Here's Your Shot to Score Big

Some of the best investment advice I've ever heard came from "The Great One."

But I don't mean Peter Lynch, Benjamin Graham, or even Warren Buffett. (Though as you're about to see, Buffett is a big fan of The Great One, too.) And I definitely don't mean Jim Cramer.

You've probably heard The Great One's name dozens of times, but you may not know just how wise he is. Nonetheless, he has said some very smart things. For instance ...

"You miss 100% of the shots you never take"
That's but one of the many pearls of wisdom The Great One has dropped over the years. And while it might seem obvious, or even trite, it's a truth we often take for granted.

Just think of the person you never asked to the dance, or the job you never applied for, or the novel you never finished ... or the stock you never purchased.

It happens to all of us. We get nervous, or doubtful, or busy, or ... you name it. And that might end up costing us the person of our dreams, or the job we've always wanted, or our only shot at fame. But in the case of investing, it will definitely cost us a fortune.

Back in 2007, two stocks sat on my watch list for a full 365 days:

Stock

Gain in 2007

Market Cap Today

Google

50%

$179 billion

Chipotle

158%

$3.7 billion

Apple

134%

$214 billion

A $32,100 mistake
Should I have bought them? Perhaps. But by not investing in them, I wound up making a grand total of ... nothing. Nada. Zip. Zilch.

That's a bitter pill to swallow, especially considering that if I'd invested five grand in each company at the beginning of 2007, I would have been sitting on $32,100 one year later.

I guess that's not as bad as all the people who boasted about how they were going to "bet" on the future of Las Vegas Sands, MGM Mirage (NYSE: MGM  ) , or Wynn Resorts (Nasdaq: WYNN  ) this time last year, then didn't. But it does go to show you that if you want to score, you've got to take a shot.

And if we want to score really, really big ...
In that case, we have to follow The Great One's most famous piece of advice: "Skate to where the puck is going, not to where it's been."

You may already know that The Great One is hockey legend Wayne Gretzky. If not, all you need to know is that Gretzky was arguably the greatest player ever to take the ice.

What made him The Great One? Quite simply, he was always one step ahead of everyone else -- not because of his speed, but because of his anticipation. While everyone else skated to where the puck had just been, Gretzky always skated to where it was going next.

That's the key to great investing, too
And apparently, I'm not the only one who thinks so. In an op-ed piece he penned for The New York Times, Warren Buffett used this same quote to make the point that investors who keep their cash on the sidelines when market sentiment is negative are missing out on a potentially huge opportunity.

While I couldn't agree more with Mr. Buffett, I think this quote has an even more meaningful connection to small-cap investing. If you look at the tables below, you'll start to notice an interesting correlation between market cap and percentage gain: The smaller the business, the greater the returns. While this won't always be the case, this data is a quick and dirty way of showing that the best performers do indeed start small.

That's also how you can skate to where the puck is going next.

Bigger isn't better, but size does matter
For proof, just have a look at some of the top performing stocks of the past 52 weeks with market caps equal to or  greater than $5 billion:

Stock

Market Cap

52-Week Gain

Rank Among Large Caps

General Growth Properties (NYSE: GGP  )

$5.2 billion

2,248%

No. 2

Dendreon (Nasdaq: DNDN  )

$5.0 billion

751%

No. 3

Las Vegas Sands

$14.0 billion

591%

No. 5

MGM Mirage

$5.5 billion

319%

No. 13

Dow Chemical (NYSE: DOW  )

$34.5 billion

240%

No. 19

Data provided by Google Finance.

Now compare that with some of the top-performing stocks of the past 52 weeks with market caps less than $5 billion:

Stock

Market Cap

52-Week Gain

Rank Among Small Caps

Dollar Thrifty Automotive

$966 million

2,653%

No. 2

Somaxon Pharmaceuticals (Nasdaq: SOMX  )

$229 million

2,470%

No. 3

Avis Budget Group

$1.3 billion

1,373%

No. 12

Kodiak Oil & Gas

$391 million

1,230%

No. 15

ArvinMeritor (NYSE: ARM  )

$1.3 billion

1,081%

No. 22

Data provided by Google Finance.

So, here's how you can score big
First off, keep Buffett's advice in mind. Second, keep The Great One's advice in mind. Finally, take a page out of my colleague Tim Hanson's book and make sure to dedicate at least a portion of your time to researching stocks that are obscure, ignored, and small.

These three traits have characterized some of the best-performing stocks of the past decade. More importantly, they will characterize some of the most lucrative stocks of the next 10 years.

In fact, we started our Motley Fool Hidden Gems service precisely to uncover businesses with these three traits. Since day one, our team members have dedicated themselves to discovering where the puck is going next.

And thanks to continuing market uncertainty, many of today's most promising small-cap stocks are still selling at bargain-basement discounts. So, if ever there were a perfect time to take your shot and score big, this is it.

Need a little help uncovering great small-cap stocks?
Great! You can get all of Hidden Gems' top small-cap research and recommendations -- including our top two picks for new money -- absolutely free by taking a 30-day guest pass.

You'll also be able to follow along as the Hidden Gems team invests $250,000 of The Motley Fool's own money in a best-of-the-best small-cap portfolio (so far, 17 of their 20 open positions are in the green, and two have already more than doubled).

This offer is completely risk-free, with no obligation to subscribe. To get started, simply click here.

This article was first published Jan. 25, 2008. It has been updated.

Austin Edwards did finally buy shares of Google, Apple, and Chipotle in 2008. Chipotle Mexican Grill is a Hidden Gems recommendation. Chipotle Mexican Grill and Google are Rule Breakers picks. Apple is a Stock Advisor recommendation. The Fool owns shares of Chipotle. The Fool's disclosure policy is the coolest game on Earth.


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