The Stock That Got Away

Just like folks who go fishing, investors love to tell tales of "the one that got away."

We speak remorsefully 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 Green Mountain Coffee Roasters or a die-hard Apple fan, but you didn't invest in either company back then. Now, every time you hear that they're two of the market's 10 best stocks from 1998 to 2007, you wish you could time-travel back to 1998 and invest $1,000 in each company. Today, those tiny investments would be worth $30,854 and $11,966, respectively.

Sadly, the flux capacitor is fictional.

Mustard seeds
"The stock that got away" is usually a small company that made it to the big leagues. That makes sense, because those are the stocks with the most room to grow. You simply don't hear stories about people missing the boat on megacaps such as 3M (NYSE: MMM  ) and Dow Chemical (NYSE: DOW  ) -- unless the storyteller was born in 1902.

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

One of the worst things an investor can do is invest in "the stock that got away" after it has reached large-cap status, in hopes that it will repeat its past performance. The law of diminishing returns makes such a feat difficult to achieve.



Return Oct. 1988-Oct. 1998

Return Oct. 1998-Oct. 2008

Applied Materials (Nasdaq: AMAT  )



Dell (Nasdaq: DELL  )



Cardinal Health (NYSE: CAH  )



Gap (NYSE: GPS  )



Data provided by Yahoo! Finance.

As you can see, even with good results like Dell's, there's a stark difference between the stocks' most recent 10-year returns and their previous 10-year returns.

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 hard to locate tomorrow's winners among the thousands of small companies on the market, especially with all the market turmoil we've experienced. But the down market makes the search for great small companies even more exciting because some of the best companies of the next 10 years are trading at great prices right now.

To get started, look for companies that have founders with large personal stakes, have little or no debt on their books, and have 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 nearly 15 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 Jan. 25, 2007. It has been updated.

Urban Outfitters was the one that got away from Todd Wenning. He owns no shares of any other company mentioned. 3M, Dell, and Gap are Motley Fool Inside Value recommendations. Apple is a Stock Advisor pick. Dow Chemical is an Income Investor choice. The Fool has a disclosure policy.

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