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 I did have 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 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 a few 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. Are you a devotee of Hansen's
(NASDAQ:HANS)Natural Sodas or its Monster Energy drinks? Do you enjoy playing video games sold by Electronic Arts (NASDAQ:ERTS)? Do you buy or sell frequently on eBay? Well, Hansen's has been one of the best stocks of the past decade -- it's appreciated by a compound annual average of 71% during that period, during which time stock in Electronic Arts has grown by an annual 21% and eBay stock by an annual 37% (over the past nine 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 OSI Pharmaceuticals
(NASDAQ:OSIP)-- if you're invested in it, do you have a good grasp of its current and in-the-pipeline therapies for oncology, diabetes, and obesity, among other things? How about the pipelines of its key competitors? Level 3 Communications (NASDAQ:LVLT)is one of the Nasdaq's most actively traded stocks these days. Do you have a sound understanding of how it makes its money? If not, learn more or steer clear.
- 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 Coca-Cola
(NYSE:KO)or Pfizer (NYSE:PFE). Both stocks have earned incredible returns for early investors and many still have high expectations for the companies' future performance, but Coke has averaged only a 1.5% annual gain over the past decade (though it's up more than 30% this year), while Pfizer stock has lost ground over the past five years.
- Do consider selling 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 recommend. Their Stock Advisor 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 71%, versus 29% for like amounts invested in the S&P 500.
I invite you to try Stock Advisor free for 30 days, when 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.
Longtime contributor Selena Maranjian owns shares of Time Warner and Wal-Mart. Time Warner, Electronic Arts, and eBay are Motley Fool Stock Advisor recommendations. Coca-Cola and Pfizer are Inside Value selections. The Motley Fool is Fools writing for Fools.