This article's swaggering headline smacks of exaggeration -- but, it's true.
How it happened
Picture it: New Jersey, 1995. Although not then a Motley Fool employee, I was, perhaps like you, an avid reader of Fool.com. Founding brothers David and Tom Gardner occasionally recommended stocks, and one of their recommendations was an online service provider, 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, utility, and potential. So I bought. I snapped up $3,000 worth of shares and hung on.
Over the next several years, the stock went up and down, sometimes significantly -- but I held on. It mostly 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 had 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 held 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 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 a 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 a Hewlett-Packard
printer? Do you shop at Costco (NYSE: HPQ) and Walgreen (Nasdaq: COST) ? Do you do your banking at Citigroup? Hewlett-Packard shares have increased in value almost 10-fold over the past 20 years, while Costco shares have increased more than sixfold. Would you believe a drugstore chain has done even better than that? Walgreen stock has increased in value more than 20-fold over the past 20 years, and Citigroup shares have increased in value 15-fold -- and that's despite having swooned significantly during our recent subprime lending crisis. These companies have performed rather well, right under our noses. (NYSE: WAG)
- 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 present a good example. Think of Onyx Pharmaceuticals
-- if you're invested in it, do you have a good grasp of its and its competitors' current and in-the-pipeline treatments for kidney and liver cancer, among other things? (Nasdaq: ONXX)
- 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 those 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 Home Depot
or American International Group (NYSE: HD) . Both stocks have earned incredible returns for early investors, and many people still have high expectations for the companies' future performance, even though stocks have been flat or worse over the past few years. (NYSE: AIG)
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.
This kind of issue is what investors in companies such as First Solar need to think about. Its stock was recently trading at a P/E ratio of 100-plus, based on trailing twelve months' earnings. Is that reasonable, or has the stock gotten ahead of itself?
- 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 52%, versus 15% 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, Home Depot, and Costco. Time Warner and Costco are Stock Advisor recommendations. Home Depot is an Inside Value recommendation. The Motley Fool is Fools writing for Fools.