As the investment world's do-it-yourselfers, we spend a lot of time trolling for new stock ideas. Sometimes we're looking for solid values, like when we recommended Intuit (NASDAQ:INTU) in Motley Fool Inside Value a few months back. At other times, we're hoping to find the next big thing, like world-beater Intuitive Surgical (NASDAQ:ISRG), a Motley Fool Rule Breakers recommendation.
I firmly believe that it's possible for the average Jane to find the good ideas. But in my experience as an investor, there's one thing that's made a bigger difference to my returns than finding the good ideas, and that's being patient once I've found them.
Stock prices fluctuate. Sometimes by a ton. Often for very little reason -- if any at all. And even a minor discount in your purchase price can mean a big difference to your returns.
Consider, if you will, a company I recently recommended for our annual stock-picking guide, Stocks 2006. At the time of writing, I pegged the shares as being worth about $35 each. When we locked in the prices for the book's official tally, they were trading for about $25. Now, some simple math shows that the potential gain, by my estimate, is about 40%, which would be a pretty robust return over even a couple of years.
But I also advised readers to be patient because the stock is volatile and would likely present them with a better buying opportunity later on. And so it has. Shares have dropped, for no particular reason. And that's good news for those who are interested in this story. Consider that a climb from today's levels to that $25 of just a couple of weeks back would already provide an 11% return. That's already a decent year's return -- and as I mentioned, I think there's more in store from there.
But what about those stocks that simply float upward and never come back? I really believe that they're few and far between. But for those that look like they're defying gravity, I follow a policy also advocated by my colleagues over at Motley Fool Hidden Gems, which is to take a small position in a company I like, even if I consider the current price to be too high. That way, you've got a little something to ease your aching hindsight, should the stock continue to rocket. And if it falls, or keeps rising because of unusually good performance, you're more likely to pay attention and be able to adjust your position accordingly, because you've already got "some skin in the game." This is how I've come to do well with a company like Blackboard (NASDAQ:BBBB).
In fact, being patient and "knowing my chickens," as I like to phrase it, has helped me juice my returns far beyond those I'd have gotten by just buying and holding. By waiting, and periodically doubling down in solid companies I already knew well, it's possible to turn an average return into something extraordinary.
SanDisk (NASDAQ:SNDK) offered this opportunity over the past year. Ceradyne (NASDAQ:CRDN) did as well. In fact, the latter returned a solid 38% in the one year that's passed since I recommended it for our Stocks 2005 publication. But patient investors who watched the company carefully could have purchased shares near $18 a stub a few months later -- about a 50% discount. They trade for around $45 a share now, and that means a potential 150% gain for those who curbed their enthusiasm when things looked hot and got down to business when the Street would not.
I could go on. Chico's FAS (NASDAQ:CHS), which we singled out for Stocks 2004, always looks expensive, right? Wrong. Sure, it burst out of the gate shortly after publication, tacking on a 25% gain, but a few months and a couple of bogus hurricane stories later, and it was back below where it started, despite great sales and earnings growth. Those who bought on the recommendation have seen about a 140% payback. Those who waited a while longer for that price drop could have done better still. Those who bought high on the subsequent enthusiasm have still shown a very solid 90% return. But do the math, and figure out which you'd rather have.
The moral of the story is that even the best investing idea can get better, and that most often happens when you get your shares for less. So keep your mind working and stay on the lookout for market-beating companies, but do yourself a favor and sit on your hands once in a while. Your portfolio will thank you.
If you're interested in a look at our latest and greatest ideas for 2006, Stocks 2006 is just a click away. You can get also get Stocks 2006 free when you sign up for any of our market-beating newsletters by clickinghere.
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Seth Jayson is glad that the investment world provides rewards for his innate skinflintery. At the time of publication, he had shares of Blackboard, Ceradyne, and SanDisk -- as well as covered calls in the latter -- but no position in any other company mentioned. View his stock holdings and Fool profile here. Blackboard is a Motley Fool Hidden Gems pick. Intuit is an Inside Value recommendation, and Intuitive Surgical is a pick from Rule Breakers . Fool rules are here.
