Doubling your money -- a "two-bagger" in investing lingo -- is a popular investing aspiration. I fondly remember my first double, EMC, and I'm always looking to repeat the experience. The number is seductive. But the question remains: How do you get a double?
The key is to buy shares of companies with above-average business potential and then hold them for as long as possible (ideally forever). When you do that, performance tends to take care of itself -- just take a look at the track records of master investors such as Warren Buffett, James Gipson, and Fred Olstein.
Five years: Solid stories, proven concepts
In a normal market environment, five years is a very reasonable time frame for a double -- requiring just a shade under 15% annual appreciation, excluding any dividends. While that's certainly better than average performance in most markets, there are almost always large, high-quality stocks that achieve this level over a number of years. Stocks like Bank of America
But here's the part that I find really interesting -- all of these were already "winners" five years ago. What's more, each of these companies was already a large and well-known player in its niche. Solid companies, proven concepts, strong management teams -- one, two, three, double.
Three years: Emerging excellence, growth industries
To achieve a double in 36 months requires three straight years of 26% appreciation. At this level, you're no longer talking about solid stock-picking; consistent 26%-a-year performance would place you among the master investors. Nevertheless, three-year doubles are possible without exceptional risk.
From October 2002 to the present, Genentech
So if you're looking for the next three-year winner, find well-run companies with good revenue performance and a neutral-to-favorable industry environment to help them along. Fool co-founder Tom Gardner believes that health care is one of the next great growth industries and he has identified eight companies to help Motley Fool Stock Advisor subscribers profit from the trend. Those recommendations have doubled on average, helping Tom beat the market by nearly 50 percentage points since inception in 2002.
One year: Lightning in a bottle
One-year doubles are the stuff of investor dreams (and fraudulent newsletter promotions). If you start with $1,000 and double it for 10 straight years (somehow managing not to pay taxes along the way), you'll end up with more than $1 million. This is not a sane expectation for a rational investor.
Though it's an unrealistic target, some stocks do manage to achieve it. Over the past year, you could have doubled your money in stocks as varied as Hansen Natural and NutriSystem
How, then, to go about stalking the one-year double? If we're talking about real companies and real stocks (in other words, not penny stocks), we're pretty much talking about catching lightning in a bottle: a timely sector, a biotech success, or an incredible turnaround.
At Stock Advisor, Fool co-founder David Gardner bottled lighting when he recommended Netflix in January 2005. The stock is up more than 101% since then. David saw a company led by a visionary CEO (Reed Hastings) that he thought would be the last one standing in the DVD-by-mail business. By all accounts, Netflix should have been a three-year double, but broad market recognition sent the shares shooting higher very quickly.
A holistic approach to doubles
Although I'd love for every stock I purchase to quickly double, focusing on single-stock doubles is really missing the forest for the trees. I'd much rather build a solid portfolio of proven companies and superior management that helps me achieve meaningful long-term returns. I even accept the fact that some stocks I pick will -- gulp -- lose money. Remember that at any time in your portfolio, some stocks will be rising and others will be falling. But as long as you stick to proven companies, you should be able to survive short-term volatility and profit.
This is precisely what David and Tom Gardner are helping subscribers do at Motley Fool Stock Advisor. The brothers' more than 80 recommendations are beating the market by some 40 percentage points (61.5% returns vs. 19.8% for the S&P 500 since 2002), and they expect to do even better three and five years out.
Remember that while stalking the double is a worthwhile pursuit, keep it within the context of disciplined stock selection and portfolio construction. Investors who lose sight of that risk turning themselves into investing Ahabs forever in search of their Moby Dick -- and we know how well that story worked out for Ahab, right? Go forth and find doubles, my fellow Fools, but make sure you don't end up harpooning your foot in the process.
Information provided by Capital IQ was invaluable in the writing of this column.
This article was originally published on Nov. 8, 2005. It has been updated.
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares). While he haunts the dark corners of the stock market looking for value, he also loves to chat about investments on The Motley Fool discussion boards . Bank of America is an Income Investor recommendation; FedEx is a Stock Advisor pick. The Fool has adisclosure policy.
