Do I really expect 100% returns when I buy a stock? Absolutely.
It's not nearly as crazy as it sounds. I'll explain why and give you some specific stocks that I expect 100% returns on.
Why 100% returns are attainable
Right about now, many readers are probably looking at their individual stocks and seeing a huge difference between their historical returns and 100%.
Consider this, though.
We have to factor in the harsh reality that we'll get a lot of picks wrong. Peter Lynch famously said, "In this business, if you're good, you're right six times out of 10. You're never going to be right nine times out of 10."
But too many investors discount that nugget of reality by mistakenly clinging to Warren Buffett's inspirational quote: "Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1."
No matter how careful we are in our due diligence, events will cause us to be wrong. Often. Even Buffett takes a bath sometimes.
So our winners have to make up for our losers.
The stocks I expect 100% on
A mistake many investors make when they buy a stock is that they don't think about when they'd sell the stock. This includes factors such as the business environment changing, increased competition, company-specific problems, and, yes, stock price gains.
Let me explain with two stocks I recently bought for the public real-money portfolio I manage for The Motley Fool (I also subsequently bought these for my own account when Fool trading rules allowed me to).
|
Company |
Date Purchased |
Purchase Price |
Current Price |
Return* |
|---|---|---|---|---|
|
Bank of America (NYSE: BAC) |
11/2/2010 |
$11.38 |
$14.49 |
27.3% |
|
JPMorgan (NYSE: JPM) |
11/2/2010 |
$37.15 |
$45.53 |
22.6% |
Source: The Motley Fool. *For simplicity, excludes dividends, which are pretty much immaterial.
When I bought these two big banks, I bought them on weakness. There was (and still is) a good deal of uncertainty regarding their handling of foreclosures. In a worst-case scenario, they'd have to take major hits on a lot of troubled mortgages. My basic thesis was that it wasn't (and isn't) as bad as the market fears because the government has proven it is interested in keeping the too-big-to-fail banks healthy.
The big problem for me with these banks is that there is very little visibility into their operations. They are no doubt engaging in financial engineering we wouldn't understand even if they made everything transparent. And we saw with the financial crisis exactly what happens when those cobbled-together financial products blow up.
But 10 years from now, we'll still have banking, and most likely we'll still have Bank of America and JPMorgan. And remember, when I say Bank of America, I'm really saying Bank of America plus its fire-sale acquisitions of Merrill Lynch and Countrywide. And when I say JPMorgan, I'm really saying JPMorgan plus its fire-sale acquisitions of Bear Stearns and Washington Mutual. Very simply, at price-to-book values below 1.0, the market wasn't giving them much credit for any of that.
Despite my current bullishness, these aren't the kinds of companies I want to hold to the grave. Only at bargain-basement prices am I interested in companies that even Einstein would struggle to understand. Once those price-to-book values get close to 2.0 (or before), I'll be thinking hard about selling. Basically, I think 100% returns are attainable on these two banks. If the market gives me that 100% return in the next year or two, I'll be seriously eyeing the exit.
But I may not sell these stocks
Contrast that with some other stocks I bought for my personal portfolio. I bought each of the three below stocks on Oct. 8, 2008, when the stock market was in turmoil. For context, this was just after Lehman Brothers went down and just before the government doled out money for the original TARP bank bailouts. The S&P 500 was sitting at 985 and the Dow at 9,258.
Take a look at the stocks before I explain why I may not settle for a 100% return on these.
|
Company |
Purchase Price |
Current Price |
Return* |
|---|---|---|---|
|
Accenture (NYSE: ACN) |
$29.49 |
$52.99 |
79.7% |
|
Disney (NYSE: DIS) |
$25.27 |
$43.31 |
71.4% |
|
Philip Morris International (NYSE: PM) |
$42.50 |
$59.17 |
39.2% |
Source: Yahoo! Finance. *Return since Oct. 8, 2008. For simplicity, excludes dividends.
My buy thesis on each of these three seemingly dissimilar companies was similar. The market was in turmoil and giving us some cheap prices on blue-chip stocks that would weather all but the most catastrophic conditions. In a prolonged downturn, consulting services (Accenture), entertainment and tourism (Disney), and maybe even smoking (Philip Morris International) could take some hits, but these were all best-of-class players in their spaces.
Since my buys, the S&P 500 is up about 34%. So each is beating the market, and Accenture and Disney are doing so significantly. But if (hopefully when) they reach 100% returns, it's very possible I won't sell.
What's the difference between the two banks I mentioned before and these three?
The difference is that while I believe the banks will be around years from now, they are built to boom and then bust. If my buy thesis plays out before the next bust, cashing out makes a lot of sense.
In contrast, I believe these three stocks are built for the long haul. Their business models are pretty straightforward and, outside of normal cyclical volatility, steady. Even if their stock prices double from my buy-in price, their earnings should also be moving up steadily and relatively predictably. Despite their run-ups, the forward earnings multiples for Accenture, Disney, and Philip Morris stand at 14.9, 14.7, and 13.6, respectively. Not exceedingly expensive.
The takeaway
So back to the original question. Do I really expect 100% returns when I buy a stock?
Absolutely.
Do I get 100% returns on every stock I buy?
No way.
Not even close. But the winners have to make up for the losers. And just like Buffett seeks to never lose money, I seek a large return on the stocks I buy. Just not in the overnight, get-rich-quick way speculators target. When I buy a stock, I fully expect to hold it for years, not months. If the stock doubles in five years, that's a healthy 15% average annual return (plus dividends). If it's sooner, much the better. Of course, in the case of companies like Accenture, Disney, and Philip Morris, I may reup my bet if I conclude that shares could go up another 100%.
Now those are some great expectations.
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