Drop Anchor, Get Rich

If you clicked on this article expecting to read how to get rich investing in shipping companies, I'm sorry to disappoint you (though kudos to those who took advantage of Dryships' incredible run last year).

The anchor I'm talking about is the mental kind -- the kind holding you back from making serious money.

"I missed the boat"
How many times have you thought, "Well, I missed the boat on that one"? In case you're not sure what I mean, this often comes after you've considered investing in a company only to watch it go up, say, 50% or more over the next little while. You then give up, thinking it's too late to invest.

Well, stop it!

What kind of sense does it make to give up on a potential 500% gain after missing a 50% gain? Yeah, I know that if you had invested earlier, you'd have a 1,000% gain. But not investing because you missed the earlier movement is not the way to end up rich. Give up on a 500% gain? Are you kidding me?

What you really missed
Take a look at this long-term chart of Starbucks (Nasdaq: SBUX  ) . Look back to the end of April 1995, almost three years after the company came public. The closing price back then was $23.50 (pre-splits). Two months later, it closed at $35.625, some 52% higher. Nice run up in just a couple of months.

How many people saw that, decided they had "missed the boat," and never invested? Well, they lost out on a return since then of 820% through the end of last year, including Starbuck's decline over all of 2007. If they had sold out near the top in late 2006, they would have had almost a 1,600% return.

Focusing on the price when you first become aware of a company and comparing everything to that price is called "anchoring." It can make you think that, after a quick run-up, the price can't go much higher, so why bother. This is one of many different types of mental mistakes investors make that, as you will see, can be costly.

Anchors drag
Starbucks is far from the only example where people could have anchored onto one price. Here are six more where those who did this lost out on huge future profits.

Missed the Boat Time Frame*

Missed the Boat Gain

Total Gain Since**

Cognizant Technology Solutions (NASDAQ:CTSH)

5/03 - 7/03

49%

341%

Companhia Vale do Rio Doce (NYSE:RIO)

4/04 - 11/04

64%

427%

Express Scripts (NASDAQ:ESRX)

8/04 - 5/05

46%

216%

Garmin (NASDAQ:GRMN)

2/03 - 5/03

45%

302%

Precision Castparts (NYSE:PCP)

3/03 - 9/03

47%

690%

Vimpel-Communications (NYSE:VIP)

1/04 - 9/04

44%

474%

*Last trading day of indicated month. **From end of "missed the boat time frame" through end of 2007.

At the beginning of each time frame for the above companies, they had seen at least two years of net income growth greater than 16% per year. At the least, they were worth further due diligence. Finding good investments, as those turned out to be, is hard enough without worrying about whether or not it can keep climbing.

Now not every company you spot is going to perform like these did. The point is, though, they can. Don't let anchoring happen to you.

Anchors away!
At our Motley Fool Stock Advisor newsletter service, David and Tom Gardner try to avoid anchoring. In fact, the brothers have chosen several companies after a climb in price. At Stock Advisor, the only anchors we use are those grounded firmly in Foolish investing practices.

Those strategies have paid off -- the Gardners have beaten the S&P 500 index by an average of 40 percentage points per pick since inception in 2002. If you'd like to find out which stocks are good enough to succeed after dramatic, pre-choice, rises, sign up for a free 30-day trial.

Jim Mueller owns shares of Garmin and Starbucks, but no other company mentioned. Both of those are recommendations of Stock Advisor. The Fool is all about investors writing for investors.


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