How to Double Your Money

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 timeframe for a double -- requiring just a shade less than 15% annual appreciation, excluding any dividends. While that's certainly better-than-average performance in most markets, there are always large, high-quality stocks that achieve this level over a number of years. We just need to find them.

Looking back over the past five years, it seems that you didn't have to take any tremendous risks to get your double. Stocks such as Starbucks (Nasdaq: SBUX  ) , Progressive (NYSE: PGR  ) , and Zimmer (NYSE: ZMH  ) all would have fit the bill. And that's no mean feat -- anybody's who's been investing for the past five years knows that there were some treacherous times 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 its niche. Solid companies, proven concepts, strong management teams -- one, two, three, then double.

Three years: Emerging excellence, growth industries
Achieving 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%-a-year performance would place you among the master investors. Nevertheless, three-year doubles are possible without exceptional risk.

Companies such as Motorola (NYSE: MOT  ) and Lehman Brothers (NYSE: LEH  ) would have delivered 100% performance or better had you bought them in early August 2003. Here, too, there is a common trait in the sense that there were underlying positive industry trends in both cases -- demand for cell phones has been robust, and investment banks have enjoyed a very profitable trading environment.

So if you're looking for the next three-year winner, find a well-run company with good revenue performance and a neutral-to-favorable industry environment to help it along. Fool co-founder Tom Gardner believes that health care is one of the next great growth industries, and he has identified eight companies to help Stock Advisor subscribers profit from the trend. Those recommendations helped Tom beat the market by more than 40 percentage points since Stock Advisor's inception in 2002.

One year: Lightning in a bottle
One-year doubles are the stuff of investors' dreams. 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, however, is not a rational expectation for a rational investor.

Though it's an unrealistic target, it is a target that some stocks will achieve every year. Over the past year, you could have doubled your money in stocks as varied as Silver Wheaton, Pacific Ethanol (Nasdaq: PEIX  ) , and Atmel (Nasdaq: ATML  ) . Now, the silver mining company, ethanol play, and semiconductor company don't have a lot in common -- aside from greatly improved stock valuations.

How, then, do we 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, Tom's brother (and fellow Fool co-founder) David Gardner bottled lightning when he recommended Nvidia in May 2005. The stock is up more than 130% since then. David saw a chip maker with a best-in-industry product poised to benefit from the increasing popularity of video games and complex consumer electronics. In his words, this was a "leading company" in a "can't-miss industry." David was fairly certain this investment would pay off. He had no idea how quickly he'd be proved right.

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 with superior management that helps me achieve meaningful long-term returns. I even accept that some stocks I pick will -- gulp -- lose money. Remember that at any time in your portfolio, some stocks will rise and some will fall. But as long as you stick to proven companies, you should be able to survive short-term volatility and profit.

This is precisely what David and Tom are helping subscribers do at Motley Fool Stock Advisor. The brothers' recommendations are beating the market by more than 30 percentage points (54% returns versus 18% for the S&P 500 since 2002).

Remember: While stalking the double is a worthwhile pursuit, keep it within the context of disciplined stock selection and portfolio construction. Investors who lose sight of that risk turning themselves into investing Ahabs, forever in search of the elusive Moby Dick. We know how well that story 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 Nov. 8, 2005. It has been updated.

Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares). Starbucks is a Stock Advisor recommendation. The Fool has adisclosure policy.


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