How to Find Big Winners
10 of Cabot's Top Stocks
Back in 1972 a fellow named Thomas W. Phelps wrote a book about the ultimate buy-and-hold investing strategy. Called "100 to 1 in the Stock Market," it touts a strategy that can bring you profits of 10,000% or more in stocks.
That's like turning $1 into $100. Or more impressively, turning $10,000 into $1 million.
The strategy? Never selling.
In these days of in-and-out Internet trading, such a strategy is even more radical than it was back in 1972, but there's sound logic behind it.
And Mr. Phelps was no amateur. He spent 40 years in the investment business. Over the decades, from just before 1929 to the mid-70s, he was an analyst, columnist, financial advisor, private investor and author. In the early 80s, after Mr. Phelps had retired to Nantucket, my father and brother visited him and bought his remaining stock of books, and for years we doled them out as bonuses to subscribers.
Mr. Phelps' method was not complex. You didn't have to get in on the IPO. You didn't need to buy at the bottom. You just needed to be really, really patient. And you needed to have the intelligence to pick the right stocks.
And they're not that rare!
In fact, Mr. Phelps went back in history and found that, beginning in 1932, there were over 350 stocks in which you could have turned $1 into more than $100. He ended his study in 1971.
Now, starting in 1932 (after a three-year, 80% decline) is a little like cheating. But only a little. Mr. Phelps found that in every year thereafter, there was at least one stock you could have bought that could have turned $1 into $100 by 1971. The last one in his study was bought in 1967 and thus accomplished the feat in just four years. (It was Development Corp. of America, which was acquired by Lennar in 1986.)
No doubt there have been hundreds more since.
But why do so few people amass these types of profits? Mr. Phelps said it was because so few people try!
"The reason that more people don't make 10,000% on their money is that they don't set their goals high enough!"
And these days, when our perspective is so short, and people are happy with a profit of 20% earned in two weeks, it's even rarer than it was then. Low commissions and fast-breaking news all conspire to make us sell . . . so that we can move on to the next hot stock.
But there's one big reason to buy and hold that existed then and still exists now, and that will probably exist decades hence. It's the taxman. The best way to prevent Uncle Sam from getting a share of your hard-earned profits is to never sell. Pass the stock on to the next generation!
So how do you find these big winners?
According to Mr. Phelps, you look for companies that provide:
1. Inventions that enable us to do things we have always wanted to do but could never do before.
2. New methods or new equipment that helps people do commonplace things easier, faster or at less cost than ever before.
3. Processes or equipment to improve or maintain the quality of a service while reducing or eliminating the labor required.
4. New and cheaper sources of energy.
5. New methods of doing essential jobs with less or no ecological damage.
6. Improved methods or equipment for recycling the materials used by civilized man instead of making mountains of waste and oceans of sewage.
7. New methods for delivering the morning newspaper without carriers or waste.
8. New methods or equipment for transporting people and goods on land without wheels.
There's an interesting earth-friendly twist to the list that reflects the sentiments of 1972, and #8 was a nod to maglev trains, but other than that I can't argue with the list.
Mr. Phelps goes on to point out that a stock should be bought when the company is still small and undiscovered by the masses. Small companies grow faster.
He also dwells on “gates,” which we typically call barriers to entry. Patents and market leadership are valuable here.
He writes about earnings, stressing that you want to find the most profitable businesses, where earnings are growing fast.
And he doesn't minimize the value of buying when stocks are temporarily depressed . . . as they were in 1932 and, more recently, in 2002 and 2008.
The most important aspect of all in the equation, however, is time. Says Mr. Phelps, “Perhaps the greatest advantage of all in buying top quality stocks without visible ceilings on their growth is that when we do so we give ourselves the chance to profit by the unforeseeable and the incalculable.”
To me, these last five words are magic.
So what stocks would you buy today if you wanted to hold them forever … and you wanted them to make you (and your heirs) rich?
Three years ago, I asked this exact same question in this Wealth Advisory. And I put my head together with the other Cabot editors and came up with a list of 10 stocks. On July 7, 2007, I published this list, along with a description of each company.
China Security and Surveillance Technology (CSR)
First Solar (FSLR)
New Oriental Education (EDU)
Nuance Communications (NUAN)
Taser International (TASR)
Tata Motors (TTM)
And I wrote, “None of these stocks is guaranteed. Any one of them might fall victim to competition, to mismanagement, to national or natural disasters, or to a bear market. But I think many of them will do very well in the long run, and if you had a windfall of $10,000, I think you might do well by putting $1,000 into each one and locking it away for a few decades.”
Since then (July 2007), the S&P 500 has LOST 24%.
And the 10 stocks--on average--have done very well!
Three of the recommended stocks, China Security & Surveillance, Crocs and Taser, have lost more than 60%.
Nuance Communications and Tata Motors are pretty much where they started.
But First Solar is up 24% and still has a very bright future.
New Oriental Education is up 75% and is still attractive long-term.
Ctrip is up 86%, and is still one of my favorite stocks, not least because I love to travel.
Illumina (the king of genetic scientific equipment) is up 105% and still full of promise.
And Baidu is one of the market’s leading stocks today, up 328% and going strong.
The AVERAGE return for these 10 stocks over the past three years has been 39.5%.
And if you’ve done it Mr. Phelps’ way, by never selling, you haven’t paid any capital gains taxes!
I’m planning to get my editors together in the weeks ahead and work up a new “never-sell” list of stocks, and I’ll tell you about it when it’s done.
In the meantime, if this stock selection approach interests you, I suggest you take a closer look at our flagship advisory, Cabot Market Letter, by clicking here.
P.S. Cabot Market Letter has been investing in revolutionary companies with huge potential with great success for 40 years. In fact, our readers have outperformed the S&P 500 by a whopping 82% over the past two difficult years and a staggering 113% over the past 10 years. Don’t miss out the next round of gains. Click here to get started now!