Invest Like a Billionaire

Q: How do you invest to end up with a billion dollars?
A: Start with two billion dollars, and invest it in this market.

(Rim shot!)

Investors likely won't laugh as hard at that joke as they might have a few years ago, when stocks were still finding a way to appreciate year after year. After a brutal year that's left many portfolios down 30%, 40%, 50%, or more, many investors may be throwing up their hands in surrender. In October alone, investors withdrew $72 billion from stock funds.

Watching the erratic ticks of the market indexes, or trying to follow along with the perpetually disagreeing folks shouting over one another on CNBC, may make the process of investing seem overwhelmingly daunting. If that's how you're feeling, now may be the perfect time to take a step back from the madness and see what we can learn from the wealthiest folks around.

The billionaires' club
To begin with, when I say "the wealthiest folks around," I don't mean that guy down the street who just told you about the few thousand he made trading Japanese yen at night. No, I'm talking about the people that need at least 10 digits to talk about their wealth.

Though some folks such as George Soros, James Simons, and Steven Cohen have traded their way to massive wealth, they're pretty lonely among the world's billionaires. Most billionaires have gotten there another way -- ownership of a single great company. Among the top 15 billionaires, we've got Warren Buffett and Berkshire Hathaway (NYSE: BRK-A  ) , Carlos Slim Helu and America Movil (NYSE: AMX  ) , Bill Gates and Microsoft (Nasdaq: MSFT  ) , and Larry Ellison and Oracle (Nasdaq: ORCL  ) -- just to name a few.

Hobnobbing with the members
Obviously, many of these billionaires' success lies in having a great business idea, guts, timing, and a little bit of luck. Michael Dell, for example, founded the predecessor to Dell (Nasdaq: DELL  ) in his college dorm in 1984. Dell was one of the first companies to successfully sell computers directly to consumers, which allowed Michael Dell to cut out the middleman -- and undercut his competitors' prices.

Fortunately, though, we can do something that these billionaires have done without needing our own billion-dollar business idea: We can own a great company for a long time. Michael Dell didn't get rich by trading in and out of Dell shares; he did it by owning a big piece of the company as it became a leader in PC sales. Likewise, it wasn't savvy options trading that helped Bill Gates score his enormous net worth -- it was owning a chunk of Microsoft and benefiting from its growth. And Sergey Brin and Larry Page? OK, I think you get the point.

But holding onto just any stock for a long time isn't optimal. Sergey and Larry aren't the proud owners of Billy Bob's Crab Shack and Automart; they lay claim to 18% of the shares of Google (Nasdaq: GOOG  ) . To reap the rewards of owning a piece of a company for the long haul, you need to make sure that the company is worth owning for that duration.

So what are the shared characteristics of the companies mentioned above during their meteoric rises? They all had …

  • A sustainable competitive advantage that kept them at the forefront of their industries.
  • A shareholder-friendly management team that (preferably) owned a big piece of the company.
  • A solid balance sheet.
  • A business that pumped out cash.

Finding the future billionaires
Though the companies I've mentioned above should continue to perform solidly, they have already created massive wealth for both the founders and shareholders. In other words, Microsoft in the early or mid-'90s had a lot more growth opportunity ahead of it than the already-$170 billion Microsoft of today.

That's why the team at the Motley Fool Hidden Gems service is focused on small companies that investors can buy today and hang on to for years, so they can benefit as the company goes from challenger to champ. Here are two stock ideas, courtesy of the team.

Buffalo Wild Wings (Nasdaq: BWLD  ) is a fast-growing business that is chowing down on market share in the "chicken wings, beer, and sports bar" restaurant segment. The company is debt-free because its business generates buckets of free cash flow, which it plows back into building new restaurants. CEO Sally Smith has done a great job running the company since she took over in 1996; she owns almost $5 million in stock, and share dilution is minor.

Meanwhile, in the health-care industry, the team has tracked down Natus Medical, a market leader in newborn hearing screening that's steadily building its franchise in other areas of newborn health tests. The company has $67 million in net cash on its balance sheet, and management has a history of generating organic growth and making smart acquisitions.

The advisors at Motley Fool Hidden Gems think that both of these companies are high-quality businesses that will produce market-smashing returns for shareholders in the years to come. You can check out detailed write-ups on more of the stocks that the team has recommended to subscribers -- including a just-recommended cash-rich infrastructure player -- with a 30-day free guest pass.

Click here to learn more -- there's no obligation to subscribe.

Fool contributor Matt Koppenheffer does not own shares of any of the companies mentioned. Microsoft, Dell, and Berkshire Hathaway are Motley Fool Inside Value selections. Google is a Motley Fool Rule Breakers pick. Buffalo Wild Wings and Natus Medical are Motley Fool Hidden Gems picks. Berkshire Hathaway is a Motley Fool Stock Advisor recommendation. The Fool owns shares of Buffalo Wild Wings and Berkshire Hathaway. The Fool’s disclosure policy has never once been caught with its pants down. Of course, it doesn't actually wear pants …


Read/Post Comments (13) | Recommend This Article (12)

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.

  • Report this Comment On February 19, 2009, at 4:01 PM, pondee619 wrote:

    "Most billionaires have gotten there another way -- ownership of a A SINGLE great company."

    Most failures have started the same way, ownership of a single company. Great only becomes obvious in hindsight.

  • Report this Comment On February 19, 2009, at 4:30 PM, TMFKopp wrote:

    Maybe we're looking at an issue of emphasis here.

    "Most billionaires have gotten there another way -- ownership of a single GREAT company."

    Great is certainly easier to see in hindsight, but I'd disagree that it only becomes obvious in hindsight.

  • Report this Comment On February 19, 2009, at 4:37 PM, sidinsd wrote:

    The MotleyFool, while an interesting site, is really no better than any other tout. They always point out their wins but never tell you about their losses. Well, I'll tell you a good one. Almost exactly a year ago they touted a stock with the symbol BUCY, Bucyrus International, which was selling then at a split adjusted $50 a share (it was $100, but they split 2-1 in May of 2008). The stock is now at 13.5, giving the Motley Fool a whopping 73% loss! They are going to have to pick a whole lot of BWLDs to make up for that one.

  • Report this Comment On February 19, 2009, at 6:50 PM, TMFKopp wrote:

    @sidinsd

    I'm not sure where you're pulling the BUCY recommendation from, but I can guarantee you won't find a single person that will deny that we get it wrong sometimes. Investors that get it right 100% of the time only exist in folk tales.

    I'll also point out that BWLD as an example above isn't pointed out as a "win" but more as a stock/company that the HG team thinks will succeed well into the future.

  • Report this Comment On February 20, 2009, at 7:47 AM, pondee619 wrote:

    "Great is certainly easier to see in hindsight, but I'd disagree that it only becomes obvious in hindsight"

    Okay. Please give me that Single Great Stock in which to invest all my money NOW. Or should I continue to diversify my portofolio into companies I think may become great? But that ain't the way Billionaires got rich, is it?

    Thank you.

  • Report this Comment On February 20, 2009, at 8:30 AM, Stocklovr wrote:

    "That's why the team at the Motley Fool Hidden Gems service is focused on small companies that investors can buy today and hang on to for years, so they can benefit as the company goes from challenger to champ."

    Ahh, if this were only true. You see, Hidden Gems also hops out of stocks for a "quick gain". Nothing wrong with that "if" that's the strategy going in but your statement above differs from the "let's sell it now because it is too rich and by my spreadsheet and is therefore overvalued.

    I'm referring to the sell of IPHS after 7 months and the sell of some of BWLD based mostly on valuation. When I asked how a stock ever got to double, triple, 1000% etc., if you sell it for a quick profit, I was admonished for not seeing the value of the immediated return.

    Immediate returns are great but the question posed and still unanswered is how can you say "that Hidden Gems service is focused on small companies that investors can buy today and hang on to for years, so they can benefit as the company goes from challenger to champ"? There will be no benefit of watching one of these sells go to champ status from the sidelines.

    -Slvr

  • Report this Comment On February 20, 2009, at 4:14 PM, pgoel6uc wrote:

    "Most billionaires have gotten there another way -- ownership of a a single great company"

    "Investors that get it right 100% of the time only exist in folk tales"

    So let me see. Are you recommending that I buy a single great stock, and lose all my money, since I could not be right, given that if I was right, that would make it 100%, or are you saying that there is no way I can diversify and become a billionaire, since in that case, I would not be owning a single great company?

  • Report this Comment On February 20, 2009, at 6:52 PM, TMFKopp wrote:

    It's interesting that so many seem to have latched onto the "single" here. The thrust here was ownership of great companies over long periods of time. Diversification when you aren't a founder / executive at the company is important but a topic in itself:

    http://www.fool.com/investing/mutual-funds/2009/01/06/the-mi...

    http://www.fool.com/investing/general/2008/07/30/should-you-...

    I don't think you'll hear anybody in the Motley Fool community suggest that putting all of your money into a single stock is a good idea. Buying stocks with the long term perspective of a founder/owner, though, that's a darn good idea.

    Matt

  • Report this Comment On February 20, 2009, at 7:20 PM, TMFKopp wrote:

    @Stocklovr

    HG still has two active recommendations on BWLD. They've both been in the HG portfolio for nearly 5 years. The HG service itself isn't even 6 years old yet.

    Matt

  • Report this Comment On February 21, 2009, at 8:29 AM, pondee619 wrote:

    "Invest Like a Billionaire"

    "Most billionaires have gotten there another way -- ownership of a single great company"

    Your words. Invest like a billionaire who got rich investing in ONE great company.

    "I don't think you'll hear anybody in the Motley Fool community suggest that putting all of your money into a single stock is a good idea" In this article YOU do.

  • Report this Comment On February 21, 2009, at 5:43 PM, TMFKopp wrote:

    Hey pondee, maybe you should check out Hidden Gems and see their strategy for yourself.

  • Report this Comment On February 23, 2009, at 8:09 AM, pondee619 wrote:

    "Hey pondee, maybe you should check out Hidden Gems and see their strategy for yourself" I subscribe, I have.m BUT...

    I'm not commenting on HG. I'm commenting on your story, which says: Invest like a billionaire who, mostly, invest in A SINGLE great company.

    Maybe you should read what you write. I never mentioned HG in any of my comments. Maybe you should read what others have written.

  • Report this Comment On February 23, 2009, at 8:15 PM, TMFKopp wrote:

    pondee, see above. Diversification is important, but the focus here was on long term ownership.

    Yes, the word "single" was used, but that was not to suggest that investors should be investing in just one company. In short, investors should look for great companies and buy with a long-term, owner-oriented focus. I'm sorry that the article was confusing to you, but hopefully this clears it up.

    Thanks for the comments.

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