Baidu and Salesforce.com both share a key trait: the top dogs in emerging industries. David explains why this, coupled with a sustainable advantage, is a key trait of a Rule Breaker.
Rule Breaker Investing
Finding the Lead Husky
It's the Rule Breaker Investing Podcast with Motley Fool Co-Founder, David Gardner. Welcome back to Rule Breaker Investing. I'm David Gardner. Delighted to have you join with me again last podcast. I talked about the six signs of a Rule Breaker, the traits that we're looking for in companies as we scour the world looking for rule-breaking investments that will beat the market over long periods of time. Hopefully beat the market quite badly, and I talked about those six signs, but I also said I had to gloss over them. I really just wanted to cover the waterfront last time. This time I want to start with a short series where I'm going to take two at a time and just break them down a little bit further. And that means this very first one is going to be looking at our first two Rule Breaker attributes. The first is top dog and first mover in an important emerging industry, and the second one is about sustainable advantage, which we'll get to in a sec, but let's start with the top dog. This is the most important of all the six attributes. When you find a company that truly is a top dog and first mover in an important emerging industry, you may well have a tiger by the tail. You might well have one of the next great investments. It's hard to find truly great long-term investments, in my opinion, that don't conform to that trait, that don't show, don't exhibit that. So as I look back on some of our most successful investments at the Motley Fool, I can consistently see these companies were top dogs and first movers. Let me give a few examples. I think of Baidu, which has been our best performer in the Motley Fool Rule Breaker service. Baidu is up, let me see, our cost in the stock was $8.34 in 2006. Today, Baidu is at about $209 as I taped this podcast. So that's a pretty good return for Rule Breaker members. And as I think back on why, it's very easy for me to see in retrospect that as China came online and as the internet began to spread, the company that kind of functioned like Google within that area of the world was going to be in a great position. And indeed, Baidu was the top dog and first mover in an important emerging industry. Now, search is a global industry, so Baidu is not a global leader in search. Google is much closer to a global leader. By the way, Google is another Rule Breaker. But Baidu has actually outperformed Google significantly for us as a stock, which is a maybe topic for some separate podcast. But let me not just focus down on any one stock, but just point out a few others, intuitive surgical has been one of the best Rule Breakers picks that we've had. And we first picked that stock in 2005 at $44 a share, today it's around $499, just short of $500. So that's been an outstanding 11 times return in 2005. The market's about doubled since 2005. So we've crushed the market and, you know, intuitive surgical is the company that really brought, well, robotics into surgery. And when you think about all that that probably means, both in the present and the future, and you realize that the company that becomes synonymous with higher tech surgery, with better outcomes, fewer days of bed stay after surgery is accomplished, you start to realize that that is a great position to be. And intuitive surgical, definitely the top dog and first mover in an important emerging industry, high tech surgery, an amazing company, amazing stock. And one more example, Salesforce.com has also been a tremendous Rule Breaker, up 10 times in value since 2009, and his customer relationship management became a software thing, and as that software then went into the cloud and became a place that you could keep up with your customers and manage them through the magic of the internet and all the possibilities that higher tech, higher touch brought. Salesforce was the company that first came to mind for so many people as a leader in that field. And so another top dog and first mover in an important emerging industry. So those are just three examples there are many others I could give, but I don't want to belabor the point. I hope you see now that, as I said last time, if you're not the lead husky, the view never changes when we find the lead huskies, and they are taking us into places in the forest that no one had ever gone before, and there's a pot of gold behind that tree that no other dog ever noticed when you find that top dog and that first mover, and you find them in truly important emerging industries, and by the way, more important emerging industries are happening today than ever before. Whether we're talking about Amberella's high tech, high deaf chip sets for GoPro cameras or you think about all security cameras, et cetera, you think about all, I think the next decade cancer is going to be cured in a lot of ways. It already is. Another amazing frontier for us. You think about drones, you think about robots. There are any number of important emerging industries happening all the time. The stock market can even be flat for a meaningful period of time, but you and I can beat the stock market because we don't have to own the whole stock market. We can find the important emerging industries and the leaders within those industries. So that's our first attribute, and then our second attribute, sustainable advantage, which is earned through business momentum, patent protection, visionary leadership, or inept competition. Now, there are other forms of sustainable advantage, but there are four that I've called out in that attribute, and I'll give examples of each, but let's just talk for a second about how what a wonderful one, two punch this is. When you find a company that is the top dog and first mover, an important emerging industry, and you find that company has a sustainable advantage, you can see why that would lead us to some of the best stocks you can find on the market, some of the best businesses to be invested in over the course of time. And I earlier mentioned Baidu, which is today a smaller company than Google, but has been a better stock than Google. You can see that often it's finding these early emerging companies at younger ages. Baidu was a younger company when we found it than Google was when it went public. So it's possible for a stock market investor to make a lot more money by finding these early companies. And again, when you find them and they have a sustainable advantage, that's a very powerful, powerful one, two punch. So let's take a look quickly at the four examples I give. And the first is business momentum and a company that comes quickly to mind when I think about business momentum is Amazon.com, which when Amazon really created the e-commerce industry, it got so big, so fast that it became very difficult to compete with. So Amazon just had that momentum, Earth's biggest bookstore is how it started. I still have my mouse pad that says Amazon.com, Earth's biggest bookstore. It's become a lot more than that. They started to offer CDs and music and movies, purchases, DVDs. I bet you can remember those days, perhaps, if you've been around for 20 years or so. And then of course, they started adding things like ladders and tubas and all kinds of it. And then they added new businesses altogether beyond e-commerce, like their cloud computing business. The Kindle was really started its own little mini industry. And there are any number of additional Amazon, Amazon Prime, Amazon innovations that are happening now today, they're competing against Netflix. So this is a company that has always used momentum and getting big fast in order to stave off competition. It became very hard to identify who was number two, playing the same industry as Amazon once it got big enough. Who is number two to Amazon and e-commerce today? It's hard to answer that question with a quick Pepsi to their Coke, a Pepsi-like answer against Amazon. That's what happens when you have great business momentum. The second example I gave, or the second sustainable advantage trait that we'll often find is patent protection. Now this is of the four, probably the weakest one of them, because when you're trying to use the power of government to stave off competition, that's a little bit weak sauce. But it's also totally understandable. If you think about biotech companies, which frequently have this kind of patent protection protecting them, a huge amount of resources have been invested in getting their eventual drug to the market. So it makes sense that we would give them 20 years of profit protection. At the same time, patent protection is of the four, the one that is relying on the government to protect this company. And I much prefer to see my companies not need anybody's help as they just get out and create sustainable advantages. But I mentioned Amberella earlier. The number of patents that they have governing, basically their video chip technology, the compression. Actually, you can go Google Amberella patents and you'll see their list of patents. You can see how well protected that business is. So some of these infrastructure companies that aren't selling their product directly, like they're not the GoPro camera. They're the thing inside the GoPro camera. A lot of those kinds of companies often have this form of patent protection. So it certainly can be a sustainable advantage. Number three is visionary leadership. And I don't need to say much more than, I don't know, Steve Jobs, Elon Musk, a Tesla, Mark Zuckerberg at Facebook, you may not know as well, the founders of Chipotle. But Steve Owls and Monty Moran, but these are all visionary people and it almost doesn't matter the industry. In fact, I just gave you companies that sell burritos right next to the biggest social media company of our time. So they can come from any industry. When you have the visionary leader, the smartest person in the room in his or her industry, that is a tremendous sustainable advantage, especially if they're well invested in the stock and stay with that company often as youthful entrepreneurs over long periods of time. We make a lot of money with those companies. And then finally, I'll just go quickly with inept competition, my final one. One of my favorites, there's a few better sustainable advantages than when the people that you're competing against are poor. And Netflix has for years enjoyed inept competition, whether it was Blockbuster competing against Netflix back in the day to then competing against Walmart, which decided it would compete against Netflix for a while with the DVD mail. For today, Netflix competing against the cable companies in a lot of ways, which are big regulated entities that are not very innovative and very easy to compete against in my opinion, even though they looked much bigger than Netflix, which looked like a David to their Goliath. Netflix will face less inept competition going forward, HBO and others represent good competitive forces. But I hope by bringing these two points together, you can see how we find our way to some of the best rule breakers of our time. So these two attributes will cover the next four in our succeeding two podcasts. But these two attributes are really important to respect. And I hope you in those in closing, one important thing about these, they're about the business. They're not about the stock. They're not about some game around the stock. They're looking real businesses in the eye and saying, do you want to be a part owner of this enterprise versus that one? And which are the ones that are really going to make us money and really succeed versus shareholders over time? And so, that business focus is always underlying so much of what we do in Motley Fool World Breakers. So, thanks a lot for listening. This was Rule Breaker Investing. I'm David Gardner, our website, a companion to this podcast, rbi.fool.com. I look forward to talking to you soon. Fool on. As always, people on this program may have interest in the stocks they talk about, and the Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. Learn more about Rule Breaker Investing at rbi.fool.com. [MUSIC] [BLANK_AUDIO]