Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



The Only Way to Earn 50% Annual Returns

Think back to the fall of 2007. Happy times, indeed. The market was rising, Lehman Brothers and Bear Stearns still existed, and we didn't have any bizarre Tiger Woods press conferences to deal with.

At that time -- perhaps overcome with confidence -- my colleague Joe Magyer and I penned an article asking why you weren't earning 50% annual returns. This, in fact, was a challenge posed to us by Motley Fool CEO and co-founder Tom Gardner. We spent some time thinking about it because, well, we thought we might be able to pull it off.

The results of our brain strain
Our strategy to achieve this glorious return had three steps:

  1. Get out of index funds.
  2. Protect our principal.
  3. Invest in small, underfollowed stocks that are likely to be mispriced.

Fast-forward to today. While I stand by those three steps, if you had followed them for the past few years, you would have subjected yourself to extraordinary volatility and (at least temporary) losses.

And that's the catch-22: The only way to give yourself a chance at massive returns is to expose your portfolio to massive potential losses. 

So, are we idiots?
Since few individual investors are willing or able to take that degree of risk, that two-year-old article looks in hindsight like nothing more than a useless thought experiment. Sorry for wasting your time.

But I've revised my thinking to make it more actionable and relevant to you. Rather than chasing 50% annual returns across your entire portfolio, why not aim for them in a small portion of your portfolio? That's called diversification, and it reduces your risk of massive losses. As the same time, as you'll see below, it also gives your portfolio the potential to achieve very meaningful outperformance.

Here's what I mean by that
This past summer, I traveled to China on our annual Global Gains research trip, looking for stocks that might double or more over the next three years. (Anything less is generally not worth the hassle of investing in China.) One of the companies we discovered in Inner Mongolia was a small fertilizer company called Yongye International.

The stock was cheap, the management team savvy, and the market opportunity enormous. In other words, it looked like a promising investment. (To read more about the investment opportunities in rural China, click here.)

And it turned out to be just that
I made Yongye my top pick from that trip. But it wasn't my only pick. Instead, I placed it within the context of a broader basket of plays on the booming development taking place in rural China. In fact, I told folks to buy four stocks in addition to Yongye, with Yongye representing less than half of a full 5% position. Here's what that basket looked like in the end:


Recommended Position Size

Yongye International


China Green Agriculture


China Marine Food




China Mobile


And here's what the returns have been from that basket since we recommended it in July:





China Green


China Marine




China Mobile


As you might guess, the basket has been an incredible performer thus far. In fact, if you weighted the stocks as we recommended, your basket of China stocks is up almost 60%. Even better, it's crushed its China benchmarks, such as the Xinhua 25. That passive index, composed of giants such as Huaneng Power (NYSE: HNP  ) , is actually down 8% over the same period of time. Similarly, Matthews China, a more consumer-focused fund that holds the likes of (Nasdaq: CTRP  ) , New Oriental Education (NYSE: EDU  ) , and (Nasdaq: NTES  ) , is up just 10%.

Still, keep it small
Now it's easy to look at those returns and say that we should have told folks to invest more money in Yongye or China Green. But doing so would have subjected you to all of the risks associated with investing in a small, unproven Chinese company -- the consequences of which can be disastrous, given China's "developing" standards for corporate governance and accounting.

Yet you didn't need to invest a ton of money in Yongye to realize significant tangible benefits. In fact, if you were 95% invested in a market index fund composed of stalwarts such as AT&T (NYSE: T  ) and Verizon (NYSE: VZ  ) , and just 5% invested in our basket (as we recommended), then you would have beaten the market's return since July by more than 200 basis points -- 15.4% to 13.1%.

Nothing to shake a stick at
That significant improvement could have been achieved without subjecting your portfolio to enormous potential losses or the volatility associated with emerging-market stocks. Furthermore, thanks to the benefits of compounding, if we can keep that edge up over time through smart emerging-market investments, the difference in dollar terms on a sum as small as $5,000 becomes incredible.





$5,000 at 15.4% becomes ...




$5,000 at 13.1% becomes ...




We seek to deliver that extra edge to you at Motley Fool Global Gains through our research trips to emerging markets and careful selection of emerging-market stocks.

I mention this because we just returned from a research trip to India with our top picks in that emerging market. We hope they'll replicate the success we had in China this summer. Read all about them by clicking here to join Global Gains free for 30 days.

This article was first published Oct. 19, 2009. It has been updated.

Tim Hanson is co-advisor of Motley Fool Global Gains. He owns shares of Yongye International and China Marine Food. China Marine Food and China Green Agriculture are Motley Fool Global Gains recommendations. Coca-Cola is an Inside Value and Income Investor choice. Ctrip is a Hidden Gems pick. is a Rule Breakers pick. The Fool has a disclosure policy.

Read/Post Comments (0) | Recommend This Article (11)

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.

Compare Brokers

Fool Disclosure

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: 1116738, ~/Articles/ArticleHandler.aspx, 5/30/2016 1:33:54 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...

Today's Market

updated 2 days ago Sponsored by:
DOW 17,873.22 44.93 0.25%
S&P 500 2,099.06 8.96 0.43%
NASD 4,933.51 31.74 0.65%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

5/27/2016 4:00 PM
CTRP $45.90 Up +1.22 +2.73% Internat… CAPS Rating: ***
EDU $42.53 Up +0.82 +1.97%
New Oriental Educa… CAPS Rating: **
HNP $25.95 Down -0.04 -0.15%
Huaneng Power CAPS Rating: **
NTES $175.79 Down -1.04 -0.59%
NetEase CAPS Rating: *****
T $38.99 Up +0.15 +0.39%
AT&T CAPS Rating: ****
VZ $50.62 Up +0.46 +0.92%
Verizon Communicat… CAPS Rating: ****