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Here's a thought experiment. Let's say you could invest in a risk-free opportunity that produces a compounded annual return of 12%-14%, guaranteed, in perpetuity. Would you do it?

The catch is you couldn't invest in anything else. I mean nothing. No stocks, no bonds, no gold, no real estate, no private companies ... absolutely nothing. Still interested?

I've run this poll on a couple of our message boards, and it usually breaks down as follows: 75% say "yes" and 25% say "no."

Given the fact that the market, since 1900, has returned roughly 10% on average, you might think accepting the option to beat the historical market averages, with no "risk," would score even higher.

Furthermore, screening for stocks that delivered 13% compounded average returns over the past five years yielded only about 200 candidates, which comprises less than 5% of North American companies that trade on major exchanges. Even more challenging is the fact that most of these stocks were not your large blue-chip stocks, but rather under-followed companies that were navigating very unique events and special situations.


5-year % change

5-year CAGR

Special Opportunities

CF Industries (NYSE: CF  ) 783% 55% Misunderstood IPO, cyclicality low
Rubicon Minerals (AMEX: RBY  ) 734% 53% Undervalued gold deposits
Mosaic (NYSE: MOS  ) 449% 41% Cargill's complex ownership stake, uncertain phosphate and potash pricing
Cal-Maine Foods (Nasdaq: CALM  ) 403% 38% "Unremarkable egg producer," historical high short interests
Seabridge Gold (AMEX: SA  ) 330% 34% Undeveloped and undervalued gold deposits
Linn Energy (Nasdaq: LINE  ) 212% 26% Misunderstood master limited partnership
Steven Madden (Nasdaq: SHOO  ) 207% 25% Stigma related to founder's legal woes

Yet despite these apparent hurdles, fellow Fools had a host of objections to taking these above market average returns:

"I can do better"
Assuming you can easily crush the market year after year is pretty hubristic given that roughly 75% of all professional money managers fail to beat the indexes. Don't get me wrong; I don't believe it's impossible to do so, but a healthy fear of the market is the beginning of wisdom.

"I want the opportunity to do better"
Several respondents who chose "no" in our poll cited the potential of runaway inflation as a reason for potentially foregoing this opportunity. In 1998, Buffett warned investors not to use their rearview mirrors to forecast returns:

Let's say you put $1 million into the 14% 30-year U.S. bond issued Nov. 16, 1981 and reinvested the coupons ... At the end of 1998, with long-term governments by then selling at 5%, you would have had $8,181,219 and would have earned an annual return of more than 13% ... And so here's what equities did in that same 17 years: If you'd invested $1 million in the Dow on Nov. 16, 1981, and reinvested all dividends, you'd have had $19,720,112 on Dec. 31, 1998. And your annual return would have been 19%.

Clearly, maintaining both mental and capital flexibility matters.

"I enjoy investing"
Buffett says that he's a better investor because he is a businessman and vice versa. Several Fools cited the inability to invest in start-ups, real estate, or private businesses as the main reason for taking a pass. Good point, given that between 1980 and 2005 the top private equity firms delivered average annualized returns of 39%. Heck, any business owner who has successfully grown even a mid-sized company from scratch has probably been compounding their invested capital at rates above 30% for five years or more.

Let me end by saying that there is no "right" answer -- only the right answer for you. Temperament and self-awareness are the only factors that should dictate whether you're part of the vast majority of investors who would be well-served by taking this proposition or the select few with the aptitude and attitude to be compounding machines.

As an analyst for Motley Fool Special Ops, I'm part of an investment team that believes that it can not only crush the market over a rolling 3-5 year period, but also compound capital at rates that would have those "75 percenters" rethinking their choice. In our first year, our average recommendation is up 16.5%, with our best performer up 67%.

One opportunity we like today is Fidelity National Financial (NYSE: FNF  ) . This beaten-down title insurer is being unfairly lumped in with all things related to housing and the mortgage crisis. With a dominant U.S. market share and an underappreciated private equity portfolio, we see Fidelity stock price rising more than 50% within the next three years, which would land investors 16% compounded annual returns.

So if you'd like to learn more about how Motley Fool Special Ops team is targeting special situations to produce these returns, simply enter your email address in the box below today. We will send you the details on how you can begin capitalizing on these opportunities in your own portfolio.

This article was adapted from a piece originally published on Jan. 26, 2011.

Motley Fool research analyst Andy Louis-Charles owns options and shares of Fidelity National Financial. However, his mother is quite happy that he will finally be putting his law degree to work, performing complex due diligence on the next great "Special Op" stock. The Fool owns shares of Cal-Maine Foods and Rubicon Minerals. The Fool also owns options and shares of Fidelity National Financial. Motley Fool Alpha owns shares of Seabridge Gold. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (15) | Recommend This Article (23)

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 February 23, 2011, at 5:43 PM, LQM2 wrote:

    Implying you can guarantee 13% in Special Ops, even as a teaser, is potentially confusing for novice investors, and not something regulators would be happy with. Bad form!

  • Report this Comment On February 23, 2011, at 5:46 PM, cmazingo wrote:

    Uh...guaranteeing 13% returns with no risk - run, do not walk, in the other direction.

  • Report this Comment On February 23, 2011, at 6:06 PM, dividendbuzz wrote:

    I cannot think of any risk factor greater than putting all your eggs in one basket, no matter what the claims of no risk. The US treasuries are often cited as the closest thing to risk free, and I would not put all my money in treasuries no matter what the return.

  • Report this Comment On February 23, 2011, at 6:32 PM, Notfooled1 wrote:

    Why should we be surprised? This is typical of the Motleys who believe that we are all fools.

  • Report this Comment On February 23, 2011, at 6:36 PM, TMFDiogenes wrote:


    The last sentence was guaranteeing that "we will send you the details." But with the confusing way it was worded, I can see how it could easily be read the way you both did. So we fixed it.

    Obviously promising those kinds of returns is not at all Foolish, and you're right to question anyone who would make such a claim. Thanks very much for bringing that up!


    (Andy's editor)

  • Report this Comment On February 23, 2011, at 6:40 PM, johndog19 wrote:

    The article isn't guaranteeing returns, or implying a guarantee of any sort. The point is that some people, if hypothetically offered such a guarantee, would actually turn *down* this offer, which should surprise many people. And depending on who you are and what you're prepared to do to beat the market, this may actually be the right choice for you. So the question "Do you want 13% returns guaranteed?" is more than a teaser, it's a meaningful, introspective question. The answer perhaps should be no, or perhaps yes. If it is yes, well, good luck finding it anyway; nobody here is offering it.

    Now of course there is a plug for the Special Ops service, but that doesn't guarantee anything either. There's just Andy's conviction that he can *beat* 13% consistently. But that's far from a guarantee.

  • Report this Comment On February 23, 2011, at 7:48 PM, midnightmoney wrote:

    No, John, the fact that only some would turn down the offer is only part of the point. The other part is an attempt to bait people with, if not a guarantee, a very strong suggestion that special-ops can do better. In fact, I'd say the point of the article is more to sell a service than to provoke thought, though provoke thought it has indeed done. But to what real end?

  • Report this Comment On February 23, 2011, at 10:40 PM, wrenchbender57 wrote:

    Of course the catch is that NONE of these companies can really guarantee 13% returns forever. In fact, nobody can. Companies and situations change over time. Small companies are more likely to fail than large ones. But even the large blue chips eventually become obsolete or have to reinvent themselves. Nothing is forever.

    So, the only real alternative is not being locked in to anything and being able to adjust on the fly.

  • Report this Comment On February 23, 2011, at 11:20 PM, yaiwolf wrote:

    Motley Fool folks are known for these "teaser" type of articles with some interesting comments... but generally pumping one of their premium services.

    For me... I find them a turn off and move on.

  • Report this Comment On February 24, 2011, at 12:44 AM, dgmennie wrote:

    Seems I read about someone offering investors "Guaranteed 10% Yearly Returns" recently. He was eventually found to be running a multi-billion-dollar Ponzi scheme and will now be spending a century or two in jail.

    Furthermore, investment projections of any type that involve re-investing all the annual proceeds are nonsense. What are you suppose to be living on during the decades when "re-investment" is to work its hoped-for magic? Where will the guru who sold you this ball of wax be 20-30 years hence when you (with worthless paper instead of wealth) might like to experiment with legal action (or perhaps knee-capping)?

    And if you are already independently wealthy, or close enough that you can afford to gamble, there are an incredible number of much more fun ways to blow your extra cash while you can still enjoy it.

  • Report this Comment On February 24, 2011, at 4:01 AM, lowmaple wrote:

    dqmennie: Guess I'm boring but i find making money on the market fun and often(sometimes unfortunately) enlightening.

  • Report this Comment On February 24, 2011, at 1:32 PM, TOM48 wrote:

    I know where you can 13% & get paid every month. I normally do not buy mutual funds, but I did put $20000.00 in GABUX which pay 13% annually at a rate of $0.07 per share each month. Although I have continued to reinvest the dividends at this point, I could easily switch to getting a check each month & the $216 I receive each month would pay my power bill.

  • Report this Comment On February 25, 2011, at 11:56 AM, mikecart1 wrote:

    Generally the more research and time you put into investing, the more your returns. Simply buying 1 stock and walking away and coming back in 10 years would yield statistically LESS than your investment for 90%+ of all stocks.

    This article stink!

  • Report this Comment On March 01, 2011, at 1:07 PM, chartrich wrote:

    You stopped at 1998. The treasury had 30 years. So by 2010 the treasury reinvested would have compounded to $35 Million. The other was stuck in the Lost Decade at $19 Million.

  • Report this Comment On September 29, 2011, at 9:25 PM, Johnf30 wrote:

    Under that hypothesis, I would accept, and take a huge loan (from the bank and all my family and friends), and invest it all in the guaranteed investment vehicle. I can't think of a better option than leverage on a supposed guaranteed investment.

    That's of course, provided that there is such a thing

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