How to Snag Those 50-Baggers

I've been a stupid and reckless investor in the past: owning too many stocks, not knowing enough about them, trading in and out of them too impatiently, and not keeping up with my holdings. It was a dumb strategy, and I paid the price -- poor performance.

I've learned a lot since then. My portfolio is full of companies I'm rather familiar with, and I understand them much better than my holdings of yore. I'm also aiming to hang on to them for a long time, unless some specific change in their fundamental fortunes makes me lose confidence in them. I expect that this approach will serve me well.

After all, these blue chips may be big, but they can still grow. Just look at how some of them have done in the past 20 years:

Not so bad, huh? If this group of holdings merely doubles every decade from now on, I'll have eight times its value in 30 years. $125,000 could become $1 million. And if my portfolio triples each decade -- admittedly more of a pipe-dream scenario -- its value will grow 27-fold.

For many investors, this is enough. Through a broad-market index fund, large-cap mutual fund, or blue chips you've carefully selected on your own, you can meet or beat the market over the long haul, outperforming most Americans.

Holding out for blowouts
Still, I confess that I yearn for much more than doubling every decade. Perhaps this is because I've actually experienced much more. I invested in America Online more than a decade ago, and watched my investment grow 70-fold. Of course, I didn't sell near the peak; now those shares, merged with Time Warner (NYSE:TWX), aren't even close to their former worth.

While I'm focusing my portfolio these days on proven winners with strong track records and defensible competitive positions, I'm also leaving some room for potential blowout results, by devoting a small portion of my portfolio to some aggressive investments.

How to find 'em early
Quite obviously, one secret to achieving blowout results lies in finding great companies early.

Back in the mid-'90s, you might have noticed America Online's large and growing base of users. In 1996, it had around 5 million subscribers and a market cap of $5 billion; by 1998, subscribers had roughly tripled, while its market cap increased fivefold. The company had a competitive advantage because of its high "switching costs" -- once subscribers had shared their email addresses with lots of friends, they were not likely to change providers or addresses too quickly. Based on all these factors, you might have decided that the company was worth at least a small investment, in case it became wildly successful.

Fool co-founder David Gardner has a certain strategy for finding tomorrow's rocket stocks for his Motley Fool Rule Breakers newsletter. Among other factors, he looks for a top dog and first mover in an important, emerging industry. Amazon.com (NASDAQ:AMZN) is a beautiful example here, setting up an online retail site before most people had considered the concept, and thereby seizing important competitive advantages.

But in situations like Amazon's, it takes far-sighted thinking to realize (or at least suspect) that you're looking at an important, emerging industry. Many people probably scoffed at the idea that people would ever shop online. But those who saw the promise and invested in it were generally rewarded.

You can help your ultimate investing results by keeping an open mind and trying out new technologies when possible, so that you'll have a better sense of how the market might receive them. David also points out that you don't have to invest in such companies' earliest days. He's often jumped in after a firm has been proving itself for several years.

To appreciate the power of investing early, or even jumping in after a few proven years, consider Microsoft (NASDAQ:MSFT). The list below shows how you'd have fared if you'd invested in the company at various points:

• 1986: 25,100%, a 252-bagger
• 1989: 6,350%, a 64-bagger
• 1994: 758%, an eight-bagger
• 1996: 293%, a three-bagger
• 1999: a 27% loss

Both Microsoft and Amazon have strong competitive positions. Even if I gave you millions of dollars in funding, could you build an online site anywhere near Amazon's scale, or a software success story as widespread as Windows? It's doubtful. Since Amazon is where so many people go to buy things already, it's where today's and tomorrow's shoppers will want to go, too.

But will these firms be 50-baggers over the next decade or two? That's very unlikely, given their current size. Investing in young and rapidly growing companies with exciting technologies is a great way to give yourself the chance of snagging a true rocket stock.

Finding tomorrow's rockets
If I'm looking for aggressive growers, and I want to find them early, how should I start? Thankfully, you don't have to go it alone.

Our Rule Breakers newsletter is dedicated to finding and introducing companies like Green Mountain Coffee Roasters (NASDAQ:GMCR) that have come out of left field to create entire new markets, and profited wildly in the process. David Gardner has a community of like-minded investors working with him, sharing ideas and pointing out companies that are worth a closer look.

Here's to big profits in your future!