I was talking with Motley Fool co-founder David Gardner at lunch recently. (That's one of the best things about working here: picking the brains of one of the best investors around.) We were talking about his investing strategy, and if you’ll give me a minute, I'd like to pass along three secrets he shared with me that have helped him crush the market for more than 20 years.
First secret
The conversation started when I asked him why he likes to pay up for stocks -- that is, buy more shares as the price rises. Now, me, I'm more of a value investor. I crunch the numbers, look to see how the company has grown in the past, analyze what the market is expecting today, and try to buy when the two don't match. In other words, buy when stocks are on sale (like they have been recently, and still are in my opinion).
David answered that, over time, he's learned to look beyond the numbers. Sure, they're important, but even more important is what a company is capable of. Not this quarter or next quarter, which is about as far into the future the market really looks, but two, five, or 10 years down the road.
Take Amazon.com (Nasdaq: AMZN ) , for instance. David bought it at $3.24 (split-adjusted) back in September of 1997. At the time, it was "just" an online bookseller. People were saying it was overvalued, Barnes & Noble and Borders were going to eat its lunch, and just wait until Wal-Mart (NYSE: WMT ) got into the game. But David was looking beyond that. He saw a company that had figured out how to use the Internet to sell stuff on the cheap. It didn't need the overhead of a storefront and sales staff. And as it continued to build its community, the opportunity was huge.
And we all know what happened. With low overhead, Amazon sold stuff more cheaply, undercutting its storefront competitors. The community and its recommendation engine got stronger. And today, Amazon has revenue of more than $20 billion and has made a profit for the past six years, throwing off billions of dollars in free cash flow, selling everything from books to Zytel knives.
More recently, David's done the same thing with surgery-revolutionizing Intuitive Surgical (Nasdaq: ISRG ) . So far, so good.
Second secret
When he first started investing, David said a little later, he hunted around in small-cap land, looking for companies with huge growth opportunities. He managed to find several that were the No. 3 or 4 companies in their field that he thought looked pretty good. What could be better for growth than aiming to be No. 1, after all?
Well, as you might imagine, that didn't work out so well. The companies that were already No. 1 remained in place, growing at the expense of those third- or fourth-best guys he found.
From this, he learned that the best place to be was in those No. 1 companies. For instance, he owns shares of Microsoft (Nasdaq: MSFT ) , the giant in its field, and Activision Blizzard (Nasdaq: ATVI ) , by far the largest third-party video game developer. Those have been very satisfying investments. And though Amazon seemed surrounded by larger competitors, it was actually the top player in the brand-new, online retail space.
Third secret
David finished up our discussion by highlighting something that is near and dear to many Fools' hearts.
He doesn't buy companies like Suntech Power Holdings (NYSE: STP ) or Amazon, or recommend companies like market-leader FedEx (NYSE: FDX ) to Stock Advisor subscribers, just to sell them a few quarters later. He buys to hold for the long term. In fact, he still owns shares of Amazon from that 1997 purchase. And even after all the ups and downs the stock has had over the years, he's sitting on a 24-bagger. That's an average annual gain of 32% for 12 years.
That's the way to crush the market.
Your lesson
There you have it -- three secrets to David's success. Look beyond the numbers, favor the No. 1 operator, and buy with the intention of holding for the long term. If you take these three lessons to heart, I believe you can kick your portfolio into a higher gear.
David hand-picks one stock every month for subscribers to our Stock Advisor newsletter service. Of his first seven picks, he's sold only one; another is a 14-bagger, and a third is a five-bagger. And over the course of seven and a half years, his picks are crushing the market to the tune of 50 percentage points on average. His secrets work.
Right now, we're offering a free 30-day trial of Stock Advisor so you can learn what other secrets he uses, what those seven picks are, and what he just chose this month. You get all that, plus his brother Tom's picks, which are also handily beating the market. There's no obligation to subscribe. Get 30 days of access today, just by clicking here.
David fan Jim Mueller owns shares of Activision and Intuitive Surgical and is a beneficial owner of Microsoft, but has no position in the other companies mentioned. Activision, Amazon, and FedEx are all recommendations of Stock Advisor. Intuitive Surgical and Suntech were chosen for Rule Breakers. Microsoft and Wal-Mart have been highlighted by Inside Value. The Fool's disclosure policy is on double secret probation.
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