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Last time I teased the style box that helps explain why Rule Breaker investing wins. Remember that style boxes oversimplify; they’re cartoonish views of the world. But when we make things as simple as we can (Einstein: “But no simpler”), we give ourselves a clarity that many others lack.
Here’s the style box I use to explain why Rule Breaker Investing works:
The Y axis, labeled “Timeframe,” goes upward from “short-term” to “long-term.” This is the holding period of your investing, with traders at the bottom and investors at the top.
The X axis, labeled “Company Type,” goes rightward from “predictable” to “innovative.” “Predictable” companies predominate the world of business, whether they’re operating oil fields or selling Dunkin Donuts. These companies stay within the defined lines of their industries and their core businesses. The “innovators” are the rare Rule Breakers.
For “Timeframe,” well more than half the financial world operates in a short-term timeframe. So if you’re fishing in the “long-term” pond, you’re already feeling lonely. For “Company Type,” well more than half the corporate world is not only predictable, most of it strives to be even more so! Businesses at scale that challenge the status quo, or completely unravel it, are few and far between.
Thus, if you’re investing in the quadrant of “long-term” and “innovative,” you are among a tiny subset of investors. Most of the long-term capital out there (e.g., the Buffett crowd) has been actively coached and reinforced to avoid innovation. Meantime, most of the “innovator” company stocks are highly volatile, “overpriced.” “Make your money fast before they blow up,” short-termers say, treating them as a “trade.”
Malcolm Gladwell has shown: The best way for David (here, individual investors) to beat Goliath (institutional investors) is by playing the game completely differently. Rule Breaker investors ironically serve as lonely fishers at the market’s most stocked pond. The fish swimming here are the world’s great innovators who’ll provide the most market-crushing long-term returns.
I love this pond, this style box! It’s enriched me, so much, in part because so few find their way here… to our quadrant.