Invest Like a Simpleton

Just what does "buy and hold" mean to you? Hold until your stock drops a little more than you'd like? Sell after achieving a double? Or does it mean that you buy and simply go and do something else for a decade or so?

Most of the Foolish readers I interact with simply aim to get a double. I applaud the thinking. Double your investment enough, and you'll quickly find yourself sitting on a mountain of moolah. But this philosophy doesn't exactly mesh with the wisdom of some of the best investors out there. For the legendary Warren Buffett, the ideal holding period is forever. That couldn't possibly work ... could it?

Sleep on the job, grow your portfolio
Ten years ago yesterday, Fool co-founder and Motley Fool Hidden Gems lead analyst Tom Gardner set out to prove that any of us could crush the market with almost zero daily effort. The experiment became known as the Simpleton Portfolio -- a collection of 10 stocks that Tom believed would beat the market over the next decade.

Each business boasted excellent growth rates at the time and showed multiple signs of further expansion. The managers of these firms were also owners who demonstrated a commitment to keeping clean balance sheets. Tom says that he thought these were the characteristics of enduring firms and that the market would have trouble pricing them correctly over a long period of time. Good thinking:

The Simpleton Portfolio

Company

Purc.*
7/7/
1995

Close*
7/5/
2005

Closing value*

Total ret.

Dell (Nasdaq: DELL  )

$1.00

$39.85

$39,850

3,885%

AOL (now part of Time Warner) (NYSE: TWX  )

$1.66

$16.45

$9,909.64

891%

Sun Micro (Nasdaq: SUNW  )

$1.59

$3.64

$2,289.31

129%

Cisco Systems (Nasdaq: CSCO  )

$3.07

$18.82

$6,130.29

513%

Texas Instruments (NYSE: TXN  )

$6.72

$28.94

$4,306.55

331%

Intel (Nasdaq: INTC  )

$7.93

$26.68

$3,364.44

236%

Gap (NYSE: GPS  )

$4.45

$20.26

$4,552.81

355%

Microsoft (Nasdaq: MSFT  )

$5.27

$24.98

$4740.04

374%

Hewlett-Packard (NYSE: HPQ  )

$9.32

$23.71

$2,543.99

154%

Silicon Graphics (NYSE: SGI  )

$43.25

$0.72

$16.65

-98%

TOTAL

$77,703.71

677%

(*Assumes $1,000 invested in each stock on 7/7/95. Per-share prices are adjusted for splits and reinvested dividends. Data provided by Yahoo! Finance.)

You read that right, Fool. The Simpleton Portfolio would have returned more than seven times your money had you invested on day one -- even with one of the companies losing nearly all its value. Over the same period, the S&P 500 gained 147%.

Don't be afraid to be a couch potato
It's tempting to think of Tom as a clairvoyant genius whose propensity to trounce the overall market is matched only by his charm and wit. And I'll say that again if it'll get me a raise. But it isn't the truth. Instead, Tom told me, the key lesson of the Simpleton Portfolio is that patience pays.

"We constructed the Simpleton Portfolio," Tom said, "to demonstrate to readers that if you find companies with superior economics, outstanding underlying financials, and great growth prospects, the real challenge is to be patient. If every Motley Fool member learned to think in decades rather than quarters, we would have a lot more Motley Fool millionaires in 2010, 2020, and 2030."

So spend more time outside, at the mall, or on the couch gearing up for Martha Stewart's run at The Apprentice. Just stop -- yes, right now! -- poring over an endless pile of financial reports. (Unless that's really how you want to spend your time.)

Where did Tom buy his crystal ball? Can I get one, too?
Still, you'll need more than patience to earn multi-bagger returns. I was patient with Sun, and it cost me a 20-bagger as I watched it rise and then fall. How could Tom have foreseen which stocks to buy? Luck certainly had a little do with it, but Tom believes paying attention also mattered.

"It's important to follow the spirit of the day and understand the demographic trends," he said. "Of these 10, look at how many were technology companies. These were the businesses demonstrating excellent financials, strong growth characteristics, and determined executives with large stakes in their companies."

OK, smart guy. What's next, then? Health care, according to Tom. "While I think there are still remarkable opportunities in tech," he told me, "I think the baby boomers are more interested in a healthy heart than an upgrade to their Dell system."

Ten more stocks to bank on
The days of the Simpleton Portfolio are past, but our Foolish analysts, including Tom and yours truly, went on record just two weeks ago with 10 new stocks for the decade ahead. You'll find them all in our Blue Chip Report. Tom teamed up with fellow Fools Bill Mann and Bill Barker to select what they've deemed the best-run business in America. Seth Jayson picks a Simpleton Portfolio incumbent that he believes is value-priced. And me? I went for a turnaround play that I think will pay off big. That's why I urge you to give the report a try. If you don't like what we have to say, the Fool offers an ironclad money-back guarantee.

But even if you choose not to take advantage of our best investment thinking, at least promise me that you won't treat your portfolio the way a hyperactive 2-year-old treats a can of Coke. Don't fidget around in search of a quick high. Savor the flavor instead. Buy to hold. Check in every quarter or so. Then sit back and enjoy the riches that only patience can deliver.

Fool contributor Tim Beyers is still shopping for a crystal ball. Let him know if you find one, won't you? Tim didn't own stock in any of the companies mentioned in this story at the time of publication. You can find out what is in his portfolio by checking Tim's Fool profile, which is here. The Motley Fool has an ironclad disclosure policy.


Read/Post Comments (3) | Recommend This Article (12)

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.

  • Report this Comment On September 27, 2009, at 2:40 PM, CityWealth wrote:

    Did you notice that list was ALL Tech except gap?

    All those companies were tech companies in their infancy and SGI went bankrupt.

    Those are all once in a lifetime opportunities. The home PC only started to become prevalent in the late 80's and early 90's and then skyrocketed as the internet took off and PC's were required for everything.

    Those kinds of returns just don't happen, the simpletons portfolio took all the companies that made their industries. And intel's success was partially dumb luck, the X86 architecture was actually not as good as other architectures the problem was that the hardware guys didn't understand that hardware is meaningless to joe average consumer.

  • Report this Comment On January 11, 2010, at 3:45 PM, grant224 wrote:

    "Simple" must mean choose one sector, invest

    in nine stocks from it, and then throw in a company that is almost wholly dependent on fickle consumer taste and trend.

    Sounds stupid to me.

    A better "simple" portfolio would be to make a quick stock screen using simple, common measures, such as a low p/e and a consistent earnings history. Then you could print it out, and throw 10 darts at it.

    Keep those for 10 years and then the true worth of a "simple" portfolio would be revealed.

    It's also a good thing that this portfolio started in 95' and not in 98' since closing in 2008 would have certainly put a dent in profits..

    --grant

  • Report this Comment On December 21, 2010, at 1:37 AM, monkeyrat100 wrote:

    Yea, not only would closing in 2008 put a dent in profits, but the techs were much higher in 1998, right before the dot com bubble. I too, find it hard to believe that a "simple" portfolio would risk all of its capital in one sector.

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