Big Money Is All in the Timing

Don't kid yourself -- exactly when you plunk your hard-earned dollars into a particular investment will have a great effect on its performance for you. Check out these returns for Wal-Mart (NYSE: WMT) over a handful of 10-year periods:

Data: Yahoo! Finance.

The numbers offer us several lessons:

• Performances can vary widely over time.
  
• A company often grows more rapidly in its earlier years. Wal-Mart featured tremendous gains in much of the '80s and '90s. Its later years saw slower growth. Now remember -- some, or much, of this is linked to the overall market's slowdown and various bubbles bursting in recent years. But it's also the case that as a big company gets huge, it's hard to keep growing at a rapid clip. For a firm bringing in $50 million per year, doubling means grabbing another $50 million. But once a company is at $50 billion, it can take much longer to draw another $50 billion.
  
• Note also that you don't necessarily have to be among the earliest into a stock. Investors in Wal-Mart in the 1970s didn't enjoy quite the same growth as their decade-later counterparts. This phenomenon is appreciated by our Motley Fool Rule Breakers analysts, who are always looking for the next big things, and who aim to do well by investing early in them, but usually not right at the beginning. (As Fool co-founder and team leader David Gardner has explained, they're out to grab "the highest possible returns. period.")
  
• Context matters, too. That 4% average annual gain in the last row might look kind of pathetic, but it's actually market-beating. During that decade, the S&P 500 averaged 3%. Everything is relative.

The downside to all this is that you can't know in advance when exactly is the best time to invest in anything. Here's a clue, though: Consider Wal-Mart's average annual gain from December of 1978 to December of 2008: 25%. That's right -- over those 30 years, you would have seen the value of your investment grow roughly 800-fold. The lesson there is that when you have an exciting company succeeding over time, it's often best to just hang on for the long haul as long as the fundamentals remain intact. Of course, not all your investments will be this successful -- but really, it just takes one stock to change everything. For that reason, I like to have at least one or a few Rule Breakers in my portfolio, aiming for some possible spectacular growth.

Slower growers work, too ...
While it can be especially effective to find great companies when they're still young and growing rapidly, it's also true that you can do well by buying into familiar, established firms. Check out the following companies' recent performances, and compare them with the S&P 500's average annual loss of 3.6% during the period:

Data: Morningstar.com, as of May 31, 2009.

Even here, though, timing matters. Aim to buy into any company when it appears undervalued. If you're capable and experienced, you can determine that by doing extensive calculations via discounted cash flow analyses. Or you can get a general impression by looking for some clues, such as:

• Its price is down considerably from where it was trading a few months or a year ago.
• Its price-to-earnings (P/E) ratio or price-to-sales (P/S) ratio is considerably below its average levels.
• Its P/E or P/S ratio is considerably below those of its peers.
• Its P/E ratio is considerably below its long-term estimated earnings growth rate.

Looking at these is not enough -- you still have to make sure the stock isn't down for a good reason, or that it lags its peers for good reason. But at least these bullet points can get you thinking in the right direction.

We'd love to help you zero in on compelling opportunities. If you'd like some pointers to a bunch of exciting stocks the Street misses, I invite you to check out our Motley Fool Rule Breakers service, which you can try free for 30 days, during which time you'll enjoy full access to all past issues and every previous recommendation. It pays special attention to cutting-edge fields such as biotech, alternative energy, robotics, and nanotechnology. Click in to learn more.

Longtime Fool contributor Selena Maranjian owns shares of Wal-Mart. Best Buy and Wal-Mart are Motley Fool Inside Value recommendations. Best Buy is a Motley Fool Stock Advisor recommendation. The Fool owns shares of Best Buy. Try our investing newsletters free for 30 days. The Motley Fool is Fools writing for Fools.