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 moola. 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
It was 11 years ago this summer that Fool co-founder and Motley Fool Hidden Gems lead analyst Tom Gardner decided to try and 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

July 7, 1995
Purchase Price*

May 11, 2006
Closing Price*

Total return

Dell (Nasdaq: DELL  )

$1.00

$24.51

2,351%

AOL (now part of Time Warner)

$1.65

$17.31

949%

Sun Microsystems (Nasdaq: SUNW  )

$1.59

$4.89

208%

Cisco Systems (Nasdaq: CSCO  )

$3.07

$20.05

553%

Texas Instruments (NYSE: TXN  )

$8.14

$33.36

310%

Intel (Nasdaq: INTC  )

$8.13

$19.36

138%

Gap

$4.82

$18.00

273%

Microsoft (Nasdaq: MSFT  )

$5.22

$23.22

345%

Hewlett-Packard (NYSE: HPQ  )

$13.71

$32.53

137%

Silicon Graphics

$43.25

$0.06

(100%)

Total

523%

*Prices are adjusted for splits and dividends. Data provided by Yahoo! Finance.

You read that right, Fool. Even with a tough week in which Silicon Graphics filed for bankruptcy and Dell admitted its business is not at all like it used to be, the Simpleton Portfolio would have returned more than six times your money had you invested on day one. For context, consider this: Over the same period, the S&P 500 gained approximately 135%.

Don't be afraid to be a couch potato
It's tempting to think of Tom as a clairvoyant whose propensity to trounce the overall market is matched only by his charm and wit. (Although 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 watching the Stanley Cup playoffs. Just stop -- yes, right now! -- poring over an endless pile of financial reports. (Unless, of course, 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 multibagger 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 paying attention also mattered.

"It's important to follow the spirit of the day and understand the demographic trends," Tom 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."

More stocks to bank on
The days of the Simpleton Portfolio are past. And while Tom's focus has shifted to small caps, he's still as patient as ever with his portfolio. His quest to buy and hold some of the world's best small businesses in Hidden Gems has created a service that is torching the S&P 500's average return, 45% to 15%, since 2003. It's still simple, and it's still successful. Click here to get 30 days of free access.

Even if you choose not to check out our best investment ideas, at least promise me that you won't treat your portfolio the way a hyperactive 2-year-old on a sugar high treats a can of Coke. Savor the flavor instead. Buy to hold, check in every quarter or so, and then sit back and enjoy the riches that only patience can deliver.

This article was originally published on July 8, 2005. It has been updated.

Fool contributorTim Beyersis 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 ishere. Microsoft, Intel, Dell, and Gap are Inside Value recommendations. Time Warner, Dell, and Gap are Stock Advisor recommendations. The Motley Fool has an ironcladdisclosure policy.


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