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. And I definitely don't mean Jim Cramer.

"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, three stocks sat on my watch list for a full 365 days:

Stock

Gain in 2007

Google

50%

Chipotle

158%

Apple

134%

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.

But I could have scored even bigger ...
How? By following 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
If you look at the tables below, you'll 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, let's have a look at five of the past 52 weeks' top-performing stocks with market caps greater than $25 billion:

Stock

Market Cap

52-Week Gain

Rank Among Stocks >$25B

Ford

$45 billion

216%

No. 1

VMWare

$25 billion

142%

No. 5

American Express

$55 billion

129%

No. 6

Caterpillar

$43 billion

112%

No. 10

Freeport-McMoRan

$33 billion

103%

No. 15

Data provided by Google Finance.

Now let's compare that with the top five performing stocks of the past 52 weeks overall ...

Stock

Market Cap

52-Week Gain

General Growth Properties (NYSE: GGP  )

$5.0 billion

2,816%

Human Genome Sciences (Nasdaq: HGSI  )

$5.2 billion

2,243%

Keryx Biopharmaceuticals (Nasdaq: KERX  )

$241 million

1,912%

Dana Holding Corporation (NYSE: DAN  )

$1.8 billion

1,886%

Somaxon Pharmaceuticals (Nasdaq: SOMX  )

$185 million

1,855%

Data provided by Google Finance.

Make no mistake ...
I'm not showing you these two tables to try to talk you out of investing in large-cap stocks. In fact, I selected these five large caps because I think they're all potentially great investments. The first three are official Motley Fool recommendations, and I personally own shares of the last two.

But as you can clearly see, the size of a company puts major limits on its growth potential. And the larger the company, the more analysts are following its every move –and the less likely the market is to misjudge its value.

In other words, if you want to score really big ...
You've got to dedicate a portion of your time to finding stocks that -- just like the small-caps listed above – are small, obscure, and ignored. Don't forget that because relatively few analysts are covering these stocks, there is a much greater chance that the market is undervaluing them.

There's one more point worth pondering here. Whereas a company like American Express would have to pack on another $55 billion in value for its shares to merely double, any of these five-small cap stocks' shares would soar at least 500% if they gained just half that amount.

That's why I'd like to invite you to take a free 30-day trial of our signature small-cap service, Motley Fool Hidden Gems, and 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, 16 of their 21 open positions are in the green, and seven are already up more than 50%. Their approach to investing could give you a real shot to skate to where the puck is going next.

This offer is completely risk-free, with no obligation to subscribe. Stick with us if you like it, or pay nothing if you don't. To get started, simply click here.

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

Chipotle Mexican Grill, VMWare, and Google are Rule Breakers picks. Apple and Ford are Stock Advisor recommendations. American Express is an Inside Value selection. Chipotle Mexican Grill is also a Motley Fool Hidden Gems pick, as well as a Fool holding.

Austin Edwards did finally buy shares of Google, Apple, and Chipotle in 2008. He also owns shares of Caterpillar and Freeport-McMoRan. The Fool's disclosure policy is the coolest game on Earth.


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