When you look back at some of the highest-returning stocks in history, it often seems like their eventual success was inevitable. It's easy to forget that in most cases, investors in those stocks didn't get a nice, smooth ride to riches. To go beyond simply impressive gains to go after once-in-a-lifetime investing opportunities, you have to endure plenty of gut checks along the way, along with the huge temptation to get out and lock in your gains.
So how can you both find stocks that have the potential to be tomorrow's big winners as well as help build a rock-solid investment thesis that you'll be able to rely on through the inevitable downturns? Later in this article, I'll reveal five stocks that have already put in some stellar performance but which also have the potential for even further gains -- along with the best way to make sure you go the distance with them.
The biggest mistake you can make
Many beginning investors are scared when they first start out because they think they'll lose every penny they invest. It's true that nearly any investment, the possibility of total loss is always there, no matter how remote it may be in particular instances.
But when you think about it, there's something that's even worse than a complete loss. You may not be able to lose more than 100% of your investment when you buy a stock, but you can definitely miss out on gains that will dwarf the amount of money you initially spend on a stock. How can that happen? By selling too early.
You can find countless examples of huge errors that investors made by taking profits too soon. Here are just a few:
- Microsoft rewarded early investors with 15-fold gains from 1986 to 1991. But if you'd sold out then, you missed out on shares multiply nearly 20 more times between 1991 and 2001 -- even after losing more than half their value in the first year of the tech bust.
- Apple jumped 12 times between 2001 and 2007. If you'd sold it then, though, you'd have left a lot of money on the table, as shares have nearly quadrupled since.
- From 2005 to 2006, Netflix
(Nasdaq: NFLX)tripled in price. But since then, shareholders have seen eightfold gains as the company has evolved beyond its original purview.
Each of these companies simply kept pulling rabbits out of their hats. For instance, Netflix has gone beyond its convenient mail-order DVD business, which has stood up well against both brick-and-mortar video rental stores like Blockbuster as well as Coinstar's
To see which stocks might be best poised to repeat the long-term experiences of Microsoft, Apple, and Netflix, I searched beyond megacap stocks for small and mid-sized companies that already have a history of strong performance but have also seen extreme price moves in the past five years. My results included these five stocks:
10-Year Total Return
Cliffs Natural Resources
Source: Capital IQ, a division of Standard and Poor's.
These five stocks don't appear to have a whole lot in common, ranging from players in the red-hot mining and energy sectors to a chip producer, a chemical maker, and a premium mattress manufacturer. But what they share are three things: big returns, a lot of volatility, and plenty of room to keep rising if the trends that pushed them this far continue.
Your next step
I'm not saying that these stocks are sure things; you'll want to do a lot more research before you conclude that they haven't already seen their best days. Either way, though, the best way to get started is to add these stocks to your watchlist -- and keep them there even if you decide to invest in them.
The reason why is simple: win or lose, these stocks are volatile. Rather than seeing share prices move without knowing what's going on, keeping them on your watchlist will give you the information you need, helping you distinguish random price noise from moves that actually mean something. That's indispensible in helping you avoid selling too soon on stocks that have big-winner potential.
Stocks with huge potential usually involve huge risk. The best way to manage that risk is to stay informed -- and the best way to stay informed is to keep a close eye on your stocks.
Fool contributor Dan Caplinger has the first watch. He doesn't own shares of the companies mentioned in this article. Microsoft is a Motley Fool Inside Value recommendation. Apple and Netflix are Motley Fool Stock Advisor picks. Motley Fool Options has recommended a bull call spread position on Apple and a diagonal call position on Microsoft. The Fool has written puts on Apple and owns shares of Apple and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy looks out for you.