Searching for 40,000% Returns

I have a confession to make: I am not a wealthy man. Now, this information might be worrisome to some of you, knowing that I work for a company that provides advice on maximizing personal wealth. I do, however, have a good explanation for my relatively modest financial situation.

I spent most of my 20s without an income, languishing away in grad school. During my 30s, I earned a pittance teaching history to college students. Only recently did I leave academia for the private sector, motivated by such grandiose dreams as being able to afford my own home and send my kids to college. All things considered, I have only one major regret over the past 20 years or so: I didn't invest early enough in the great companies of our generation. Where was the Motley Fool Rule Breakers service when I was 21?

What's past is prologue
During the past 20 years, the American economy has experienced phenomenal growth, fueled by a technological revolution that has transformed the way we work, shop, and communicate.

From 1984 to 2003, GDP grew by 77%, and manufacturing productivity expanded by more than 100%. To see how far we've come, just have a look at an old Star Trek episode. What was supposed to look futuristic back in the 1960s now looks utterly ridiculous. My underpowered laptop appears far more useful than anything Captain Kirk had at his disposal to navigate the USS Enterprise.

During the 1980s, developments in the computer industry provided much-needed stimulus to a U.S. economy still smarting from the stagflation years of the previous decade. Innovative companies such as Cisco Systems and Dell led the way in this sector. In the 1990s, visionary enterprises like Google (Nasdaq: GOOG  ) ushered in the Internet era. Entrepreneurship was not, however, limited to computer firms and Internet companies. Dynamic retailers such as Best Buy (NYSE: BBY  ) and Staples (Nasdaq: SPLS  ) responded to new economic trends, familiar products in more profitable ways. In the sciences, biotech firms like Celgene (Nasdaq: CELG  ) and Biogen Idec (Nasdaq: BIIB  ) emerged with breathtaking discoveries in the realm of cellular and molecular biology.

All eight of the companies mentioned above broke the rules when they first appeared on the scene. Indeed, David Gardner, lead analyst for Rule Breakers, started touting many of these companies from the early 1990s onward. Now, of course, long after the fact, conventional wisdom recognizes the genius of these companies.

So imagine what would have happened if I had plunked down $1,000 on each of these outstanding firms early on in their high-growth stages.

Co.

Starting Investment

Start Date

Value in 2007

Total Return

Cisco

$1,000

1990

$324,250

32,325%

Best Buy

$1,000

1985

$290,500

28,950%

Staples

$1,000

1990

$34,230

3,323%

Biogen

$1,000

1991

$14,480

1,348%

Dell

$1,000

1988

$228,500

22,750%

Celgene

$1,000

1990

$77,250

7,625%

Google

$1,000

2004

$4,480

348%

What's interesting is that since this article first ran, Dell has been pummeled by the market. Even after declining from a 40,000% return, it's still up 22,750% for early investors! A paltry $1,000 investment in Dell back in 1988 would have yielded $228,500 today. With that kind of performance, I suspect I'd now be in a position to purchase my own home, which would be preferable to the house I'm currently renting. On a less spectacular scale, $1,000 invested 17 years ago in Staples would have grown to $34,230 by February 2007. That figure approaches a year of tuition (excluding fees) at Harvard. And I would still have 10 more years to invest for the other three years of college, since my oldest is only in second grade.

At this point, some of you might object that it's unlikely for any investor to have gotten in on the ground floor of all of these great companies. Perhaps you're right. Let's see what would happen if we delayed our investments in three of the above companies by two years, which might have given us more time to monitor these high-growth businesses.

Company

Initial Investment

Starting Date

Value in 2006

Total Return

Cisco

$1,000

1992

$43,960

4,296%

Dell

$1,000

1990

$190,410

18,941%

Best Buy

$1,000

1987

$91,137

9,013%

My hypothetical return in Dell would still have been quite large, while my returns in Cisco and Best Buy would have declined considerably by waiting -- not that I'd complain about those returns. So we see that the great companies are still available at reasonable valuations early in their growth stages.

Money for nothing
You might be thinking: I like those huge returns! How do I get some of those? OK, now for some reality. The purpose of looking at the returns of the great companies listed above is not to show that growth investing is an all-win situation. Far from it. I'm trying to demonstrate how well great companies perform over a long period. If you can identify just one great company early, then hold on for the long term, you can do pretty well for yourself.

Growth investing is highly volatile, and it will fray the nerves of individuals with a low risk tolerance. That said, all investors should devote a portion of their portfolios to growth stocks. For those traveling in the fast lane, an allocation of 30% of their portfolios might make sense. More conservative types should allocate at least 5% in order to provide a little juice for their investments. I'm somewhere in between, so I devote about 15% of my portfolio to growth.

Willie Sutton and investing
Should I concentrate all of my growth allocation on computer and Internet stocks? Doubtlessly, great opportunities still exist in these areas. In fact, there's a Rule Breakers selection I like that utilizes the Internet in an entirely creative way to deliver one of the most timeless products out there. But we also need to find new areas to trawl for great companies.

You might recall the familiar story about Willie Sutton. When asked why he robbed banks, old Willie replied, "Because that's where the money is." With Willie's advice in mind, the Rule Breakers service recommends focusing on those sectors where the next great companies are likely to emerge -- biotechnology and nanotechnology, for instance.

Epiphany
The high-growth train of the 1980s and 1990s has already left the station, and some of us were left behind, muttering obscenities to ourselves on the platform. We have two choices facing us today. One option is to lament our bad fortune, admit that high-growth stocks demand too much hard work and more than a bit of luck, and then resign ourselves to index funds, hoping to eke out 7% per year over the next 20 years. The other option demands boldness and vision. It asks you to forget the past and plan for the future by joining in the search for the great companies of the next 20 years.

The novelist George Eliot once said that "it is never too late to become what you might have been." That quote inspires me to seek those investments in the future that I didn't in the past. If you think our dedicated Rule Breakers team can help you in a similar quest, why not try a risk-free trial for 30 days?

This article was originally published on Feb. 2, 2005. It has been updated.

John Reeves does not own any companies mentioned in this article. Best Buy, Biogen Idec, and Dell are Stock Advisor recommendations. Dell is also an Inside Value recommendation. The Motley Fool has a disclosure policy.


Read/Post Comments (0) | Recommend This Article (18)

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.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 522977, ~/Articles/ArticleHandler.aspx, 12/18/2014 7:41:20 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement