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 twice more, 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 banging my head on my desk. 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 shares were priced in the $70s, but it's a fuzzy memory. They spent years below $20 until relatively recently, though they're back down there again. 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 -- I sold more shares to diversify into other stocks instead of holding a big chunk of my net worth in a company in which I no longer had 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.
Buy what you know
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, and knowing their products or services will go a long way toward understanding the business. Plenty of well-known companies have done phenomenally well over the past decade or two -- let's look at a few.
Do you have some SanDisk (NASDAQ:SNDK) memory cards in your digital camera? Do you use a Cisco Systems (NASDAQ:CSCO) router in your home computer network? Do you fill your car up at your local ExxonMobil (NYSE:XOM)? SanDisk stock has been volatile over the past decade, but those who've hung on have enjoyed a compound annual growth rate of 21%, and a total gain of over 575%. Cisco shares have increased in value more than 15-fold in the past 15 years, 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.
Beware what you don't
Along those same lines, be wary of what you don't understand. If you don't understand how a business makes money, you probably won't be able to tell when business is going badly. Biotechnology companies present a good example, as do new-technology firms. Think of Energy Conversion Devices (NASDAQ:ENER) -- if you're invested in it, do you have a good grasp of its solar energy technologies, and those of its competitors? Can you discuss the benefits of amorphous silicon technology versus polysilicon? Lehman Brothers (NYSE:LEH) is down more than 70% from its 52-week high, attracting some bottom-feeding investors. But is it really at its bottom? Unless you're rather comfortable with your understanding of its exposure to credit and other risks and you're aware of and approve of its plans to turn itself around, steer clear.
Hang on for the ride
If you buy into a company hoping that it will be a multibagger for you, buy to hold as long as you continue to understand the business, strategy, and leadership. If 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 Dell (NASDAQ:DELL). It earned incredible returns for early investors, and many still have high expectations for the companies' future performance, but it has delivered a net loss to investors over the past decade.
Sell if things get too crazy
Consider selling some of your shares if they hit levels you can't justify or if the company is facing some long-term problems. That was my main mistake -- irrationally and greedily hoping to get even richer. If a stock is trading for far 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 Amazon.com (NASDAQ:AMZN) need to think about. Its stock was recently trading at a P/E ratio of 60-plus, based on trailing 12 months' earnings. Is that reasonable, or has the stock gotten ahead of itself?
Get help from the pros
Finally, consider checking out the stocks that David and Tom Gardner recommend. Their Motley Fool Stock Advisor service, launched more than six years ago, offers two picks (and two investing styles) each month. They have a few losers, of course, but on average, their recommendations are beating the S&P 500 by more than 41 percentage points.
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. Dell is a Motley Fool Inside Value pick. Amazon.com is a Motley Fool Stock Advisor recommendation. The Motley Fool is Fools writing for Fools.
