3 Rule Breaker Investing Hacks From David Gardner's Latest Book

Key Points

Much of David Gardner's advice bucks traditional investing wisdom. He doesn't recommend following the traditional wisdom to buy low and sell high, and he's open to buying companies that are considered overvalued. He looks for companies that are top dogs and first movers in important, emerging industries.10 stocks we like better than Nvidia ›

David Gardner is a co-founder of The Motley Fool and responsible for some of its most profitable recommendations. I wish I had been here when he first recommended Nvidia way back in 2005, and that's one of many prescient stock picks (others include Amazon, Netflix, and MercadoLibre).

In September, Gardner released Rule Breaker Investing, which covers his investing philosophy and how he finds winning companies. Here are a few of my favorite nuggets of wisdom from the book.

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1. Four of the most harmful words ever strung together

That's how Gardner describes the classic advice to "buy low, sell high," and he points out a few flaws with this oft-repeated mantra. Good companies generally don't go through dips very often, and when they do, it's not for long. Waiting for a supposed bargain could leave you sitting on the sidelines as a quality stock grows and grows.

Although selling high certainly beats selling low, it's usually better to avoid selling entirely, unless you need the money or you no longer believe in the company. But if you're still bullish about it, then you should keep it in your investment portfolio.

Gardner recommends an alternative strategy: "Buy high and try not to sell." There's nothing wrong with buying high -- excellent companies frequently trade at a premium -- and ideally, you'll hold on to these companies as long as possible.

2. What most great stocks have in common

In the first chapter, on traits of Rule Breaker stocks, Gardner writes, "Most great stocks of every era are top dogs and first-movers in important, emerging industries." For example, although Amazon wasn't the first e-commerce company, it was the first big one, and nowadays, there's no competitor that matches its scale. Netflix quickly established itself as the leading streaming service during the early stages of that industry.

Emerging industries are often tied to tech innovations, but not always. A company could also check this box if it's one of the first to serve an under-addressed market. An example Gardner gives of the latter is ResMed, which pioneered CPAP machines for sleep apnea.

I realize that finding top dogs in emerging industries is much easier with the benefit of hindsight. Keep in mind that you can still profit from industry leaders even if you aren't among the first to invest in them. Take a company like Nvidia. It was already successful with graphics processing units (GPUs) well before it became one of the top artificial intelligence (AI) stocks. But if you had invested a few years ago, you'd still be up big. Even over just the last year, Nvidia stock has increased by 48% (as of Nov. 5).

It's great if you find innovative companies early on. Even if you don't, you can still be successful investing in the top dogs after they've already made a name for themselves.

3. There are no numbers for the things that matter most

One of the unique parts of Gardner's approach is that he doesn't mind if a stock is considered overvalued. In fact, if a company checks all the boxes, the "overvalued" label is another sign that it's a potential Rule Breaker investment.

Financial metrics, such as a stock's price-to-earnings (P/E) ratio, can provide some insight into a business. But as Gardner explains, you can't measure everything about a company with numbers. Many of the most important attributes aren't found on financial statements, including the CEO and the rest of the management team, brand value, company culture, and innovative ability.

These all have tremendous value. A company with a great CEO and a strong brand could be a winning investment, even if stock market analysts on TV or the investing public are calling it overvalued. On the other hand, plenty of supposed value stocks with low P/E ratios have disappointed investors. Don't write off a stock just because of a high valuation, especially if everything else is telling you it's a buy.

I enjoyed Gardner's book and learned quite a bit from it. Those three pieces of wisdom are a few that stood out to me and that I'm using with my own portfolio, but there are plenty more throughout Rule Breaker Investing.

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Lyle Daly has positions in Nvidia. The Motley Fool has positions in and recommends Amazon, MercadoLibre, Netflix, Nvidia, and ResMed. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.