Before we start, I can save you some time and tell you what not to do. Forget the penny stocks, the CNBC pundits, the data mining/back testing stock screening approaches. Forget speculating stock options, trading frontier markets, or even heading to California if they announce a gold rush. Ooops! That was over 150 years ago, and that was a total bust for those who made the trek. All of these will likely drain your funds so you are left empty-handed, or gun shy, when the real opportunities arise.
As a matter of fact, the above have eventually even underperformed the boring ol' market itself!
If you've been here before, you would maybe expect me to shout out a big FERGETABOUTIT!!!!!! After all, I'm an indexer. But I won't and don't. Although I believe 90% of retirement assets for most people should be indexed, I do leave 10% leeway for investing in individual stocks. And this 10% can have some potential, if you have the aforementioned patience and staying power.
And, to prove its potential, I present you 2 of my biggest misses. This is from the "opportunities on the end of my nose that I missed" file.
The misses aren't easy to admit because I have always felt that I was the perfect person to uncover a gem. I have the perfect qualities. First of all, I am the average man - the "man in the street." If I see something and like it, the masses will like it. I'm not the guy standing at the Hirschhorn Museum admiring a photograph of a mop standing in the corner. Instead, I'm the one walking away muttering "I don't get it! Not one bit."
Secondly, I'm cynical; so I need evidence. When I first heard about the internet, the first words out of my mouth was "a fad!" But when an email came into the office from Australia, sent 5 seconds earlier, congratulating the firm's economist on a quote in the Wall Street Journal, I went "Whoa!!!!!!" Sometimes my brain is quick, and I saw it was the real thing.
Before I jump into my first miss, some of you young people will think that you won't get these kinds of opportunities. Don't believe it. You'll probably get more. You just need to be patient, recognize them, and be ready and able to jump on them when they come along (with 10% of your nest egg).
OK. Let's go back a few years. I'm sure some of you have guessed this one. I'm wrapping up my Economics class; and one of my students is standing at the back, and the others (instead of bolting to the door as usual) are gathered around him, chattering excitedly. I approach them and ask what they are looking at. You guessed it - it was an iPod. They were each trying the ear phones, asking about how many songs he had on it, where he bought it, how much it cost. I heard over and over "this is da' bomb" my generation's version of "cool."
I held the iPod and it got Jobs'es desired reaction: it just felt and looked awesome.
There is an ongoing question in the field of investment research on the value added in visiting companies. Few people raise the significance of seeing customers with a new product. Here, in front of my nose, was a corollary of famed investor Peter Lynch's advice to invest in "what you know." Those students were future customers for Apple and (think about this!) marketers - they were going to push the iPod to their friends!
If I would have gone out the next day and put 10% of my assets in Apple stock, I would be writing this from the beach on Maui because we know the history of the stock. Another clue came later when I visited an Apple store. At the time, stores on either side in the mall were empty; and yet the Apple Store was elbow-to-elbow with the so-called geniuses answering questions and customers excitedly trying and talking about the products.
The second example took place in College Park, Maryland. Again not traditional stock research. My daughter: "Have you ever eaten at Chipotle?" Me: "No, what is it? Mexican?" Her description of the layout left me thinking I'm going to have a headache eating fast food with hyped-up college freshmen. Two bites and I knew this was the real thing. Since then I've eaten at Chipotle throughout Maryland and Virginia. Today, several years later, I go out of my way at lunch time to find a Chipotle. In every single instance, there is and has been a long line, many times winding out the door!
The story with the stock was the same as with Apple. It was a "I need a swift kick" for missing this one. There were others, of course. A bit more difficult but arguably pretty easy to see, even for ones who weren't searching for investment opportunities 24/7. For example, Under Armor.
Something to keep in mind is that these companies are not easy to hold on to and to get their full upside. After stocks double, there is a tendency to translate the gain into real terms - i.e., the number of flat screen TVs the gain equals, etc. When you start to reach this point, take out your Buffett book and read over and over the value of holding over the long term!