We've all read them. The grand, backward-looking profit projections that appeal to our hopes, our dreams, or maybe just our greed. Thousand-percent returns! What could be better than that?
Of course, this sounds too good to be true. Sure, there are companies out there that grow that much, but how could any single investor possibly have hung on for the ride? What people in their right mind would ever be able to hang onto a stock long enough to book that kind of gain?
It does happen
Here's a secret: There are people out there who have done it. There are people who held Intel
You can do it, too. But you have to wrap your head around one rule.
Be careful what you sell.
While it's true that you'll never go broke booking profits, it's also true that you might leave plenty on the table. Ask me about Chico's FAS
The trick is not to sell out the future for the concerns of the day. Dell
They said that about Google
On the other hand, there are companies out there that seem like they're ready for liftoff, and all they do is fizzle. The sad truth is this: You're not going to find yourself more than a handful of multibaggers, and maybe one or two real skyrockets during your investing career. So when you hop aboard, don't be so quick to jump off. But how do you know whether you're riding a real moonshot or dangling at 5,000 feet below a hissing balloon?
Marks of a moonshot
I think there are a few ways to tell:
A new way of doing business. From Microsoft's efforts to build an operating-system monopoly to Chico's unique clothes-sizing system, multibaggers harness a different approach to business, and they capitalize on the advantage.
Obvious, but hard to see. Real skyrockets often have obvious advantages that the Street refuses to acknowledge, or vastly underestimates. It can't acknowledge them, because it's incapable of processing the data. The success of Google's ancillary products in creating new ad revenue is, I think, a contemporary example.
Creating and exploiting mass-market consumer trends. Companies that can sell one or two or a dozen of something to large and growing segments of the population have potential unlike any others. Even an innovator like Apple
(NASDAQ:AAPL)was dead in the water until it reached out to everyone with the iPod.
Making money. You can burn cash for only so long. The best way to build for the future is to make enough money to invest in it. Look for profits. Look for high returns on investment.
- Leading the way. There's often little left for second place. But leaders can continue to roll for years. They not only supply the demand for current products in their field, but they also dictate the design, costs, and market of future goods. They set the standards that others must follow, whether it's in fashion, technology, or even something as boring as groceries.
Foolish bottom line
If you have stock in companies that behave like this -- and I think today that Google, Chico's, SanDisk, Apple, Whole Foods Market, and a few others qualify -- don't rush to pull the trigger when you're up a hundred percent. Let me be clear: I'm not saying that any of these are going to book thousand-percent gains from here, but I do believe that they will continue to surprise us, so long as they continue to lead. For that reason, I don't think investors who are sitting on fat profits should rush to cash in.
I know it's not easy to summon this kind of willpower. But I've made the dumb sale in the past, and I'm determined not to repeat it -- as I didn't, thank goodness, when SanDisk doubled for me this year, which was more than 20% ago. Don't dump a winner like this because it looks expensive. Winners have a way of surprising you again and again. Don't dump it unless it's clear that the business is losing its grip. Booking profits is no fun when you leave the best behind.
For related Foolishness:
- How can you find the ultimate growth stock?
- Review the power of margins.
- Learn how a single Rule Breaker can help you make a million over coffee.
Any of this sound familiar? It's similar to the qualities sought by the Motley Fool's growth team, which seeks out the tomorrow's moonshots before the Street catches on. Want to see what they've dug up? A free trial to Motley Fool Rule Breakers is just a click away.
Seth Jayson struggles every day to keep from dumping his winners. At the time of publication, he had shares of Microsoft and SanDisk but not, alas, any of the other companies mentioned. View his stock holdings and Fool profile here. Dell and Whole Foods are Motley Fool Stock Advisor picks. Fool rules are here.