The Greatest Secret of All

Welcome to my article. I'm glad you found it, because it is your lucky day, dear Fool: The greatest secret to easy riches in the stock market is contained right here, below.

I won't say you can't find it anywhere else. Maybe it's there in books like You Can Be a Stock Market Genius or How to Make $1,000,000 in the Stock Market Automatically. Maybe Robert Kiyosaki writes about it in Rich Dad, Poor Dad. Maybe not. I wouldn't know -- I'm not going to read those books. I don't need to, because I already know the most important secret. And I'm more than happy to give it all away below.

I learned it for good on the very day I turned 25
On my 25th birthday, I discovered the truth. The powerful impression it made on me changed my investing forever, and my investment returns went from so-so before that to skyrocketing ever since. Three years later, I bought and held AOL all the way to 200-bagger status. Three years after that, I paid $3.18 per share for Amazon.com (Nasdaq: AMZN  ) , which may not be trading at its 52-week high of $101, but still puts a smile on my face at $77. Both of these positions I still hold -- though, fortunately, I've given away a lot of Time Warner (NYSE: TWX  ) (AOL) shares to charity, because they haven't been much worth holding these past few years!

More recently, I've now picked 71 stocks as monthly picks for six years at Motley Fool Stock Advisor. Their average return is 70.5% -- more than 50 percentage points ahead of the comparable S&P 500 return of 19.7%. Had I not had the experience I'm about to relate, none of these real-world numbers would be the same.

Here's what happened
When I turned 25, I was the fortunate beneficiary of a trust from my grandfather Gardner's estate, divvied up among each of his grandchildren. Having gotten married at age 24 without any official employment at the time -- you can imagine the rehearsal-dinner toasts -- I should probably have been more interested in this inheritance than I was. But if I recall correctly, I didn't show a great deal of interest or attention when my father began presaging this event in occasional phone conversations.

The money had been put in the primary care of my uncle, money manager Gene Gardner of Lancaster, Pa. (His firm, Gardner Investments -- now Gardner, Russo & Gardner -- is a respected and successful value-focused operation.) I had grown up with three primary ideas about my Uncle Gene: First (and most important), he is a very funny uncle; second, he is a champion bridge player; and third, he is an excellent money manager.

On the fateful day of the distribution, I made a trip to Lancaster with my dad to visit my uncle and sign documents transferring the investment portfolio. I cannot now remember the exact setting or particular circumstances. Sixteen years ago already seems like another era -- it was pre-Internet, for one thing. But it was during this trip that I would be greeted with an image that has seared itself into my memory -- and will now sear itself into yours as well, if I convey it to you properly.

I am not here to talk amounts, portfolio theory, or asset-allocation models (although if you're interested, the portfolio was mostly in stocks, probably about 25 different positions).

I am not here to talk individual stocks. I can't tell you definitively what many of the stocks were, but most were well-known or respected firms with strong long-term records.

Here's what I saw
Expressed in easy-to-read black and white on a page or two of numbers was an astonishing demonstration of long-term investment success. Almost position by position, stocks that were trading for $30, $40, $50 a share on that day had been held for years and years, invested at cost bases of $1.57, $2.34, $0.88.

What I saw that day is what every young investor should see: Finding good companies and holding those positions tenaciously over time can yield multiples upon multiples of your original investment. That's what great investors do. Warren Buffett has done it with classic American brands Coca-Cola (NYSE: KO  ) and American Express (NYSE: AXP  ) ; Philip Fisher did it with Motorola (NYSE: MOT  ) and Texas Instruments (NYSE: TXN  ) ; Shelby Davis did it with American International Group (NYSE: AIG  ) . The act of doing it is part of what made them great investors. And after finding good companies, boy, do you ever work a lot less than people making dozens of trades a week, following fast-talking TV gurus or somebody's overpriced charting software.

I'm happy to say that when I combined what our dad himself invested (also brilliantly) for us from birth with the estate I came into at 25, there was no immediate pressure for me to seek a job. Instead, my brother Tom and I had the freedom and opportunity to do something really special. Two years later, we started our own company -- The Motley Fool. (Thank you, Dad, and thank you, Uncle Gene.)

The greatest secret?
Is the greatest secret of all even a secret? Maybe not, but judging by the short-term mindset of many investors -- individual and institutional alike -- it may as well be.

So scribble this down and put it on your fridge door: Find good companies and hold those positions tenaciously over time to yield multiples upon multiples of your original investment.

That's how to go about finding the real stock-market winners -- the mega-winners that multiply over time -- and it's what I'm doing, teaching, and advising at Motley Fool Stock Advisor every day. Five of my stocks have more than quadrupled, and that's even including their declines in the big sell-off over the past few months. Two of them are seven-baggers. (And that's just my side of the scorecard -- my brother Tom is also whomping the market with the 71 stocks on his side.)

We are focused on the long term. Let the day traders work all day for their 5% blips here and there, and fret when the market sells off for a month. Boo-hoo-hoo. We play an entirely different game -- a game measured by huge percentage points of profit, and counted in years.

Why not become part of the team? I invite you to join me for free at Stock Advisor with a 30-day guest pass. Come and see all of our recommendations, join us on the message boards, and, best of all, start practicing the greatest investing secret of all.

David Gardner is co-founder of The Motley Fool and co-advisor of Stock Advisor. David owns shares of Amazon and Time Warner. Amazon and Time Warner are Stock Advisor recommendations. Coca-Cola is an Inside Value recommendation. The Fool is investors writing for investors.


Read/Post Comments (7) | Recommend This Article (343)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 03, 2008, at 1:31 PM, fibreoptik wrote:

    Teach me how to find great companies please.

    And no, I do not wish to pay you $300/year for the service. :p

  • Report this Comment On September 29, 2008, at 10:46 PM, JoeBlack17 wrote:

    Awesome article Mr Dave. What you experienced what you did with that experience was "truly epic". I am a "new fool' whole has experienced his own "epic-like moment". I remember the month, the day and even the time of morning. The moon was full in the sky and so was the sun. The leaves on the trees were showing their colors and everything still glistened in the dew. The corn field next door was asparkle with diamonds and gold.

    In that one special moment I finally understood the the common phrase--"Buy Low, Sell High". I was researching the market by studying charts of the major indexes back to the early part of the twentieth century. I studied hundres and hundreds of charts which comvered every single time period in history and I also compared some of these charts against the performance of my 401-k mutal fund investments. I did ths relentlesslyuntil that One Special Day when I looked at what the Dollar value of the S&P 500 was on 1/3/1950 and I considered what "might" have transpired in my life had my father invested just $10.00 in the 500 Index.

    A thoroughly genuine, light-bulb kind of smile crept over my face as I began to see the majic of the market in all its glory and splendor. Sixteen dollars and sixty-six cents is a far cry from fifteen hundred dollars or even eleven hundred dollars--and that's without dividends or splits! Extrapilate these figures in small and upcoming companies, and for even shorter periods of time and you get "The Answer". I am forty-four and, unlike most investors out there right now, I am putting my money in the stock market. Thank you for offering MDP. I am a beginning member. I trust your philosophy and I respect your judgement Thank you, JoeBlack17

  • Report this Comment On November 19, 2008, at 5:30 PM, Calidreams wrote:

    I have been a member of the Motley Fool SA service for over a year now and the one thing that bugs me is most of the stocks you guys pick are too expensive. With the alotted money i have to buy stocks every week i could maybe buy 1 share of just one of your 2 stocks a month recomendations. I'm only 24 And I do know about the power of the market thats why i'm interested at 24. I just wish you could find great companies in 5-10$ range then i could buy alot more.

  • Report this Comment On December 07, 2008, at 10:35 AM, cloatus wrote:

    Calidreams, remember that you are not investing to acquire greater numbers of shares. You're primary goal is to increase your investment through stock appreciation and dividend reinvestment. If you have $50 to invest you can buy one share of company X at $50 per share or ten shares of company Y at $5 per share. In either case, gaining 15% on your investment is $7.50 in both scenarios. Many people think that buying a "cheap" stock is better because the upside seems bigger. Good stocks will simply split or some will just trade at very high per share prices. You're biggest concern as a "stock" investor shouldn't be the per share stock price from what I can tell. You need to find a way to keep your investment expenses down, relative to your investment. Spending $5 or $10 on trade fees per "trade" each month and investing $50 is killing your profit potential (investment fees and other costs are sometimes referred to as slippage). Try buying quarterly to reduce the percentage of your investment dollar that you have to pay in fees for a better return and focus on the fundamentals of the stocks you like versus the per share price. You could consider investing in a mutual fund which may be cheaper on costs but it's certainly not as fun or engaging (in my opinion). Lastly, keep plugging away even if it is only in small amounts. Had I been as diligent as you at 24 I'd probably be sunning on a beach as my permanent job right now :)

  • Report this Comment On January 14, 2009, at 4:15 PM, bteasdel wrote:

    A 15% gain is a 15% gain, however you don't realize gains until you sell. Selling company X earns you $7.50 while selling company Y earns $75.

    I agree your primary focus should be value when choosing a stock, but the more shares you can afford/aquire, the more earning potential present.

  • Report this Comment On February 06, 2009, at 4:30 PM, ThePuros wrote:

    how is a 15% gain for 1 share of company X $7.50 but a 15% gain for 10 shares of company Y $75.00.

    I think it would be either 1 share of company X @ $57.50 or 10 shares of company Y @ 5.75 each either way it is $57.50 total

    "the more shares you can afford/acquire, the more earning potential present."

    that is just not true.

    If it was than penny stocks would rule the market you can buy 1,000,000 shares of a company, but where is the earning potential there

    I have had people tell me that a $5.00 stock with a market cap of 15 B is way cheaper than a $70.00 stock with a market of 400 M "all other things being equal" just because they can get more shares.

    in my opinion the share price should be one of the last things you look at

  • Report this Comment On April 21, 2009, at 4:10 AM, moffett8 wrote:

    I remember a few years back when there was a day when SIRI stock price was going up very quickly that day and the Motley Fool released a press release through it's email service trashing SIRI with the seemed intent of stopping the increase in the stock price. The stock immediately reversed course and went down. Now that it's not near as financially sound as it was back then they love the stock. Some body at Motley Fool should have went to jail for manipulating stock prices.

    You can bet they profited from manipulating the stocks price. At the time they were a big fan of XM

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