The Stock That Got Away

Just like fishermen, investors love to tell tales of the "big one that got away."

We speak ruefully about the stocks that could have, would have, or should have made us a fortune -- if only we had made an investment.

Maybe you were an early customer of Best Buy and American Eagle in the 1990s, but you didn't invest in either back then. Now, each time you hear that they're two of the market's 10 best stocks of the past decade, you wish you could time travel back to January 1997 and invest just $1,000 in each company. Today, those tiny investments would be worth $44,150 and $46,060, respectively.

Sadly, the Doc's flux capacitor is fictional.

Mustard seeds
The stock that got away is usually a small company that made it to the big leagues -- which makes sense, because those are the stocks with the most room to grow. You simply don't hear stories about people missing the early boat on mega-caps like Coca-Cola (NYSE:KO) or JPMorgan (NYSE:JPM) -- unless the storyteller was born in 1902.

That's because large companies may have many years of steady growth ahead of them, but their high-growth stages have long since passed.

Johnny-come-lately
One of the worst things an investor can do is invest in the stock that got away -- after it has reached large-cap status -- with the notion that it will repeat its past performance. The law of diminishing returns makes this a very difficult feat.

Consider:

While the most recent returns for these companies are nothing to scoff at, they pale in comparison to their previous 10-year returns. By the end of 1997, these companies were too big to repeat their incredible performances.

Catch the next one
The good news is there's no need to dwell on the stock that got away -- tomorrow's big catches are out there right now, masquerading as small caps. The problem is, it can be difficult to locate tomorrow's winners among the thousands of small companies on the market.

To get started, look for companies that have founders with large personal stakes, little or no debt on their books, and dominant positioning in their market niche. These are some of the criteria Fool co-founder Tom Gardner and the Motley Fool Hidden Gems team use to select small-cap stocks for their subscribers. That tack works -- since July 2003, their strategy has outperformed the market by 23 percentage points. If you'd like, a 30-day free trial will give you access to every one of their stock recommendations. Just click here to get started -- there's no obligation to subscribe.

This article was originally published on Jan. 25, 2007. It has been updated.

Urban Outfitters is the one that got away from Fool contributor Todd Wenning. He does not own shares of any company mentioned. The Motley Fool owns shares of American Eagle. Best Buy and American Eagle are Motley Fool Stock Advisor choices. Coca-Cola and Best Buy are Motley Fool Inside Value selections. JPMorgan is an Income Investor recommendation. The Motley Fool owns shares of American Eagle. The Fool has a disclosure policy.