It's all around you! The folks everywhere in the financial media are talking up the sexy stories of the moment: Google (Nasdaq: GOOG ) crosses $500! Automakers are shipping their 2007 models with adaptors for Apple's (Nasdaq: AAPL ) iPod! Addiction to Research In Motion's (Nasdaq: RIMM ) BlackBerry has created an industry for "thumb massages"! (I'm not kidding.) And while these are all great stock stories, there's an ugly truth buried within them:
You're unlikely to get rich buying these companies today.
Recipe for success
If you want to make serious money in stocks, you've got to do three things:
- Think small.
- Buy quality on the cheap.
- Look long-term.
Simple answer: because they can move faster and further with little notice from Wall Street. Oven maker Middleby (Nasdaq: MIDD ) has moved more than 450% since Tom Gardner first recommended it three years ago. Yet today, the company is still valued at just $800 million.
How many Wall Street analysts follow Google? How many eyes are fixed on Google's every move? What do you know that they don't? Google is currently priced at $148 billion. The world's biggest company -- ExxonMobil (NYSE: XOM ) -- tilts the scale at $435 billion. A triple from this point would make Google the highest-valued company in the world. Meanwhile, the next triple from Middleby will barely break the $2 billion mark, and few people will likely notice.
A Google triple or a Middleby triple ... which do you think is more likely to happen?
Quality is the easy part. Seek companies with great financials, little or no debt, a profitable niche, and leadership with large personal stakes in the business. Leaders who "eat their own cooking" generally will work hard to make their -- and your -- investment grow. I'll even doff the Foolish cap for Google, Research In Motion, and Apple, since they are all quality ventures by this definition.
Where these big companies fall short, though, is on price. You can pay 160 times free cash flow -- the money theoretically left for you, the investor, after all of the bills are paid -- for Google, or just 25 times free cash flow for Middleby. "Sure," the Google or Apple investor will bleat, "But Google will grow faster" -- as if that justifies overpaying today. Overpaying for growth worked well for Cisco Systems (Nasdaq: CSCO ) in 2000, right? Wrong.
How long is "long-term"?
How long do you have? One of the worst investment decisions you can make is to scratch the itch to "do something" and sell a long-term winner to "lock in profits." What you're also doing is locking in future lost profits. Investors who sold Google after it doubled from its IPO, or Middleby after its first double following Tom's recommendation, have cheated themselves out of 142% and 171% of further gains, respectively, to date. But while Google's price growth must slow, as per the law of large numbers, Middleby has plenty of room to run.
You want the big money? You can have it, dear Fool, but building wealth takes time. Plan on investing in small, cheap, quality stocks for at least five years at a time, with plans to extend your investment horizon indefinitely.
Do we have your attention yet?
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Fool contributor Jim Gilliesowns no shares of any company mentioned. He did once live down the street from Research In Motion's headquarters, back when the company was cheap and small. He's been kicking himself ever since. Middleby is a Hidden Gems recommendation. The Fool has a disclosure policy.