This article's swaggering headline smacks of exaggeration -- but it's true.
How it happened
Picture it: New Jersey, 1995. Although not then a Motley Fool employee, I was, perhaps like you, an avid reader of Fool.com. Founding brothers David and Tom Gardner occasionally recommended stocks, and one of their recommendations was an online service provider, America Online.
I was still quite new to investing, and I didn't know enough to do much of my own research. But I did have one thing going for me: I was an AOL customer. I used the service every day, and I liked what I saw of its user-friendliness, utility, and potential. So I bought. I snapped up $3,000 worth of shares and hung on.
Over the next several years, the stock went up and down, sometimes significantly -- but I held on. It mostly went up, and it split and split. I remember checking my portfolio regularly -- several times a day! -- to see how rich I was becoming. Near the stock's peak, I had a 70-bagger! My $3,000 investment had turned into $210,000. If it doubled in value only twice more, I'd be (almost) a millionaire! All from a measly $3,000 investment.
Did I sell shares along the ride up? No. Did I sell at least some near the top, when my mom told me to? Nope. (That strange thudding sound you hear is me banging my head on my desk. The silence is my mom, biting her tongue.) I held on.
AOL merged with Time Warner (NYSE: TWX ) in 2001, and for years after that, the stock struggled. I remember when shares were priced in the $70s, but it's a fuzzy memory. They spent years below $20 until relatively recently, though they're back down there again. I did sell a big chunk of my shares -- in the teens -- when I needed money for a down payment on my house. And I finally got smart -- I sold more shares to diversify into other stocks instead of holding a big chunk of my net worth in a company in which I no longer had faith.
I continue to hold a few shares, though, and despite my inclination to curse my stupidity for not selling earlier, I'm still sitting on a handsome profit, even at current levels. My cost basis is ridiculously low, and this has still been one of my best investments ever. I shouldn't complain.
How you can do it
If any part of this story appeals to you, know that you have a chance to make it yours -- perhaps with a happier ending -- if you make a few decisions differently.
Buy what you know
First, pay attention to products and services you know, use, and love -- especially if you see more and more people using them. There may be a great stock behind them. Plenty of well-known companies have done phenomenally well over the past decade or two.
Are you a happy iPod owner, a digital camera user, or a frequent searcher on Google? Apple (Nasdaq: AAPL ) , buoyed by the incredible success of its iPod, has increased in value more than 20-fold over the past five years. Flash memory card maker SanDisk (Nasdaq: SNDK ) has been a five-bagger over the past decade, powered by the growing popularity of digital cameras. Google's (Nasdaq: GOOG ) shares, just out of the gate a little more than three years ago, have already risen roughly six-fold. These companies have performed rather well, right under our noses.
Beware what you don't
Along those same lines, be wary of what you don't understand. If you don't understand how a business makes money, you probably won't be able to tell when business is going badly. Biotechnology companies present a good example. Think of MedImmune (Nasdaq: MEDI ) -- if you're invested in it, do you have a good grasp of its current and in-the-pipeline treatments for infectious disease, cancer and inflammatory diseases, among other things? If you're invested in Oracle (Nasdaq: ORCL ) , do you have a solid handle on the database software industry?
Hang on for the ride
If you buy into a company hoping that it will be a multibagger for you, buy to hold as long as you continue to understand the business, strategy, and leadership. If you have faith in the company's future, it's often best to just hang on, despite inevitable hiccups. Consider Wal-Mart. For its earliest investors, it's been more than a 1,000-bagger over roughly 35 years. For those who've hung on for just the past decade, during much of which the stock has been stalled, it has more than doubled their money -- still not bad, eh?
Sell if things get too crazy
Consider selling some of your shares if they hit levels you can't justify. That was my main mistake -- irrationally and greedily hoping to get even richer. If a stock is trading for more than you know it's worth, and you still hang on, you're no longer investing -- you're speculating, and at great risk. This kind of issue is what investors in companies such as customer information management specialist salesforce.com need to think about. Its stock was recently trading at a P/E ratio well above 100, based on trailing-12-month earnings. Is that reasonable, or has the stock gotten ahead of itself?
Get help from the pros
Finally, consider checking out the stocks that David and Tom Gardner recommend. Their Stock Advisor service, launched in April 2002, offers two picks (and two investing styles) each month. They have a few losers, of course, but on average, their recommendations are up 61%, versus 22% for like amounts invested in the S&P 500.
I invite you to try Stock Advisor free for 30 days, when you'll have full access to all past issues and recommendations. I've found some good stocks for my own portfolio there.
Here's to big profits in your future!
This article was originally published Feb. 2, 2006. It has been updated.
Longtime contributor Selena Maranjian owns shares of Time Warner and Wal-Mart. Time Warner and Apple are Motley Fool Stock Advisor recommendations. Wal-Mart is an Inside Value choice. The Motley Fool is Fools writing for Fools.