Invest Like a Master

I have a confession to make. I've made a lot of money learning from some of the greatest investors of our age. You too can make a ton of cash if you practice what they preach.

The master
For 30 years, Ralph Wanger ran the legendary Acorn Fund, returning an annualized average of 16.3% versus 12.1% for the broader market. From 1970 to 2003, a $10,000 investment in Acorn would have grown to about $1.3 million; the same money invested in the S&P index would have only turned into $400,000. Most would be envious of these very impressive results.

Wanger was known for colorful quarterly reports, a quick wit, and a sound investing style that worked well in both up and down markets. But what most don't know is that Wanger was excellent at spotting trends and investing in businesses that could profit from them.

As Wanger once explained, "Going downstream -- investing in the businesses that will benefit from new technology rather than in the technology companies themselves -- is often the smarter strategy." To borrow an old adage, "It wasn't the prospectors that made the money in the Yukon Gold Rush; it was those who sold them the picks and shovels."

Spotting the trend
In 1988, Acorn invested in International Game Technology, a downstream play on the emerging trend of modern-day computers. IGT took a simple microprocessor, combined it with an existing coin slot, called it a slot machine, and sold it to casinos for $8,000 a pop. Believing he had found a wonderful stock, Ralph Wagner bought IGT in 1988 for $1 per share. By the time it reached its high in 1993, he had made 40 times his original investment.

Great minds …
You'll find that attention to the beneficiaries of technological advances is an approach shared by Ralph Wanger and David Gardner, Fool co-founder and advisor of Motley Fool Rule Breakers.

Back in 2002, David noted strong growth in the video game industry and recommended Activision (Nasdaq: ATVI  ) , the producer of popular video games like Spider-Man and Tony Hawk for Microsoft's (Nasdaq: MSFT  ) Xbox, Sony's PlayStation, and Nintendo's GameCube and Gameboy. With the introduction of increasingly sophisticated gaming systems, U.S. video game sales exploded from $10.3 billion in 2002 to $17.9 billion last year, surpassing both the music and movie industries. Activision was well-positioned to benefit from the technological advances of its customers and has returned 500% since it was recommended. Last year, the company's revenue continued to grow at a torrid 37% pace.

Today's picks and shovels
In the spirit of Wanger and David's strategy of investing downstream of technology, I thought I'd share with you two stock ideas. Both of these companies stand to generate huge profits from current technological trends.

Ceradyne (Nasdaq: CRDN  ) is a do-it-all ceramic maker that's perfectly positioned to benefit from what my Foolish colleague Austin Edwards has called the next millionaire-maker megatrend. While Ceradyne's body armor business rakes in the cash, its most explosive opportunity lies with the sun. If you believe in the future of solar energy, a smart bet is to look for suppliers to power solar cell producers like First Solar (Nasdaq: FSLR  ) . Ceradyne makes disposable ceramic crucibles (containers) used for mixing the silicone needed to produce these solar cells. Regardless of which company brings the power of the sun to our homes, Ceradyne is in a good competitive position.

Immersion (Nasdaq: IMMR  ) is another example of a company riding a wave into the future. A maker of haptic applications, Immersion profits from the continued and growing use of touch-screen devices. It doesn't matter whether Motorola (NYSE: MOT  ) , Nokia, or Apple emerges as the winner in the market for touch-screen phones; as long as demand for the technology stays strong, this downstream producer is a good bet. With clients like Medtronic (NYSE: MDT  ) , Boeing (NYSE: BA  ) , Microsoft, and even NASA, Immersion has the connections and relationships to make it big.

The Foolish final word
To invest like a master, take a page from Ralph Wanger and David Gardner and look downstream. You have two ideas above for further research.

Or, if you want more, our Rule Breakers team met with Immersion -- and 17 other companies -- last week during an "Innovation Tour" of Silicon Valley. To get trip dispatches and our exclusive analysis from meetings with top executives (free of charge), simply click here, enter your email address, and tell us where to send them.

Wade Michels doesn't own shares in any of the companies mentioned. Immersion is a Rule Breakers pick. Apple, Activision, and Nintendo are Stock Advisor recommendations. Microsoft and Nokia are Inside Value selections. The Fool's disclosure policy is envied by masters.


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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 October 30, 2008, at 1:36 PM, dsmason807 wrote:

    A note on IMMR's haptic technology: this is not basic touchscreen stuff...more like force feedback stuff, which is starting to be looked at for touchscreens to make them "feel" like they have buttons, etc. (Though there are many non-touchscreen applications as well.)

    Haptic tech is not currently used in the iPhone or any other currently available touchscreen phone that I know of. However I think it is utilized by the Blackberry Thunder (or Storm, or whatever it's being rebranded as lately).

    This is not to say that it will not be increasingly used in the future, but keep an eye on the Thunder to see how people like its touchscreen feel -- early reports indicate that it's not quite ideal just yet, but we should reserve judgment until after it's been out there for a while and people get used to it.

    http://www.boygeniusreport.com/2008/10/30/verizon-blackberry...

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