I've you've ever spent a few seconds watching CNBC (and fellas, what is up with those new horrible sound effects with your graphics?), you have certainly seen one or a billion ads for mutual fund companies. T. Rowe Price, Fidelity, that weird ad with the fencers, whatever -- they're all there. (Well, not Vanguard, but I digress.)
Each one of these ads has some claim of investing superiority, with an impressive statement of outperformance against the Lipper averages, the S&P 500, or whatever other relevant marker. Far be it for me to accuse these companies of ginning up their numbers. In fact, I can flat guarantee that they don't. When you think about it, since there is no standard period of measurability, there has to be a length of time in which even the biggest dog fund can look good.
Time is money
Take a look at the small print sometime. "From the period of July 27, 2002, to Sept. 17, 2005, our returns were X." That's great, if you happened to be that one person who invested from that one not-quite-random date to that other not-quite-random date. For the rest of us, rest assured that the method to that madness was to make the investment returns advertised seem as great as possible.
Don't think a few days matter? Well, they do. Let's take the returns from Stocks 2005 as an example. As you may know, this is our product that we put out once a year, seeking to find market-beating investments. In 2002, 2003, and 2004, we smashed the market, and over the longer term, these collections of stocks have continued to outperform, substantially. In 2005, well, we limped in, with a total return of 2.7% vs. 7.4% for the S&P 500 from mid-November 2004 to mid-November 2005. When you're dealing with a one-year period, a length of time that is both short and somewhat random, this is going to happen.
But to take another random length of time, let's say from Nov. 18, 2004, to today, Stocks 2005 has beaten the market, returning 14.2% vs. 11% for the overall market. That's right -- our returns moved up 10% in less than two months, pushing us from negative to positive. Moreover, BioMarin
The method to madness
Let's be honest, though. Annual, or close to annual, returns are kind of random. What we seek to provide are multiyear, multibagger returns -- the kinds where we have correctly identified companies that have characteristics to turn small investments into massive ones. We have a few places where we mine our ideas:
(1) Misunderstood companies. In 2003, we identified a cement company called Cemex
(2) Turnarounds. Matthew Richey pulled ValueClick
(3) Underappreciated growth. For 2003, David Gardner swaggered to the table and said he was going to be recommending Activision
Foolish bottom line
These areas of ideas are tried and true for successful investors. Look where others aren't. Buy what people hate. Find companies that have a hidden or underappreciated advantage that, when revealed, holds the promise for gains that will slaughter the market averages.
Don't worry if you fail to get it right all the time, or even half the time. Those that work out tend to bury the impact of those that do not. But perhaps most important, recognize that you need to give your investing thesis time to come to fruition. It may take longer than you would like, but if you're right, you will profit.
Interested in learning more about our stock-picking approach? For more, and for the 12 stocks Motley Fool analysts like for the year ahead, click here to get a copy of Stocks 2006.
Bill Mann is the editor of Stocks 2006 , which is only available for a limited time. Bill does not own shares of any company mentioned in this article. Activision is a Motley Fool Stock Advisor recommendation. Microsoft is a Motley Fool Inside Value recommendation. The Fool has a disclosure policy.
