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 Motley 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 next several 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 relatively 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 continue to 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 last decade or two. Do you use Yahoo!
(NASDAQ:YHOO)for email and shopping? Do you fill your car up at your local ExxonMobil (NYSE:XOM)? Yahoo! shares have returned more than 25% annually over the past decade, despite that big stock-market hiccup a few years ago. Over the past 20 years, ExxonMobil stock has gained some 14% per year, on a compound average basis, trouncing most mutual funds. These companies have performed rather well, right under our noses.
- 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 Celgene
(NASDAQ:CELG)-- if you're invested in it, do you have a good grasp of current and in-the-pipeline treatments for immune-inflammatory-related diseases, transfusion-dependent anemia, myelogenous leukemia, multiple myeloma, ovarian cancer, and more?
- 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 Merck
(NYSE:MRK)or Washington Post (NYSE:WPO). Both stocks have earned incredible returns for early investors, and many still have high expectations for the companies' future performance, but both stocks have been flat or worse over a bunch of the last few years.
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. This is the kind of issue that investors in companies such as Electronic Arts
(NASDAQ:ERTS)need to think about. Its stock was recently trading at a P/E ratio of 200-plus, based on trailing-12-month earnings, and a P/E of nearly 30, based on higher earnings expected in the coming year. Is that reasonable, or has the stock gotten ahead of itself?
- 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 68%, versus 31% 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. I've found some good stocks for my own portfolio there.
Here's to big profits in your future!
This article was originally published Feb. 2, 2006. It has been updated.