I've come to loathe talking stock with friends and family. The reason? My stock-picking record is really nothing to crow about. And it's never pleasant to listen to the know-it-all coworker who consistently harps about his latest double that fronted a down payment for his new cabin cruiser.
So while I tend to do the same as almost everyone else -- talk about my few long-term winners and conveniently leave out my losers -- I have noticed a surprising trend: I've consistently been able to beat the market averages. My success has largely been due to one solid position -- Starbucks (NASDAQ:SBUX), which is up 700% and still going strong. Though I haven't impressed too many with my old or unpopular stock picks, boring seems to beat all the flash and glimmer. So what's the lesson here?
It's a team effort
Being a great investor doesn't mean being right all the time, or even most of the time. It means being right a few times, and being patient enough to realize the gains from these investments. By investing in quality companies with exceptional management, those few winners will blow away the market averages and more than make up for all your underperforming stocks.
Take a snapshot at the track record of Fool co-founder David Gardner. In 2005, David had an average record in choosing stocks for his Motley Fool Stock Advisor service. Of the 12 stocks David has picked in the last year, he is running right on the midline, holding six losers and six gainers. Talk about mediocrity. Yet the average return of his picks was 21.1%, vs. the S&P average of 7.7%. (You can check out all of David's mediocre picks with a free trial here.)
David's secret sauce is that a few star performers -- such as Netflix (NASDAQ:NFLX) and NVIDIA (NASDAQ:NVDA), up 94% and 102%, respectively -- are more than picking up the slack for his stragglers (which he still believes will come around). David's record of 2004 picks is not much different, again batting .500 with six gainers and six losers. On top of that, two of his gainers have still underperformed the S&P average. A loser year for this Fool?
Nope. David has still netted an average gain of 16.65%, vs. the S&P average return of 15.4%. He was largely carried by game retailer Electronics Boutique, now part of GameStop (NYSE:GME), which has sprinted ahead of larger retailers such as Wal-Mart (NYSE:WMT) in its niche. So it is possible to soundly beat the market even when a full two-thirds of your stocks lag the average.
Focus on the end game
There are a few important caveats to this winning plan. First, even a couple of multibagger stocks will not lift a portfolio of 35 others. You can't power to early retirement if your portfolio is overdiversified with too many stocks. A focused portfolio that holds a handful of quality companies is key.
Once your portfolio is concentrated in a handful of quality companies, it's a matter of maintaining the patience to ride your winners. Avoid an itchy trading finger and focus on company fundamentals, not price swings. Victory can be fleeting if you sell a quality company that is continues to perform for no other reason than to just "lock in a gain."
Winning the end game is what the Stock Advisor service is all about. Along with screening great stocks for subscribers to consider, the Fool team gives ongoing analysis, perspective, and follow-up advice on important fundamentals.
Patience with strong companies has rewarded Stock Advisor subscribers -- the brothers Gardner are outperforming the S&P 500 by an average of more than 40 percentage points. Give the service a 30-day test-drivehere. It's free.
Fool contributor Dave Mock happily owns shares of Starbucks and NVIDIA, as well as many other poorly performing stocks not mentioned here. A longtime Fool, he is also author of The Qualcomm Equation . The Fool has a disclosure policy .
