"The past does not repeat itself, but it rhymes."
-- Mark Twain
I'm with the good Mr. Twain on this one. While the past may not be a perfect model for the future, there's a heck of a lot we can learn by being students of the past. This is definitely true when it comes to investing.
With this in mind, I sat down with a nice, big mug of coffee and a list of the top performing stocks with a market cap of $250 million or more over the past 10 years to see if I could pull out some helpful hints for those looking to bag the next decade's monster stocks.
Before I start, though, let me be clear about one thing: These are not meant to be safe, conservative investment tips. While many of these can be adapted to a conservative strategy, I wrote them with big swings in mind. Picture mighty Casey taking powerful hacks at the ball -- if he connects, that ball may end up in the next state, but there's also the very real possibility that he strikes out.
1. Be at the front end of a massive trend
Many of the best performing stocks of any time period are part of some massive trend that carries an entire industry or multiple industries. The bubble notwithstanding, investors that have been in on the best of the computer- and Internet-related businesses over the past couple of decades have done quite well.
More recently, we've seen a major boom in commodities. One particularly notable area has been in crop nutrients. This helped Sociedad Quimica y Minera (NYSE: SQM ) stock to a near 3,800% gain and PotashCorp's (NYSE: POT ) to multiply nearly 18 times.
While there may still be some juice left in the fertilizer run, the really massive gains have likely already been banked. However, investors that can see the next massive trend and get on it early (and hang on!) could put themselves in line for tremendous returns.
2. Look where others aren't
Between July 2001 and July of this year, Bancolombia (NYSE: CIB ) provided investors with a total return of 3,591%. Where was this world-beater hiding? It was right in plain sight if you were looking in the right place. For the full year 2001, Bancolombia's return on equity was 17%. Meanwhile, the stock traded at an average book value multiple of 0.66 and an average price-to-earnings multiple of 3.4.
But who was talking about Colombia back in 2001? Heck, who's talking about Colombia today? If you look in places that other investors aren't, you stand a much better chance of finding great bargains.
3. Find a winning strategy and management capable of delivering
To some extent, you would have had to predict the future to really know the massive success that Apple (Nasdaq: AAPL ) would be from that point forward. In the middle of 2001, the company hadn't even announced the iPod, which was the jumping-off point for today's iEmpire.
However, by the end of 2001, it had launched the iPod and was talking about its "digital hub" strategy that would seamlessly tie digital music and other peripheral devices to the PC. While big ideas like that may often be of limited value on their own, Apple was captained by Steve Jobs who had the vision, creativity, and leadership to actually make it happen.
To be sure, great management or not, companies with grand visions don't always deliver. But if you find a company with both -- vision and leadership -- then there's a much better chance for a big homerun.
4. Look small
If you want really massive returns, it's unlikely that you're going to find them among mega-cap or even large-cap companies. Among the top 10 performers of the past decade, Apple was the largest with a market cap of $8.1 billion in July 2001. Seven of the top 10 performers had market caps below $1 billion.
5. Believe in dividends
BP Prudhoe Bay Royalty Trust (NYSE: BPT ) has been a very good performer. The stock price has climbed 787% over our 10-year stretch. Add in the returns that investors have gotten from BP Prudhoe's generous dividends, though -- it was paying a 23% trailing dividend in mid-2001 -- and suddenly you're looking at a gargantuan 2,414% return.
Interest in dividends has seen a renaissance of late, and I hope that continues because a solid dividend policy can juice returns in a major way.
6. Be willing to pay for growth
As painful as this is for a value investor like me to say, if you want to be in on some of the absolute best performing stocks, you may have to pay what looks like a high price.
Cognizant Technology Solutions (Nasdaq: CTSH ) has never been a cheap stock on the basis of trading multiples, and back in 2001 it traded at an average P/E ratio of 41 (its P/E is just short of 30 today). Anyone that thought that was too pricey would have missed out on tremendous growth from the company and a 2,000%-plus return from the stock.
7. Buy ugly and get lucky
For anyone that bought Netease's (Nasdaq: NTES ) stock in mid-2001, it's seems that a little luck can go a long way. Following the dot-com bust, Netease was a mess. Like many other businesses that relied on advertising for revenue, when the bottom fell out, its business went splat.
In mid-2001, the stock had fallen hard and may have looked cheap, but the company was working on what would be a hefty loss for the year and it hadn't quite figured out what would be its way out of the mud -- at the time it was trying out a whole mess of fee-based, Internet-related services.
To be sure, there was still money to be made after the company had found that a good business could be made offering massively multiplayer online role-playing games -- Rule Breakers subscribers have seen shares climb nearly 275% since the early-2005 recommendation. But while that may sound good, the stock has returned close to 14,000% since July 2001.
And to get those returns? Well, let's just say sometimes Lady Luck may have a lot to do with it.
You can kick off your search by exploring a major trend (remember No. 1?) that my fellow Fools think will scare the pocket protector right off of Bill Gates. Dive in with this free video.