10 Stocks to Last the Decade, Revisited

Back in the summer of 2000, Fortune, a highly respected publication and home to many fine pieces of journalism over the years, published an article titled "10 Stocks to Last the Decade."

An easy enough challenge, one might surmise -- simply picking 10 companies that would, umm ... not disappear. Actually, the article promised more than that. These stocks were specifically predicted to be winners, according to the piece's introduction:

"Given the market's recent volatility, a few of our picks could experience drops over the coming months and years. But if you're a long-term investor, these 10 should put your retirement account in good stead and protect you from those recurring nightmares about the stocks that got away."

Here's the list, and how they've done since:

Returns adjusted for splits and dividends.

Not so good.

All right, I'm not here to dance upon the grave of one prediction gone bad. Everybody in this business has had a few, and there's no benefit gained in mocking anyone. But let's consider the lessons learned here, and how you can use them to avoid making the same investing mistakes.

1. All of these companies might be considered "of the moment."
The article explicitly adopted and endorsed the term "new era" multiple times. We've got a biotech, the exciting wireless and telecommunications companies, software, and online brokers among the choices. Each of these things seemed to be fairly revolutionary at the time. But revolutionary enterprises don't necessarily make for very good investments, particularly if too many other people are thinking the same way at the same time.

2. Explosive growth was very clear -- in the rearview mirror.
Leading up to the summer of 2000, these companies collectively had very strong revenue growth over the previous several years. Now, not all of this revenue growth was leading to big earnings, but those earnings were expected to materialize sooner or later. Investing on the hope that earnings will someday appear -- though it sometimes works out -- is not nearly as effective an investing strategy in general as investing in companies with solid earnings and free cash flows.

Also, these companies' prices were discounting future revenue and earnings growth for upcoming years that equaled what they had enjoyed in the previous years. Which brings us to the third point ...

3. Apparently, attractive valuation was not a consideration for this list.
As a group, these companies practically defined stocks priced for extraordinarily high future growth. With the exception of Genentech, that growth did not materialize as expected.

At Motley Fool Stock Advisor, we try to do things a little bit differently. While we’re not oblivious to the opportunities that new technologies sometimes present, valuation is always a major consideration, as is a conservative estimate of future growth opportunities. We and our readers are up 57% on money added to the market over the past five years, compared to 17% in the S&P 500. It's been fun so far, and if you want to join the ride, you're welcome to a free 30-day guest pass at any time.

This article was first published Feb. 2, 2007. It has been updated.

Bill Barker does not own shares of any company mentioned. Schwab is a Stock Advisor recommendation. The Motley Fool has a disclosure policy.