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 Fools 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. (Some of us don't know when to cut our losses.) 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 in 2001, and for years after that, the stock struggled. I remember when shares were priced in the $70s (that would be north of $200 now, after a recent 1-for-3 reverse stock split), but it's a fuzzy memory. They spent years below $20 ($60, split-adjusted) until relatively recently, and even more recently drifted much lower. I did sell a big chunk of my shares a few years ago, 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. (You might end up as an accidental billionaire!)
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, and knowing their products or services will go a long way toward understanding the business. Plenty of well-known companies have done phenomenally well over the past decade or two -- let's look at a few.
Do you shop at Chico's FAS (NYSE: CHS ) ? Do you occasionally pump gas into your car at a Valero (NYSE: VLO ) station? Are you in agriculture, with a great familiarity with and respect for Deere (NYSE: DE ) products? Well, Chico's has increased in value roughly seven-fold over the past decade, while Valero has more than tripled and Deere has doubled. 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. For me, biotechnology companies present a good example, as do new-technology companies. Think of Elan (NYSE: ELN ) -- if you're invested in it, do you have a good grasp of its current and in-the-pipeline therapies for neurology, autoimmune diseases, and severe pain, among other things? How about the pipelines of its key competitors? If you're invested in Potash (NYSE: POT ) , are you familiar with the world supply and demand for fertilizer, and do you have a handle on how the fertilizer business works? Do you have a good grasp of Potash's competitive advantages?
You don't have to invest in hard-to-understand companies to do well. Think of Caterpillar (NYSE: CAT ) , for example, which has increased in value about seven-fold over the past 20 years, with a market-trouncing average annual growth rate of more than 10%.
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. If you still have long-term confidence, don't let naysayers in the media get you out of a stock because of short-term concerns.
Consider Wal-Mart (NYSE: WMT ) . For its earliest investors, it's been more than a 1,600-bagger over roughly 35 years. For those who've hung on for a little more than the past decade, during much of which the stock has been stalled, it has more than doubled their money.
Sell if things get too crazy
Consider selling some of your shares if they hit levels you can't justify or if the company is facing some long-term problems. 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 is the kind of issue that 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 around 90, 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 Motley Fool Stock Advisor service, launched more than seven years ago, offers two picks (and two investing styles) each month. They have a few losers, of course, but on average, their recommendations have recently been beating the S&P 500 by roughly 39 percentage points.
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. Wherever you find your stocks, consider buying into them soon, because the recession is a great time to buy.
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. Salesforce.com and Elan are Motley Fool Rule Breakers picks. Wal-Mart is a Motley Fool Inside Value recommendation. The Motley Fool is Fools writing for Fools.