Rule Breakers

Rule Breakers 3.91/5 (78.18%) 22 votes

Motley Fool Rule Breakers Review

Rule Breakers is the Motley Fool’s “high-growth” investing newsletter, started in 2004. From their website, they “focus primarily on under-appreciated growth stocks with solid management and a sustainable business strategy.”

An integral part of the definition of a Rule Breaker stock is that the company is an innovator in an emerging industry. They also look for stocks that have already appreciated in price and may be overvalued by traditional measures of stock valuation such as P/E ratios. They are not looking at penny stocks, nor are they necessarily targeting stocks directly post-IPO. But they generally are less well-established companies that may or may not be profitable. This means the Rule Breaker stocks tend to have much higher volatility and investing risk.

For a full discussion of the Rule Breaker investing philosophy, read the Motley Fool book Rule Breakers, Rule Makers.

The price of a subscription includes the following:

  • A monthly newsletter (including a print copy mailed to your home)
  • Weekly email updates
  • Access to the members-only Rule Breakers website and forums.

Motley Fool Rule Breakers is a long-term, buy and hold long-only service. Members receive 2 stock picks each month, typically on the 4th Wednesday of each month.  You also get a list of 5 Best Buy stocks each month. There are regular weekly email updates, and the Rule Breaker website will have miscellaneous updates on a regular basis. They also publish a list of 5 “Core” stocks that are updated on an annual basis.


For comprehensive Motley Fool performance results, check out my Performance Insights. They're the only source for Annualized Returns, Success Rates, CAGRs, Performance by Year and Industry

Whether you are already a Motley Fool member, or considering subscribing to one of their services, my Performance Insights will help you with your investing decisions.
 

Rule Breakers Performance

You can view up to date overall Rule Breakers performance, along with all other Motley Fool services, here. As of this writing, the Total Average Returns for Rule Breaker stocks since 2004 is 54% vs. 26% for the S&P in the same time frame.  These are really good results, but unlike some of their other investment newsletters (e.g. Stock Advisor), there are fewer winning picks (45%) vs. the S&P than there are losing picks. This includes closed positions. However, if you look at only currently open positions, that number improves to 56%.

As a result of being long-term holders of stocks, combined with the volatility of the stocks they choose, Rule Breakers’ losing picks tend to be big losers. A big part of the philosophy is geared towards holding companies until something has changed about the fundamental investment thesis. So they give their stocks a lot of time to turn things around, and when that doesn’t happen, the result is typically a very big loss.

On the winning side, there have been a handful of tremendous out-performers vs. the S&P with a margin of greater than 500%, and over a third of their picks are beating the market by 20% or more. This is the positive side of being a long-term investor – outsized returns. A number of these stocks were in the red at one point or another but the Motley Fool philosophy of holding for the long-term allows these companies time to turn things around.

Performance vs. the S&P

RuleBreakers 2013-03-08

What Rule Breakers is Not

Motley Fool Rule Breakers is not an active trading service. David Gardner and team view their investing horizon as at least 3-5 years, and they hold stocks for the long-term. If a stock issues a bad earnings report and the stock drops 7% in the morning, you will not get an immediate notification with an update and definitely no alert to sell. You can however go to the message board for that stock, and are likely to find an update from one of the knowledgeable fellow members or one of the various other analysts assigned to keep an eye on the boards. This lack of immediate guidance has at times been a source of frustration for some members who panic when they see a stock in their portfolio taking a sizable hit. However it’s important to understand that this is not what the Rule Breaker service is about. It’s about long-term investing, and you should be able to stomach some rocky days.

Unlike Stock Advisor, the advisors do not post an official “10% Promise” response to a drop of 10% or more. This is mostly because of the nature of the companies in Rule Breakers, which tend to be more volatile than the average stock, and so large daily variances are to be expected.

Even in cases where the stock drops on potentially alarming news like a CEO resigning or even a rumored accounting scandal, for example, they rarely will issue a Sell or Hold recommendation that day. Their tendency is to digest and analyze the news and issue a more detailed response a day or two later.

Motley Fool Rule Breakers is not a valuation based service. You get the Monthly Recommendations and you get the monthly Best Buys, but they do not tell you when to buy the stock, and more importantly, nor do they tell you at what price to buy them.  They do not issue “Buy Below” guidance nor do they give any valuations of what they think their picks are worth. It is implied that at the time a stock is selected as a Monthly Recommendation or a Best Buy that the price represents a good entry point, but the service focuses on the overall quality of the company as an investment, and not on specific price levels or momentum indicators. There have been many instances where the a stock drops significantly shortly after being recommended, which again can cause some frustration, but unless there is a substantial change to the investment thesis, Motley Fool’s general view is that they are investing for the long-term and if the stock pick plays out as expected, a small dip in price will not matter.

Motley Fool Rule Breakers is not a portfolio service either.  You do not receive any guidance on how many shares of a recommendation to buy. They also do not view their picks as being part of a holistic portfolio so if they recommend 4 housing industry-related firms in a row, that doesn’t necessarily mean they are recommending their members go overweight on an allocation in that industry. However, they do provide a risk rating for most of their stocks, which are of debatable value, but it is up to each individual to assess for themselves how they want to build their portfolio.

My Take

In my opinion Motley Fool Rule Breakers is better utilized as a complementary investment service than as a stand-alone service. In contrast to some of their other services, the companies in Rule Breakers offer too much volatility for the average investor. I would not recommend Rule Breakers to new investors who don’t already have an established portfolio.

On the other hand, if you are an investor that is looking for new investment ideas that offer a little more growth potential, and are comfortable with some additional risk, Motley Fool Rule Breakers is a very good choice. Even in this case, I would suggest that Rule Breaker stocks be given a limited allocation of your overall portfolio.

But you do need to have a long-term mindset.  Their monthly stock recommendations are deemed to be innovative companies with superior long-term growth prospects. If you are looking to make money overnight, this is not the service for you. If you are looking for a service that will tell you exactly which stock to buy, at exactly what price, and exactly when to sell it, this service is not for you either. If you are not either financially or mentally prepared to hold a stock that may drop up to 30%-40% in the short-term – again, Rule Breakers is not for you.

However, if you are looking for generally high-quality investment ideas and an outstanding community, you will find value here. And given the innovative nature of many of the companies, following them in the Rule Breakers service can expose you to industries to which you might not ordinarily get exposure. So there’s an education and excitement factor that might appeal to some investors.

Even though the performance of the service itself is enviable, probably the most valuable aspect of the service is the forums. There are some very active and knowledgeable members of the community who provide professional-caliber analysis and commentary not just on individual companies but investing in general.  Investors of any experience level will learn something here. In particular, if you are a novice investor, you will find many fellow members, in addition to the Motley Fool analysts, that will be happy to provide helpful and in-depth guidance and answers to your questions.

Consistent with the other Motley Fool premium subscription boards, the Rule Breaker forums are a very friendly and supportive environment. There are rarely any “pump and dump”-type posters like you see on other public boards, and rarely do you encounter any overly aggressive or obnoxious posts either. Any perpetrators of the former or latter offenses are usually quickly called out.

David Gardner does respond to some posts, despite what must be a very busy schedule. The other Motley Fool Rule Breaker analysts are also generally very present on the boards as well.

Motley Fool Rule Breaker is currently available at the price of $299/year, and you can find their sign up page here. You can also sign up for a 30-day trial, during which time you will have access to the entire site, including the full archive of prior issues and updates. My suggestion for those interested in trying out Rule Breakers, is to sign up for the trial when you know you’ll have some free time to dive into all the different areas of the site. And make sure to visit the boards and post a question or two to test out this vital part of the service.

You might also consider pairing a membership to Rule Breakers along with a Stock Advisor subscription, or even an Income Investor subscription to help balance the volatility somewhat. Another option is the Supernova service, which is a portfolio based service in which you automatically also get access to both Rule Breakers and Stock Advisor.

Leave your comments or questions below, and stay-tuned for more Motley Fool Reviews to come!

And if you want to learn more about the Motley Fool Rule Breakers investment strategy, take a look at their book Rule Breakers, Rule Makers.

 

Also read my full write-up on Motley Fool Stock Advisor and my introduction to Motley Fool Supernova.

Read more about my story or see some of my favorite financial blogs and books.

And last but not least, leave a comment below with any feedback or questions!


For comprehensive Motley Fool performance results, check out my Performance Insights. They're the only source for Annualized Returns, Success Rates, CAGRs, Performance by Year and Industry

Whether you are already a Motley Fool member, or considering subscribing to one of their services, my Performance Insights will help you with your investing decisions.
 

Leave a Comment

{ 7 comments }

  • Don June 2, 2013, 2:36 pm

    Thanks for the analysis. This was exactly what I was looking for.

    Reply
    • Kevin June 2, 2013, 4:03 pm

      Thanks, Don. I’m glad you found it useful.

      Reply
  • Melissa December 23, 2013, 1:43 pm

    I am curious as to why Rule Breaker receives a higher rating from you than Stock Advisor. Historically and recently Stock Advisor significantly outperforms Rule Breakers????

    Reply
    • Kevin December 23, 2013, 8:12 pm

      Hi Melissa – thanks for the question, but where do you see that I’ve given RB a higher rating than SA? I like both services, and think Stock Advisor is better for most investors as the stock picks tend to be more established and less volatile than the ones in Rule Breakers. However, Rule Breakers is a great service in and of itself, and gives a lot of exposure to growth companies, with generally greater upside.

      Reply
  • angelo barrera February 15, 2014, 8:26 pm

    I am a David Gardner supernova/rule breakers client. I have just read about the “R.I.P. Internet: 1 Explosive InterWorld Stock to Profit
    HUGE When the Web Goes Dark.” To which stock it refers to as promoted in your web site?

    Reply
  • SELWYN BECKER April 8, 2014, 12:39 pm

    I subscribed, but can’t access the rule breakers page.

    Reply
  • karan rustagi September 17, 2014, 1:39 pm

    Thank you for creating this site. Just what I wanted but didn’t have the time to do myself. If you choose to continue updating the performance results, might I suggest rolling 3 year average returns? This will help gauge the performance of these services in 3 year chunks. I know you probably don’t have time to do all this so I’d love to help with the development since it sounds pretty exciting and helpful for many.

    Reply