Doubling your money -- a "two-bagger" in investing lingo -- is a popular investing aspiration. I fondly remember my first double, EMC, and I'm always looking to repeat the experience. The number is seductive. But the question remains: How do you get a double?
The key is to buy shares of companies with above-average business potential and then hold them for as long as possible -- ideally forever. When you do that, performance tends to take care of itself. Just take a look at the track records of master investors such as Warren Buffett, James Gipson, and Fred Olstein.
Five years: Solid stories, proven concepts
In a normal market environment, five years is a very reasonable time frame for a double -- it requires just a shade under 15% annual appreciation, excluding any dividends. While that's better-than-average performance in most markets, there are almost always large, high-quality stocks that achieve this level over a number of years. Stocks like CR Bard (NYSE: BCR ) and Electronic Arts (Nasdaq: ERTS ) delivered doubles over the past five years. And that's nothing to sneeze it -- anyone who's been in the market for the past five years has seen the major market indices dip pretty sharply along the way.
But here's the part that I find really interesting -- all of these were already "winners" five years ago. What's more, every single one of these companies was already a large and well-known player in their niche. Solid companies, proven concepts, strong management teams -- one, two, three, and then double.
Three years: Emerging excellence, growth industries
To achieve a double in 36 months requires three straight years of 26% appreciation. At this level, you're no longer talking about solid stock-picking; consistent 26%-per-year performance would place you among the master investors. Nevertheless, three-year doubles are possible without exceptional risk.
The common trait among these companies is that their industries -- basic materials and energy -- have generally been in favor for much of that time, and the companies have been able to leverage very strong price environments into dramatic income and cash-flow growth.
So if you're looking for the next three-year winner, find well-run companies with good revenue performance and a neutral-to-favorable industry environment to help them along. Fool co-founder Tom Gardner believes that health care is one of the next great growth industries -- he's actually recommended eight such companies to subscribers of his Motley Fool Stock Advisor newsletter service.
One year: Lightning in a bottle
One-year doubles are the stuff of investor dreams (and fraudulent newsletter promotions). If you start with $1,000 and double it for 10 straight years (somehow managing not to pay taxes along the way), you'll end up with more than $1 million. This is not a sane expectation for a rational investor.
Though it's an unrealistic target, some stocks do manage to achieve it. Over the past year, you could have doubled your money in stocks as varied as JLG Industries (NYSE: JLG ) , Advanced Micro Devices (NYSE: AMD ) , or Vertex Pharmaceuticals. What do a construction equipment maker, semiconductor company, and biotech company have in common? Not much, aside from exceptionally strong growth and a broad recognition of that growth from the market at large.
How, then, to go about stalking the one-year double? If we're talking about real companies and real stocks (in other words, not penny stocks), we're pretty much talking about catching lightning in a bottle: a timely sector, a biotech success, or an incredible turnaround.
At Stock Advisor, Fool co-founder David Gardner bottled lighting when he recommended NVIDIA in May 2005. The stock is up more than 100% since then. The company was poised to profit from the explosive growth in video games, mobile phones, and other graphics-related devices. By all accounts, NVIDIA should have been a three-year double, but broad market recognition sent the shares shooting higher very quickly.
A holistic approach to doubles
Although I'd love for every stock I purchase to quickly double, focusing on single-stock doubles is really missing the forest for the trees. I'd much rather build a solid portfolio of proven companies and superior management that helps me achieve meaningful long-term returns. I even accept the fact that some stocks I pick will -- gulp -- lose money. Remember that at any time in your portfolio, some stocks will be rising and others will be falling. But as long as you stick to proven companies, you should be able to survive short-term volatility to profit in the end.
This is precisely what David and Tom are helping subscribers do at Motley Fool Stock Advisor. The brothers' 80-plus recommendations are beating the market by more than 40 percentage points (62.2% returns versus 18.5% for the S&P 500 since 2002), and they expect to do even better three and five years out.
Remember that while stalking the double is a worthwhile pursuit, you should keep it within the context of disciplined stock selection and portfolio construction. Investors who lose sight of that important point risk turning themselves into investing Ahabs, forever in search of their Moby Dick -- and we know how well that worked out for Ahab, right? Go forth and find doubles, my fellow Fools, but make sure you don't end up harpooning your foot in the process.
Information provided by Capital IQ, a division of Standard & Poor's, was invaluable in the writing of this column. This article was originally published on Nov. 8, 2005. It has been updated.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares). The Motley Fool has a disclosure policy.