It's October 1988. As the underdog Los Angeles Dodgers shock the Oakland A's in the World Series, insurance giant Progressive is trading at $25. Adjusted for splits and dividends, that's around $0.58 per share.
Today, as we gear up for another World Series, Progressive trades for around $17.30. In other words, even with the wild market swings and the current bloodletting on Wall Street, it's been nearly a 30-bagger over the past 20 years, turning a $5,000 investment into roughly $150,000. We believe there are several lessons to be drawn from the Progressive story that will help your future investing performance -- lessons that have aided our own strong showing in Motley Fool Hidden Gems.
1. The power of patience
Meaningful gains do not happen overnight, of course. In late 1988, George H.W. Bush, the current President's father, had just won the presidential election. That's certainly not ancient history, but it nonetheless 20 years for Progressive to increase this much in value. Time and patience are two of the most important factors in investing, and they can help overcome mediocre performance, thanks to the power of compounding returns.
Consider that a person contributing $2,500 yearly to an IRA, and earning an excellent average annual return of 15%, will accumulate roughly $116,000 after 14 years. Yet someone who started investing just four years earlier will nearly reach the same total by earning an average return of only 10%. The important thing is to simply get in the game as soon as you can. Once you're in, hurry up and be patient.
2. Small is big
Back before it started its fantastic run, Progressive was valued at just $300 million -- a small cap by any measure. Today's future 25-baggers will also be small companies. They will not carry Halliburton's
Small companies offer individual investors like us many other advantages. Most institutional investors, with billions of dollars to allocate, must avoid small caps -- at least until they grow larger. That makes small caps underfollowed, increasing the chances that they're misvalued.
To see why, consider an analogy we've used before. The less activity in a marketplace or auction house, the more likely pricing inefficiencies become. When there's only one bidder for an autographed Michael Jordan game jersey, the chances for mispricing are infinitely higher than when thousands of investors bid every day -- every hour -- on the present price of, say, Verizon
3. A penny shaved
Progressive was never a penny stock trading below $1 per share. Future 10- and 100-baggers -- at least the ones we care about -- are most often trading between $5 and $50 per share. They're rarely below $5, and they certainly aren't below $1.
Penny stocks represent ultra-tiny companies whose shares can easily be manipulated by unscrupulous people misrepresenting the businesses' true potential. In short, stay away from stocks that aren't traded on one of the major U.S. markets (the New York Stock Exchange, Nasdaq, or American Stock Exchange), that have no revenue, or that are obviously being hyped via email or discussion boards. You'll save yourself a ton of grief.
4. Dandy dividends
In our research, we're constantly studying big winners of the past to find the common ties that bind them. Capital One Financial
Just because a company is small and pays a dividend, of course, does not mean that it is destined for greatness. But a dividend is a positive indicator, a telling sign of both financial strength and management's confidence that the company will remain solid through good times and bad. Progressive began paying its dividend back in 1971, the year it went public.
In any company we research, we believe it's extremely important that management's interests align with those of the shareholders. While investors want to see their shares outperform over the years, managers who are indifferent to the stock price may be more interested in hiring friends and grabbing perks than creating value.
That's why we love to see strong insider ownership at a company. DryShips
6. Boring excitement
A world-class company like Progressive must be headquartered in New York, right? Or Hartford, Conn., the "Insurance Capital of America"? Nope. It hails from Mayfield Village, Ohio, in the eastern suburbs of Cuyahoga County, about 20 miles from Cleveland. Low-key. No flash. A bit boring, even.
Reminds us of the early days of Wal-Mart, when the company didn't raise an eyebrow among big-time analysts. Wall Street treated Sam Walton's boys like a bunch of hillbillies, it seemed. But these sleepy, small, "boring" companies -- with no hype built into their stock price -- can offer outstanding bargains to us individual investors.
Putting it together
Beating the market with small-cap stocks, as we've been doing in Hidden Gems, is not as difficult as you might think. We simply start by looking at what has worked in the past, and then look for it again.
Hidden Gems is now more than five years old, and our total average return during that time is around 12%, compared with a loss of 7% for the same amount invested in the S&P 500. If you'd like to check out all of the recommendations, plus more than 20 valuable investing lessons, the Gems team is offering a special 30-day free trial. Click here to give it a whirl.
This article was originally published on April 8, 2005. It has been updated.
Rex Moore is a Stock Advisor analyst and contributes the Foolish 8 screens to Hidden Gems. He does not own shares of any company mentioned. Wal-Mart is an Inside Value recommendations. The Motley Fool is investors writing for investors.