Prepare to Get Lucky

Caught streaking
It's been an amazing run to watch, but alas, it's over. Bill Miller's 15-year streak of market-beating returns at his Legg Mason Value Trust looks like it will end this year, with the fund about 9 percentage points behind the S&P 500 average as of this writing. This is not a knock against Miller -- or his portfolio. It's more an acknowledgment that "it happens," especially when a 2006 screamer like Amazon.com (NASDAQ:AMZN) is one of your top 10 holdings.

Miller remains -- rightly -- an investing legend. His 15-year streak is in no way diminished by this late-coming comeuppance. Over the past decade, the fund's annualized returns have clocked in at 12.6%, nearly four percentage points better than the benchmark.

As I see it, this year's "failure" is owed to only two factors. First is the arbitrariness of our calendar-year scorekeeping. The next is luck.

A lesson on luck
"Luck?" you ask. "What has that got to do with anything?"

Alas, in investing, luck is everything and nothing. In fact, Miller himself has remarked that the now-broken streak was only enabled by a long run of good luck.

But I submit that it's a peculiar kind of luck, the kind that comes -- to paraphrase Pasteur -- only to the prepared mind.

Sure, Miller and crew were "lucky" that their bet on Google (NASDAQ:GOOG) worked out so well, so quickly, but the only reason they made the bet at all was because they'd put in plenty of hard work and figured the stock to be sorely undervalued at its IPO. And they were right, many times over, just as they were on another major recent multibagger, Sears Holdings (NASDAQ:SHLD). But even continued strength in those two powerhouses wasn't enough to put Miller over the top this year.

Fools, prepare to get lucky
That's why I say only a fool (with a little f) would claim that luck has nothing to do with investment returns -- especially in the short run. On the flip side, only a fool would claim that a history of market-beating returns can be owed entirely to luck.

That's something we believe down to our bones here at The Motley Fool. It's why we pick stocks for ourselves. It's why we love helping other people do it, and it's why we like to begin every year with a few dozen of our best-prepared stock write-ups.

This year's guide to the months ahead is Stocks 2007, and a brief look back at its older siblings might give you an idea of just how lucky you can get if you take the time to prepare with us.

Last year, the companies my colleagues and I chose for Stocks 2006 put up average returns of just under 18%. Led by stocks like American Eagle Outfitters (NASDAQ:AEOS), an 85% gainer; Harley-Davidson (NYSE:HOG), a 31% gainer; and Pixar, since acquired by Disney (NYSE:DIS), this group bested the S&P 500 index almost six percentage points.

Lucky? You bet. But we only got "lucky" because we were well prepared for what turned out to be a booming market. More amazing to me is that those returns came despite a couple of pretty steep meltdowns, like the (44%) plunge at Urban Outfitters.

Luck cuts both ways
Of course, it doesn't always go that way in the short term. Last year at this time, we had the sad duty to report that Stocks 2005 -- then a year old -- was lagging the S&P 500 by nearly five percentage points.

Luck was not with us that year, but I submit that we were plenty well prepared to get lucky in 2006. The latest numbers show that the Stocks 2005 slate has returned an average of more than 26%. That's nearly five percentage points ahead of the benchmark.

Amazing gains of nearly 270% in BioMarin Pharmaceutical (NASDAQ:BMRN) paved the way, with help from Ceradyne -- a 62% gainer. Even one-time Stocks 2005 slacker DeckersOutdoor -- up 28% over the period -- has outrun the S&P 500 by a handy margin.

Foolish bottom line
There's no telling what can happen to stock prices over the short term. Your luck, our luck, Bill Miller's luck can break either way. The way to prosper when your luck turns is to make sure you've done your homework, as we have.

Luck favors the prepared.

I know, because I've delivered picks for this product that have yielded returns of more than 60% and 80%. I expected good gains, but I feel lucky that the gains came so big, so quickly. But even if my luck runs out this year, we have well-prepared recommendations from the best stock pickers in the house, like Fool biotech analyst Charly Travers (who delivered that BioMarin pick) and newsletter analysts Tom and David Gardner, Bill Mann, Philip Durell, and Shannon Zimmerman.

So give our latest release a risk-free look. I'm confident that Stocks 2007 will offer you every opportunity to get lucky in the coming year.

Seth Jayson is editor of Stocks 2007. At the time of publication, he had shares of American Eagle Outfitters but no positions in any other company mentioned. View his stock holdings and Fool profilehere. Deckers is a Motley Fool Hidden Gems pick. Amazon.com, American Eagle, and Disney are Stock Advisor picks. Fool rules are here.