The Investing Mistake of a Lifetime

If you're like me, you made a few rookie mistakes in your early days as an investor: obsessing over daily moves in the market, not diversifying, that kind of thing. Most of us make mistakes like that -- and learn from them.

My biggest early investing "lesson," though, was a costly one. Think 2,175%-costly.

Don't go feeling sorry for me just yet, though, friend. Those early failings as an investor led me to adopt a proven strategy geared toward choosing stocks with the potential to crush the market over the long run -- just like the recommendation I'll tell you about shortly, in fact.

But you've probably made the same terrible mistake yourself: You sold a great business too soon.

The $20,000 mistake
My epic blunder had to do with an itchy trigger finger. Someone made a fortune on Apple's (Nasdaq: AAPL  ) stock -- but it wasn't me. That's because, after buying shares of Apple at a split-adjusted price of around $9 back in May of 2003, I sold them at the same price a week later. Today, Apple trades at about $204. Ouch.

If you're like me, you've probably bought -- and then sold too soon -- an Apple, Intuitive Surgical (Nasdaq: ISRG  ) , or Monsanto (NYSE: MON  ) -esque stock on its way to multibagger greatness.

In fairness, who hasn't? Who actually has the foresight and patience to consistently earn such mind-boggling returns?

My boss, that's who
Meet Fool co-founder, Chief Rule Breaker, and Stock Advisor co-founder David Gardner. Fifteen of his Stock Advisor recommendations have doubled since the service's start in 2002. Four companies have more than quintupled.

Get a load of a few of these wins:

David's Recommendation

Date of Recommendation

Total Return

Amazon.com (Nasdaq: AMZN  )

05/21/04

794%

Priceline.com (Nasdaq: PCLN  )

09/06/02

769%

Activision Blizzard (Nasdaq: ATVI  )

02/07/03

540%

Data as of 11/24/09.

It doesn't take too many multibaggers to set you for life. But how does David do it, exactly, and why can't you?

Summing up an investor's philosophy in a nutshell is next to impossible, but you can pretty cleanly distill David's approach into these two strategies:

Buy right: Choose companies that will benefit from undeniable, long-term trends. Case in point: Activision. Remember the days when only kids played video games? No longer. The video-game industry has matured along with its now-grown earliest adopters, and industry leaders such as Activision have made a mint on the huge upswing in video game sales.

Buy early: Get in early on a great business and don't haggle on the price. Case in point: Amazon.com. Here's a business that has been considered overvalued by virtually everyone -- including me -- since pretty much, well, always. But money talks, and David's recommendation of Amazon has been a smashing win for Stock Advisor members. He got in on a great business early and had the foresight and resolve to stick with it.

Stocks 2010
That long-term, David Gardner-esque vision was exactly what I had in mind when I was invited to contribute alongside David and nine of the Fool's other top analysts and advisors in our flagship annual special report, Stocks 2010. I think you'll agree we've had a pretty good run with these reports over the years:

 

Average Recommendation's Return

Outperformance vs. S&P 500

Stocks 2003

114.4%

88.7%

Stocks 2004

22.1%

16.7%

Stocks 2005

4.8%

11.3%

Stocks 2006

(11.4%)

2.4%

Stocks 2007

(30%)

(7.7%)

Stocks 2008

(1.4%)

21.5%

Stocks 2009

59%

47.1%

Average

22.5%

25.7%

Returns data as of 11/5/09.

My recommendation for Stocks 2010: Yum! Brands (NYSE: YUM  ) . You may know Yum! as being the parent of quick-serve kingpins Pizza Hut, KFC, and Taco Bell, but you probably didn't realize that Yum! is effectively printing cash in the world's next superpower: China.

This is where David's "Buy Right" principle comes in. Per-capita Chinese wealth is looking at heady long-run growth, and the Chinese quick-serve market is nascent. Honestly, it doesn't take a visionary to see the potential for epic growth for China-focused consumer plays.

Now here's where the "Buy Early" principle comes in. Yes, Yum!'s core U.S. franchises have been cranking out profits for a long, long time. But consider the China opportunity, where Yum! has already established itself as the quick-serve industry's market leader.

China has roughly 600 million urban dwellers -- that's twice the entire U.S. population. Now consider that Yum! currently has about 6 times the number of stores in the U.S. that it has in China. Put another way, imagine getting in on a McDonald's-esque story a couple of decades ago.

To be super-duper clear, no, I don't expect Yum! to return 2,000% to investors over the next few years. I do, though, think it has the quiet makings of an incredible Chinese growth story, very much in the mold of the some of the biggest winners David Gardner has recommended over the years.

Two for the price of one
You can read more about Yum! and the nine other featured stocks in Stocks 2010, which comes free with new memberships to Stock Advisor. The average Stock Advisor recommendation has outperformed the market by 50 percentage points since the service's inception back in 2002 -- little wonder that Stock Advisor is the world's best-selling investment newsletter. Just click here to sign up -- you can cancel at any time.

Senior analyst Joe Magyer owns no shares of companies mentioned in this article. Apple, Amazon, Activision Blizzard, and Priceline are Motley Fool Stock Advisor recommendations. Monsanto is an Inside Value recommendation, and Intuitive Surgical is a Rule Breaker. The Motley Fool has a disclosure policy.


Read/Post Comments (25) | Recommend This Article (119)

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 November 27, 2009, at 2:56 PM, swiver wrote:

    Enough of this what could have been stuff. The web is plastered with this junk.

    Tell us about what to do with WNR ($22), ARP ($20), DW ($35), IPGP ($22), IRBT (same), VTIV (22), (=) what we bought them at....

  • Report this Comment On November 27, 2009, at 4:26 PM, lakespapa1 wrote:

    I didn't make a fortune, but I did buy Apple at $10 (non-adjusted) and rode it to the split, sold half (stupid me), and then re-bought that half at $70 & $90. I sold my original half at $205 because Apple had my Roth all out of balance.

    My first computer (1985) was a Mac, and I've bought Macs exclusively since -- so it was natural (since I understand the brand, and the market, too) to hang with Apple. But it was less a rational, cool-witted decision than an intuitive one, based on trust in the company (and Apple's huge cash reserves didn't hurt my sense of safety).

    I've had more trouble, though, hanging on to shares than selling them too early. Lucent, for instance. Select Comfort. CapitalSource. Exelixis. Suntech Power. Cemex. I'm hanging with them still. Maybe it's just laziness. (!)

  • Report this Comment On November 27, 2009, at 6:00 PM, jm7700229 wrote:

    AMZN has a net from operations of 3.3% of revenue and a return on market value of a whopping 1 1/2%. I wish I had ridden this far with AMZN, but nothing in my investment philosophy would have permitted it. And if I owned it, I would sell it this minute. I don't see them earning their P/E of 75 for many years to come (by which time someone will have come along with another disruptive business plan).

  • Report this Comment On November 28, 2009, at 8:13 AM, Joemit wrote:

    What about AIB, and CX?

  • Report this Comment On November 28, 2009, at 3:30 PM, henryking54 wrote:

    Is this author the same Joe Magyer who recommended Valero Energy back in June 2008 at $52 a share? It is now trading at $16 and has been the worst performing stock of those mentioned in The Motley Fool’s "Oil, Gas, Precious Metals, and Timber Report: 8 Stocks to Tap the Global Resources Boom."

    Why would such a person be invited to recommend another clunker in Stocks 2010?

    The only reason I can think of is that he writes kiss ass articles like the one above buttering up his boss.

  • Report this Comment On November 28, 2009, at 3:37 PM, harrietplimpton wrote:

    Henry,

    Yes, it is the same Joe Magyer. I bought Valero based on that report and lost a lot of money.

    But I don't care about Magyer; he is a nobody.

    What concerns me is that the article portrays David Gardner as some sort of great stock picker, when in fact he has recommended many losers. For example, he recommended Krispy Kreme Doughnuts and Force Protection, both of which have declined by more than half since recommended. Unfortunately, I bought both and lost even more money than I did on Valero.

  • Report this Comment On November 28, 2009, at 5:52 PM, jlanganki wrote:

    I feel like McDonald's is a better company than Yum. It is true that Chinese people love KFC right now, but that's because KFC had a head start. Once McDonald's gets going, it will be unstoppable. I also feel that McDonald's will outperform Yum in India. I've been to an Indian McDonald's (packed with people) and an Indian KFC (empty). I'll stick with McDonald's. Not to mention that McDonald's adapts very quickly as tastes change (coffee drinks, burritos, salads, store decorations, movie rentals). This is the kind of company that can outpace its rivals anywhere in the world.

  • Report this Comment On November 29, 2009, at 12:56 PM, VegasMartin wrote:

    I've had YUM on my watch list for a while and I'm glad to see that it hasn't moved too much in the last 3 months if I choose to buy it. I think YUM trades around $50 by the end of 2010. Good pick!

    http://www.ShootTheBears.com

  • Report this Comment On November 29, 2009, at 6:44 PM, drcm4t wrote:

    All this talk is always about what could have should have but didn't..... keep in mind Apple is also the stupid company that was down to its last building a decade ago. Only in retrospect, you can say...wow, it went from $9 to $204. If you knew you shouldn't have sold it, you had the chance to buy it back at and still make a hefty profit ....at $10,11,12,13,14,15,16,17,..even $100. but you didn't!

    I don't believe in "buying early"...there is no such thing. You can be a buyer of Apple in the 1980s..and your money would have been sitting around doing nothing for 20 yrs.

    The reality is, 99% of investors, "stock analysts", fund managers, and pundits are sheep.

  • Report this Comment On November 30, 2009, at 12:53 AM, anuvaka wrote:

    "after buying shares of Apple at a split-adjusted price of around $9 back in May of 2003, I sold them at the same price a week later."

    First, you had no reason to sell. It neither gained nor lost.

    Second, you held only a week? The shortest time I held a stock was 15 months, well beyond the 366 day minimum.

    Third, you did not lose $20,000, you never had it. You lost 2 trading fees and the taxes for a short term hold.

    Fourth SA makes 2 to 6 recommendations a month. With some research it is easy to have One winner from that. But the subscriber would have to $24 to $72,000 per year to match the performance of SA. After that point it would take careful selling of losers without potential, taking profits and hoping.

    Tom and Dave are playing the odds from using some good research tools. I don't see SA being a Value unless you have a lot of cash sitting on your side looking for a place to invest at $1000/month.

    I am wholly unimpressed with your article, but it is good to admit you made several mistakes. It foretells the future.

    jC

  • Report this Comment On November 30, 2009, at 11:44 AM, JakilaTheHun wrote:

    Not that I'd completely discount your analysis here, but couldn't you pretty much say the same thing for just about any international well-known company?

    It seems like every well-known US company that operates in China gets the "sensational growth potential in the Chinese market" tag thrown on it. Of course, this normally relies on a lot of big assumptions. In this instance:

    (1) The Chinese value junky fast food as much as Americans do

    (2) The Chinese live lifestyles comparable enough to Americans to support "fast food culture"

    (3) Yum Brands can target their strategies towards the Chinese market successfully

    (4) The Chinese will have disposable income similar to Americans some time within the next few decades

    (5) The Chinese are not turned off by American brands via shifts in political or cultural winds

    (6) The "Chinese growth miracle" isn't an illusion created by manipulated economic statistics and we won't see a major bust in China soon

    (7) Any growth that Yum experiences in China would be greater than the growth that the rest of the S&P 500 experiences in China

    I'd be a fool to claim I know so much about China, that I could accurately forecast dining habits there over the next few decades, so I'll assume that it's completely possible that your hypothesis is correct, but the article doesn't make much of a case for it. Nor does it refute any of my points above.

  • Report this Comment On November 30, 2009, at 12:57 PM, TMFJoeInvestor wrote:

    @JakilaTheHun

    You're right that the above article doesn't make the full case for Yum, though I'll note the full case is laid out in our Stocks 2010 report. On your specific questions, I think they're all great ones to ask, but I'd say Yum has already made most of these concerns moot. KFC is a market-leading smash hit in China, which I feel like pretty readily answers most of your questions. On the question of relative performance/opportunity cost versus S&P 500 plays, I'd point towards Yum's already proven, profitable model in the Chinese market as to a differentiator.

    Hope that helps, and thanks for taking the time!

    Best,

    Joe

  • Report this Comment On November 30, 2009, at 1:24 PM, TMFJoeInvestor wrote:

    @jlanganki

    We're on the same page that that McDonald's is a first-rate organization and that it should eventually shine in China. There's certainly room for more than one winner in the Chinese quick-serve market, and I address as much in the full Stocks 2010 write-up.

    As far as the direct competition, goes, though, Yum's head start does give it a leg up in terms of branding and expense leveraging via its distribution network and marketing costs. Yum has pretty clearly figured out the secret recipe to quick-serve profits in China, and their KFC, Pizza Hut, and East Dawning concepts all look as though they could be major long-run profit drivers.

    But, again, there's no reason both of these names can't rake plenty of cash in from China. Thanks for the note!

    Best,

    Joe

  • Report this Comment On November 30, 2009, at 4:47 PM, adutt1 wrote:

    Fools seem to delve into deep deep in past. They are recommending QSII now at $52.00, Dolve Systems etc. I bought these stocks when they were penny stocks and sold them all with a small profit thinking these have no future. Similarly in 1957 a friend introduced me to Dr.Andy Grove, founder of INTEL. Intel was in very big hole, no cash, stock selling for pennies. I did not buy, because I did not have vision about chips. If I did buy only a few thousand shares I would have been millionier several times over. But one cannot live in past, must move forward. Fools on the other had live in past only. Suggest something of future which has potential growing at least 100% before the end of year 2010. BAC, C & F will, it is given. Need something different from family of Fools.

  • Report this Comment On December 03, 2009, at 12:01 PM, ikkyu2 wrote:

    You know, this thesis on Yum! was equally valid in 2005, when I first read it here on Fool.com, and when I first bought some shares. And there wasn't a global recession on at the time.

    The shares have been total duds - they pay a small dividend, track the S+P slavishly, haven't had even a whisper of divergence. On a price basis, would've done exactly the same with an S+P index and collected a higher dividend too.

    Why is that about to change now?

  • Report this Comment On December 03, 2009, at 3:23 PM, TMFJoeInvestor wrote:

    @ikkyu2

    Thanks for the note, though I'm not sure I follow you. A quick Google Finance check shows Yum's shares have pretty solidly thumped the market since 2005, even excluding dividends. Am I missing something?

    Joe

    http://tinyurl.com/YUMchart

  • Report this Comment On December 04, 2009, at 1:07 AM, TMFBrich wrote:

    @henryking54 and @harrietplimpton,

    << Why would such a person be invited to recommend another clunker in Stocks 2010?>>

    << What concerns me is that the article portrays David Gardner as some sort of great stock picker, when in fact he has recommended many losers.>>

    Thank you for reading. You're correct to point out Joe's pick of Valero and David's picks of Krispy Kreme and Force Protection. Of course, that's not the whole story. Joe's co-authored pick from last year's Stocks 2009 report has nearly doubled, crushing the market; and David has had nine Stock Advisor picks triple or more. Overall, David's Stock Advisor recommendations and his Rule Breakers recommendations have outperformed the S&P 500, even with the clunkers you point out.

    Peter Lynch is quoted as saying, "In this business, if you're good, you're right six times out of ten. You're never going to be right nine times out of ten."

    Losers happen. It's what you learn from them that matters, imo.

    Thanks for reading and good luck in your investing.

    Best regards,

    Brian Richards

  • Report this Comment On December 04, 2009, at 2:30 PM, raystom wrote:

    The Fools tend to tout pretty risky stuff, and then brag about them IF they work out. You would do better for your friends if you would point out obvious risks when you first tout stocks.

  • Report this Comment On December 04, 2009, at 2:46 PM, JibJabs wrote:

    Jakila- I love your articles so I'm taking the time to respond to you for what my perspective is worth. I'm in China and KFC is huge here. I'm a teacher and I seek discussion topics that reflect cultural transition: KFC has come up.In fact, I can use it synonymously with "junk food" much like we use Coca-Cola synonymously with "soda" (that works here, as well, by the way). From what I can tell (and I've talked to 400 young people about it as well as 40 older people) they do value junk food here and they do know it is bad for health. The interesting thing about MCD and KFC and Pizza Hut (another success here) is that it they much cheaper here than in America in terms of dollars but relatively they are quite expensive; it is a luxury meal that is prestigious to see and be seen as a part of. They also like the food. Another major factor for their success here, and the reason I frequent them, is that they offer reliably usable toilets- by no means a guarantee here. Their brands are quite secure, in my opinion, although I can envision MCD doing quite well alongside KFC (KFC is far and away the leader at the moment).

  • Report this Comment On December 04, 2009, at 8:08 PM, pharos60 wrote:

    Much of what JibJabs says is true from my prespective. I don't live there, but travel there, and other places in Asia, regularly. But there is still the problem of translating cultural and popular success into investing success. It is not easy, especially in China, because it is much easier for an investor, whether an individual or a large corporation, to put money into a business in that country than to get it out. As for Yum vs MCD, I offer one personal story:

    In 1989 I spent several days in Tokyo on business, and stayed at a well known hotel , The Takanawa Prince. On the property was a Chinese restaurant said to be extremely good, and indeed, I had one very good meal there. I also at a quick dinner at the KFC outlet just across the street one evening, and the place was packed.

    Five years later I was back at the Prince. The Chinese restaurant was closed. The KFC was still open and doing well, it appeared.

    Yum, especially with its KFC and Pizza Hut franchises, really seems to know what they are doing in Asia.

    On the MCD side, my Taiwan friends tell me that the most popular MCD sandwich is not a hamburger, but the spicy chicken sandwich. It is quite good, if perhaps a bit much for most Western tastes.

  • Report this Comment On December 05, 2009, at 2:39 AM, borneobill wrote:

    I can second what JibJab and Pharos write above. I have lived in the west of China for 18 years and I have watched in amazement as one city after another has fallen for MaiDanLao (MdD's) and KenDeJi (KFC). Chinese love the food, the cleanliness and the price, and Pizza Hut is considered a romantic place to take your date; exotic food at a price that students can afford. And it strikes me from traveling in the west that there are still a very large number of cities of over a half million potential costumers here that have not gotten even their first outlets yet.

    But what worries me is the political risk - not from a political change, but from nationalism whipped up to a fever pitch. We have seen it several times in the last few years. These are very much seen as American brands, and that may be their Achilles heel.

  • Report this Comment On December 05, 2009, at 2:28 PM, HixNixStixFlix wrote:

    You still gotta invest in EVERY recommendation that The FOOL makes in order to match their success. How difficult is that to understand?

  • Report this Comment On December 05, 2009, at 2:35 PM, HixNixStixFlix wrote:

    You still must invest in EVERY recommendation made by The FOOL to match their success. This ought to be easy to understand.

  • Report this Comment On December 05, 2009, at 3:18 PM, sirjerry wrote:

    This is in response to what JibJabs, pharos60 and borneobill wrote about:

    I would like to compare the subject matter to India which I feel might possibly have a friendlier political structure set-up as regards the U. S. If this is not true, I would appreciate any comments.

    Anyone care to comment?

  • Report this Comment On December 05, 2009, at 3:52 PM, sirjerry wrote:

    This is in response to what JibJabs, pharos60 and borneobill wrote:

    I would like for someone to compare the subject matter to India which I feel might possibly have a friendlier political structure set up as regards the U. S. If this is not true, I would appreciate any comments.

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