Here's How the Stocks in My "Top Stock" Column Have Performed

The World Wide Web is a tricky place, particularly for investors. The nonstop prolific growth of content across the internet means investors can find arguments for or against almost any stock they're interested in. While alternative viewpoints can be healthy, information overload makes it difficult for less experienced investors to differentiate good advice from bad.

That's why it's important for public financial figures to hold themselves to high standards. In particular, some more accountability could be helpful, especially when it comes to the performance of previous stock recommendations. While past performance will never be a perfect indication of future results, it will at least provide some insight into an investor's aptitude.

Image source: Getty Images.

To that end, I went several years back to track how my highest-conviction recommendations have performed. More specifically, I tracked the performance of every one of the stocks in my "top stock" column, which I began regularly publishing in August 2017.

Here are the results.

Data source: The Motley Fool. *Price is determined by the stock's price at market open on the first market day following a "top stock" recommendation. 

Performance

On average, these stocks have risen 29.1% since I called them "top stocks." That compares with the S&P 500's average increase of 6.4% over the coinciding periods. Of the 33 calls profiled in this "top stock" column, only four have underperformed the market. In other words, 88% of these bets have outperformed the market to date.

Performance, of course, is just one side of the story. There are some key lessons from these results worth digging into.

1. Invest in what you know...

Most of the calls I've made as part of my "top stocks" column are tech stocks. In fact, 11 of 19 are tech stocks if you count Amazon.com and Netflix, six of which I've been writing about for five years or more. Tech is what I know best; that's why my recommendations don't deviate too far from my circle of competence.

When I do go outside tech, most of the companies are simple and easy to understand. Costco, Home Depot, Kroger, Vail Resorts, Walt Disney, and Intuitive Surgical, for instance, all have very straightforward value propositions and long track records of success.

2. ...but don't be afraid to learn something new

Of course, just because a company is a tech stock, that doesn't automatically mean I'll understand it. There are many tech companies involved in highly technical fields.

For me, The Trade Desk (TTD 3.52%) was one of these hard-to-understand companies, at least at first. Abbreviations and unusual words like "AVOD" (ad-supported video on demand), "DSP" (demand-side platform), "programmatic advertising," and "biddable marketplace" could scare off investors unwilling to take the time to learn more about a company's industry and competitive dynamics. However, after I listened to some earnings calls, heard some CEO interviews, and read the company overview in The Trade Desk's 10-K, I realized the tech company wasn't complex at all, but a simple and powerful business disguised in complicated language. In a nutshell, The Trade Desk has a software platform that helps ad agencies and brands get the biggest bang for their buck on digital ad spend, primarily in biddable marketplaces that transact in real-time, similar to the stock market.

In this case, the benefits of being willing to learn something new went beyond developing a better understanding of The Trade Desk. Digging into the company's financials and the industry dynamics led me down a rabbit hole of discovery until I found another stock in the industry that I believed was getting overlooked: Telaria. The company operates on the opposite side of the biddable marketplace, specifically focusing on premium video publishers. In other words, Telaria helps companies like Hulu make more money from their digital ads. Telaria ended up being my latest "top stock" call.

For the most part, investors should stay within their circle of competence. But they also shouldn't shy away from an opportunity just because it requires some new background knowledge.

3. "Find excellence, buy excellence, and add to excellence"

David Gardner, the Motley Fool co-founder and host of the Rule Breaker Investing podcast, has a saying that summarizes his market-beating investment philosophy. "I try to find excellence, buy excellence, and add to excellence over time. I sell mediocrity," he often says. "That's how I invest."

All of these companies, of course, are among the leaders in their respective industries or niches, lending well to the first part of David's quote about buying excellence. But what's worth emphasizing are the companies that were re-recommended as part of this "top stock" column. The outperformance of these "top stock" calls is, in part, due to liberal re-recommendations of excellent companies.

For example, I doubled down on The Trade Desk in November, even after my first recommendation had risen 35% in less than six months. This second call has seen a 114% gain, contributing significantly to the overall results of the "top stock" column. Similarly, I recommended Costco in 2018 at $186 and, once again, in 2019 at $212; today it trades at $295. The stocks with the most recommendations were Walt Disney and Apple, which were recommended four and seven times, respectively.

Notably, every single re-recommendation -- there were six companies with more than one recommendation -- outperformed the market. Luck, of course, is certainly a factor. But it's still worth noting how "adding to excellence" helped drive this strong performance.

4. Always be buying

For the most part, I was recommending "top stocks" in all market conditions during the past few years, including 2017's wild bull market and the S&P 500's 15% decline in the fourth quarter of 2018.

If I were focused on timing the market, I probably would have missed a number of investment opportunities.

5. It's OK to wait for the right opportunity

On the other hand, while I did recommend "top stocks" almost every month from August 2017 to August 2019, there were a few times when I simply couldn't find a stock I felt comfortable recommending. That doesn't mean there weren't opportunities during these months; it just means there weren't stocks I believed were worthy of calling a "top stock." My column, therefore, failed to see the light of day in May and August of 2018, as well as March, April, and May of 2019.

The great thing about investing, however, is that it's OK to do nothing. Indeed, sometimes it's even profitable. Inaction gives you time to think while your best investments continue to execute.

Image source: Getty Images.

6. Let quality businesses do the heavy lifting for your portfolio

One reason my recommendations were able to outperform the market during this period was that I never recommended selling them. By recommending high-quality companies and giving them time to operate, the biggest winners have enough breathing room to exceed expectations and make an outsize impact on your portfolio's performance.

Of course, that doesn't mean some of the stocks didn't appear overvalued during this time. Shopify has arguably looked expensive ever since I've recommended it. But the e-commerce platform specialist's business execution has been nothing short of astounding -- and shares have soared 229% since the company was recommended less than two years ago.

When it comes to high-quality companies in your portfolio, try not to give valuation too much weight when it comes to deciding whether to sell. The market pays a premium for the best of the best. Give your winners room to run.

7. Acknowledge that luck is a factor

While the sample size of this portfolio of "top stocks" -- at 19 stocks and 33 total recommendations -- is meaningful, these companies haven't had much time to prove themselves. In other words, a significant portion of this group of stocks' outperformance in such a short period of time probably has less to do with business performance and more to do with trends on the Street.

For instance, software-as-a-service (SaaS) stocks have generally crushed the market during this timeframe. Shopify, Intuit, and salesforce.com are all well-known companies in this space. The rising popularity of SaaS stocks during this time, therefore, likely played a major role in these three stocks' massive run-ups. Of course, strong business execution at these three companies probably justified at least some these gains. But I was certainly lucky to have recommended these three companies during a time that the Street decided to place more value in the durability of SaaS business models.

Generally, investment performance should be judged over periods of five years or more. The longer the time horizon in which an investor can beat the market, the greater the odds that skill is a factor in the outperformance.

I won't be taking credit for this outperformance. More importantly, I'll continue to look for ways to improve my craft. Nevertheless, this review of two years of "top stock" calls has led to some valuable lessons.

8. Do your own due diligence

This last lesson may be discouraging to some investors, but it's perhaps the most important truth I've uncovered as an investor: Do your own due diligence. Stock recommendations from individuals or services with a great track record may be good starting places for ideas, but investors should never rely solely on secondhand information as the backbone of their investment decisions.

Every one of these recommendations was backed by a deep understanding of underlying business fundamentals, including financial health, competitive environment, secular tailwinds, valuation, and much more. While it may be possible to find market-beating stocks by solely relying on secondhand information, that isn't how I've done it, so I can't recommend it.

Go straight to the source. Print out a 10-K and read the business overview. Read the "risk factors" section. Tune in to an earnings call. Read the latest quarterly earnings report.

Getting your hands dirty will help you develop the conviction needed to buy and -- more importantly -- hold, even as Mr. Market comes at you daily with different offers. Positive and negative headlines about your holdings will come and go, but you'll be rooted in your research and long-term focus, unfazed by noise. You'll have what it takes to be an investor, someone who buys quality companies and gives them time to execute and grow. Furthermore, by developing a firsthand understanding of the businesses in your portfolio, you'll also have a greater chance of realizing when one of them goes from great to good, or even from good to worse. You'll know when it's time to part ways with an investment that has become mediocre.

Of all of these lessons, David Gardner's maxim rings truest, so I'll repeat it one more time: "Try to find excellence, buy excellence, and add to excellence over time."