I'm all in favor of keeping investing simple. But if simplicity comes at the cost of lost returns, then it's worth a little extra work to uncover the best investment opportunities you can find, rather than settling for second-best.
Avoiding the beginner's trap
One of the biggest mistakes that beginning investors make is relying too much on their limited experience in choosing their first investments. In particular, if you're bullish on a particular industry or sector, then it's tempting just to put your money into shares of the leading company in that industry, intending to sit back and watch profits pour in.
Sometimes, that strategy works well. For instance, with online commerce, few would dispute Amazon.com's
But other times, you're not going to be best served by going with the giant of an industry. Looking down the chain a bit at somewhat smaller companies with aspirations of becoming tomorrow's leaders can uncover even better investment opportunities. Let's take a look at a couple of examples.
Big oil and you
In the oil industry, it's hard to get bigger than ExxonMobil
But Exxon's behemoth status forces it to make huge strategic moves to have any major impact on the overall company. For instance, Exxon's $41 billion purchase of natural gas producer XTO Energy raised plenty of eyebrows from skeptics who believed that natural gas was exactly the wrong place for energy companies to invest at the time, but anything less than such a huge takeover wouldn't have moved the needle much. Indeed, the move arguably forced Chevron
With a market cap well over $100 billion, ConocoPhillips
That doesn't mean that Conoco is behind the times; it merely shows a different emphasis, with management looking more toward unlocking value rather than wholeheartedly embracing the only growth strategy that megacompanies like ExxonMobil have at their disposal: big acquisitions. Certainly, shareholders have been pleased with Conoco's moves, as they've produced much larger returns on their shares, which have risen 55% in the past year versus a 30% gain for ExxonMobil. In this case, staying in the top three of the industry was enough to earn much better returns.
The biggest bargain
In Conoco's case, you didn't have to go very far down the list to get outpaced returns. But sometimes, only much smaller competitors can execute on giant-killing ideas.
For instance, the recession underscored the huge cost advantage of Wal-Mart
By drilling down to what retail shoppers really wanted during tough times, you could have replaced the flat performance of Wal-Mart shares with strength from dollar stores even when most of the stock market was plunging.
Sticking with big-name companies appeals to beginning investors because they seem so much more secure and stable than up-and-coming rivals. But by breaking outside your comfort zone, you can open the door to truly stellar returns. That's worth a little bit of extra effort.
Up-and-coming stocks like ConocoPhillips, Family Dollar, and Dollar Tree may have further to run. Add them to your watchlist and get the latest on them.
Fool contributor Dan Caplinger is always looking in hidden places for great value. He doesn't own shares of the companies mentioned in this article. Amazon.com is a Motley Fool Stock Advisor selection. Chevron and Wal-Mart are Motley Fool Income Investor recommendations. Motley Fool Options has recommended a diagonal call position on Wal-Mart, which is also a Motley Fool Inside Value and Motley Fool Global Gains pick. The Fool owns shares of ExxonMobil and Wal-Mart. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy always digs a little deeper.