Imagine that it's 1996, and you've just entered the drive-through window at McMarket's, salivating to sample their menu of stocks. Eager to bulk up your financial waistline, you pull up to the megaphone and scan the menu.
Let's see. Lots of the usual tech suspects like Cisco Systems (NASDAQ:CSCO) and Oracle (NASDAQ:ORCL) are being splashed in the news. Too pricey, though -- those can't keep going up forever. Then your eyes fall to the bottom of the menu and spot Whole Foods Market (NASDAQ:WFMI). Hmm. You remember hearing someone talk about how health food is making a comeback. It could be worth a shot. So you order up $10,000 of Whole Foods stock for the sake of diversity.
The clown face bellows back at you, "Want to supersize that?"
Since you haven't yet gotten on the "Go Big" bandwagon, you stick to your original order. Big mistake.
A second chance
Being a glutton at heart, you find yourself back at the drive-through exactly one year later, ordering up more financial sustenance. The market has been tough on you over the past year, and you're eager to shuffle the menu and get some solid growth going. But what about Whole Foods? You're up more than 30% on the stock in only a year.
Grumbling because the stock has dropped in the past few months, you think it might be time to sell Whole Foods before it drops further. Perhaps you'll pursue some of those newfangled Internet stocks instead. The clown behind the clown asks once again whether you'd like to supersize any of your stocks. If you're like most investors, you pass on the opportunity, or more likely sell the shares and whistle on home with your $13,000.
Fast-forward to today. If you'd reinvested your winnings and managed to match the market from then until now, you'd have more than $21,000 in your pocket. But what if you had held Whole Foods? And what if you had listened to the clown and supersized the position?
The power of concentration
Just staying with a well-managed company such as Whole Foods through the decade would have had you sitting on an astonishing $161,342 today. And what if you had gone big? Adding another $10,000 to your position a year after your first purchase would have lifted your returns to more than $280,000. Imagine if you had further concentrated your portfolio on such a great company.
Focusing your portfolio on great companies with lasting growth can mean big things. Just compare a few of those flashy tech stocks with some well-managed bellwethers:
|
Company |
Initial Investment in 1996 |
Ending Value in 2006 |
Total Return |
Supersized Ending Value* |
|---|---|---|---|---|
|
Cisco |
$10,000 |
$36,624 |
266% |
$69,059 |
|
Oracle |
$10,000 |
$31,786 |
218% |
$59,849 |
|
First American (NYSE:FAF) |
$10,000 |
$79,659 |
697% |
$132,300 |
|
Starbucks (NASDAQ:SBUX) |
$10,000 |
$176,946 |
1,669% |
$260,871 |
|
Whole Foods Market |
$10,000 |
$161,342 |
1,513% |
$283,197 |
|
Dell (NASDAQ:DELL) |
$10,000 |
$262,162 |
2,522% |
$328,600 |
|
Hansen Natural (NASDAQ:HANS) |
$10,000 |
$1,259,733 |
12,497% |
$3,042,375 |
The staggering results from fast-grower Hansen Natural might be the ultimate example of the power of concentration, turning only $20,000 and two trades into more than $3 million in a decade.
The moral of this story
Many investors miss out on breathtaking returns because they treat the market like fast food -- the faster you're in and out, the better. All investors struggle with when to sell a stock, but the trick is to know whether a company is fundamentally deteriorating, or whether the market has just had its faith unreasonably shaken. It's not easy to tell the difference; Whole Foods had a rocky 1996, working through a sizable merger with Fresh Fields Markets and posting a huge loss because of increased expenses.
Concentrating capital in companies that have already proved themselves successful is often far more profitable than seeking out new investments. Just ask the crack analysts behind the Motley Fool Inside Value newsletter service. Philip Durell and his team scour the market for fundamentally great companies trading below their estimated intrinsic value. A 30-day guest pass will give you a risk-free taste of all that Philip has to offer subscribers.
Where your investing story goes in the next decade is up to you. Will you be back in the drive-through, flipping in and out of volatile stocks? Or will you be content to super-size a great investment? The future size of your portfolio depends on it.
As a child, Fool contributor Dave Mock was always a little freaked out by the talking clown face. He owns shares of Starbucks. First American and Dell are Motley Fool Inside Value recommendations. Whole Foods and Dell are Motley Fool Stock Advisor picks. A longtime Fool, Dave is also author ofThe Qualcomm Equation. The Fool has a disclosure policy.
