Same Stocks, More Profit

Gambling metaphors for investing are a dime a dozen, and they can be misleading, because gambling is often a binary outcome -- you either win or you lose. But let's use one anyway.

If, like me, you enjoy the occasional game of blackjack, you might have heard -- or uttered yourself -- this common lament: "I always hit blackjack when I'm betting the minimum!" A card counter would tell you that this happens because you're betting small at the very times that you have the best odds of beating the dealer.

Same with investing
Just the same, have you ever had a tiny grubstake on a stock that has absolutely gone crazy? In 1998, in the midst of the Asian currency crisis, I was living in Jakarta and bought a teeny-tiny stake in Telekom Indonesia (TLK) after it had fallen from $30 to below $3 per share. While my investment increased more than eightfold, it meant bupkis for my real-money portfolio. My stake was simply too small to matter.

In our Motley Fool Hidden Gems small-cap service, we recommend that members diversify broadly among 20 or more stocks. This is because small caps can be volatile and diversification can save you from becoming insolvent.

At the same time, however, we see the power of going double-, triple-, or even quadruple-down on certain companies when we have the highest confidence in their prospects and their prices. Let's take a look at what I mean with the following actual five-year returns from some popular companies.

Here's how straight-up $5,000 bets on each company would have fared:

Company

Five-Year
Return

Amount
Invested

Total

Adobe (Nasdaq: ADBE  )

29%

$5,000

$6,452.59

Amazon.com (Nasdaq: AMZN  )

122%

$5,000

$11,089.80

Pfizer (NYSE: PFE  )

-27%

$5,000

$3,651.75

Altria (NYSE: MO  )

139%

$5,000

$11,943.46

Abbott Labs (NYSE: ABT  )

11%

$5,000

$5,573.43

Home Depot (NYSE: HD  )

-27%

$5,000

$3,635.69

McDonald's (NYSE: MCD  )

33%

$5,000

$6,658.49

Total

40%

$35,000

$49,005.21



Now, let's suppose our investor, with the same $35,000, had put more money on the stocks he thought had more upside potential:

Company

5 Year
Return

Amount
Invested

Total

Adobe

29%

$2,000

$2,581.04

Amazon

122%

$7,000

$15,525.71

Pfizer

-27%

$3,000

$2,191.05

Altria

139%

$7,000

$16,720.84

Abbott Labs

11%

$2,000

$2,229.37

Home Depot

-27%

$7,000

$5,089.97

McDonald's

33%

$7,000

$9,321.89

Total

53%

$35,000

$53,659.87



Even though one of this investor's biggest bets turned out utterly wrong (Home Depot, down 27%), he still did much better -- to the tune of 13 percentage points -- than if he'd made even $5,000 purchases.

Make your money count
This should clearly illustrate how powerful proper money management is in juicing your returns -- provided you can identify the stocks with the best long-term prospects. In order to help our Hidden Gems members identify the most promising of our small-cap recommendations, each month Tom Gardner and I publish our top five best stocks for new money in addition to our two new recommendations.

Our goal in doing so is to help our members do even better than the returns on our scorecard -- which have been gratifying thus far, as we've topped the market 28% to 9% since the service began three years ago. If you're interested in seeing our most recent list of top stocks for new money now, simply try a no-strings-attached free trial. There's no obligation to subscribe.

Bill Mann owns shares of McDonald's. Amazon.com is a Stock Advisor recommendation. Home Depot and Pfizer are Inside Value recommendations. The Fool's disclosure policy -- in the immortal words of Robert Palmer -- is simply irresistible.


Read/Post Comments (0) | Recommend This Article (1)

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.

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: 506626, ~/Articles/ArticleHandler.aspx, 10/25/2014 2:00:49 PM

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...


Advertisement