2002 was worth more than $300,000 when the portfolio officially closed in February 2003 — after the bear market had run its course. Those are the kinds of results that made legends of Peter Lynch and Bill Miller, and rightfully so.

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