This article's salacious headline might smack of exaggeration -- but believe it or not, it's true.
How it happened
Picture it: New Jersey, 1995. Though not yet a Fool employee, I was, perhaps like you, an avid reader of the Fool's online site. The Fool's founding brothers, David and Tom Gardner, occasionally recommended stocks, and one of their recommendations was an online service provider called America Online.
I was still quite new to investing, and I didn't know enough to do much of my own research. But at least I had one thing going for me: I was an AOL customer. I used the service every day, and I liked what I saw of its user-friendliness, usefulness, and potential. So I bought. I snapped up $3,000 worth of shares and hung on.
Over the following years, the stock would go up and down, sometimes significantly, but I kept holding on. Overall, it mainly went up, and it split and split. I remember checking my portfolio regularly -- several times a day! -- to see how rich I was becoming. Near the stock's peak, I was in possession of a 70-bagger! My $3,000 investment had turned into $210,000. If it doubled in value only two more times, I'd be (almost) a millionaire! All from a measly $3,000 investment.
Did I sell shares along the ride up? No. Did I sell at least some near the top, when my mom told me to? Nope. (That strange thudding sound you hear is me kicking myself. The silence is my mom, biting her tongue.) I kept holding on. AOL merged with Time Warner in 2001, and for years after that, the stock struggled. I remember when the shares were priced in the $70s, but it's a fuzzy memory. They spent years below $20, until very recently. I did sell a big chunk of my shares -- in the teens -- when I needed money for a down payment on my house. And I finally got smart and sold even more shares to diversify into some other stocks, instead of holding such a big chunk of my net worth in a company in which I no longer had the most faith.
I hold some shares, though, and despite my inclination to curse my stupidity for not selling earlier, I'm still sitting on a handsome profit, even at current levels. My cost basis is ridiculously low, and this has still been one of my best investments ever. I really shouldn't complain.
How you can do it
If any part of this story appeals to you, know that you have a chance to make it yours -- perhaps with an even happier ending -- if you make a few decisions differently:
- First, pay attention to products and services you know, use, and love -- especially if you see more and more people using them. There may be a great stock behind them. Plenty of well-known companies have done phenomenally well over the past decade or two. Do you use TD Ameritrade
(NASDAQ:AMTD)as your brokerage? Do you occasionally pump gas into your car at a Valero (NYSE:VLO)station? Do you buy your clothes, or your children's clothes, at American Eagle Outfitters (NYSE:AEO)? TD Ameritrade has seen its stock appreciate by nearly 20-fold over the past decade. American Eagle Outfitters gained nearly 5,000% during that decade, itself, turning a $2,000 investment into nearly $100,000. Valero has increased in value seven-fold over just the past five years. These companies are under our noses and have performed spectacularly.
- Along those same lines, be wary of what you don't understand. If you don't understand a business, you probably won't be able to understand when business is going badly. Biotechnology companies are good examples here. Think of Elan
(NYSE:ELN)-- if you're invested in it, do you have a good grasp of its current and in-the-pipeline therapies for neurology, autoimmune diseases, and severe pain, among other things? How about the pipelines of its key competitors? If you're invested in Corning (NYSE:GLW), are you familiar with current and expected demand for specialty glass and ceramics? Do you have a good grasp of Corning's competitive advantage? You don't have to invest in hard-to-understand companies to do well. Think of Dell (NASDAQ:DELL)and its direct-to-consumer distribution model. Despite some tough times right now, Dell has increased in value more than 250-fold over the past 20 years.
- If you buy into a company hoping that it will be a multibagger for you, buy to hold. As long as you have faith in the company's future, it's often best to just hang on, despite inevitable hiccups. Don't let some naysayers in the media get you out of a stock because of short-term concerns if you still have long-term confidence. Consider Wal-Mart. For its earliest investors, it's been a 1,000-bagger over roughly 30 years. For those who've hung on for just the past decade, during much of which the stock has been stalled, it has more than tripled their money -- still not bad, eh?
- Do consider selling at least some of your shares if they hit levels you can't justify. That was my main mistake -- irrationally and greedily hoping to get even richer. If a stock is trading for more than you know it's worth and you still hang on, you're no longer investing -- you're speculating, and at great risk.
- Finally, consider checking out the stocks that David and Tom Gardner are recommending now. Their Motley Fool Stock Advisor newsletter service, launched in April 2002, offers two picks (and two investing styles) each month. They have a few losers, of course, but on average, their recommendations are up 72%, versus 35% for like amounts invested in the S&P 500.
I invite you to try Stock Advisor free for 30 days, during which time you'll have full access to all past issues and recommendations.
Here's to big profits in your future!
This article was originally published Feb. 2, 2006. It has been updated.
Longtime contributor Selena Maranjian owns shares of Time Warner and Wal-Mart. Dell and Wal-Mart are Motley Fool Inside Value recommendations. Time Warner, American Eagle Outfitters, and Dell are Stock Advisor recommendations. The Motley Fool is Fools writing for Fools.