I previously reviewed the Motley Fool's "Basic Four" investment strategy -- a variant on Dogs of the Dow -- from David and Tom Gardner's first book, "You Have More Than You Think." Their third major book, "The Motley Fool's Rule Breakers, Rule Makers" (Simon & Shuster, 1999), offers much deeper understanding of how to pick long-term stocks.

A basic premise of the book is that it is better to pay a single transaction fee of $15 or so to purchase a stock -- and a similar fee, plus capital gains taxes, when cashing out perhaps decades later -- than to pay an ongoing 1.75% or so per year for a mutual fund. A portfolio of ten buy-and-hold stocks is almost as convenient as a mutual fund, and you don't get hit with transaction fees and taxes from the fund manager's trading. Over forty years, your stocks may grow to twice the value of a mutual fund with similar holdings -- e.g., $2.4M instead of $1.2M on an initial investment of $75K at 9%. For Dow Jones or S&P 500 stocks, that argument makes perfect sense -- even with just the 0.2% management fee of a Vanguard index fund. For small-cap stocks, consider that a good fund manager may achieve a much higher rate of return than you would have by yourself. (Most mutual funds have lagged the S&P 500 in recent years, but stock pickers are having more success this year.)

If direct stock ownership is best, which stocks? The Motley Fools recommend either Rule Breakers or Rule Makers. The first half of their book is about Rule Breakers: the Yahoo!s, Wal-Marts, Amazons, and Starbucks that are 1) top dog and first-mover in an important, emerging industry; 2) have a sustainable advantage; 3) show strong past price appreciation (90th percentile for its industry); 4) have good management and smart backing; 5) sell to a mass market (if possible); and 6) are grossly overvalued, according to some financial pundit. Each criterion must be satisfied, to at least a plausible degree. With these companies, get in as early as you can.

Eventually, every company faces competition and must adapt its tactics accordingly. The companies become "Tweeners," no longer Rule Breakers and not yet Rule Makers. You may want to hold onto the stock during this phase, but the Fools don't recommend new investments in Tweeners. There's too much risk and too little chance of rapid growth.

A few companies will conquer their competition, becoming monopolies. These are the Rule Makers, and again a new style of management is required -- one that builds for the future and ignores the short-term pressures of Wall Street. The second half of the Fool book is about finding these companies, via a 26-question, 60-point evaluation. The Fools gave Microsoft 59 points in 1999, whether whole or soon to be broken up. Others with 50 points or more were Cisco, Coca-Cola, Pfizer, and AOL. Of course you'd rather have bought them many years ago, but the high Rule Maker scores say that these companies are still rising fast, a bargain even at current prices and P/E ratios. (In fact, Coca-Cola's profits are growing faster than ever before.)

Second-tier companies scoring 40-50 points included Gap, Schering Plough, Intel, Disney, and Dell Computer. These are solid investments, but keep an eye on whether they progress to true Rule Makers or begin to decline. Consider selling if the Rule Maker score drops below 40, and especially below 30.

If you're interested in this kind of screening, see the latest Rule Maker recommendations at . You'll also find the official Rule Breaker portfolio -- based on past choices, not today's data -- and a discussion forum for almost any stock. Other good stock-picking forums include AOL Message Boards , Clearstation , Raging Bull , Silicon Investor , and Yahoo! Finance . CompanySleuth at pulls business news from other services, and IExchange.com at offers a pool of private research reports.

Computing the Rule Maker score requires little research, as it's not hard to distinguish a Rule Maker from companies struggling under the domination of a Rule Maker. Some of the more technical rules are based on "Foolish Flow Ratio": non-cash assets divided by current liabilities. Only a dominant company can keep this ratio low by reducing inventory and accounts receivable while delaying payments to suppliers. If the ratio is getting lower over time, even better. Other rules have to do with market factors, margins, cash holdings, and corporate style. Only companies with $1B in sales are considered as potential Rule Makers. Nowhere do the Fools consider P/E ratios and other common screens for short-term bargain hunting. (Their Basic Four portfolio was based on exactly that kind of screening among the Dow Jones stocks. Check the fool.com website to see how its returns compare.)

A quick check for both Rule Breakers and Rule Makers is that customers have no legitimate alternative. If the company were to disappear today, would it be missed? Rule Breakers are changing their markets with new products or services, and are outpacing any potential challengers. Rule Makers have captured their markets, and have the power to crush or buy competitors. Either is likely to offer market-beating returns over years or even decades.

-- Ken