Before I go into detail on investing in individual stocks, I'd like to give you an idea of how I got into stock investing.
I discovered the stock market about a year-and-a-half ago. One day, I decided to watch CNBC. I became intrigued as the commentators and analysts talked about the stocks of well-known companies such as Pepsi, Google and McDonalds. However, it was not because I truly understood what they were talking about.
I didn't understand market capitalizations, price-earnings ratios or other Wall Street lingo. Nor did I understand the fundamentals of revenue growth or earnings per share growth. But, I wanted to learn.
I have spent the last year-and-a-half dedicating myself to learning about stocks, and I still have only scratched the surface.
The reason I tell this story is not for anecdotal reasons. I want to illustrate that investing is for people that are passionate and interested in finance and stocks. Otherwise, why would you be doing it? You would be better off investing in mutual funds and spend your time doing things you enjoy.
In my opinion, the most successful investors have been passionate investors. They love stocks. Look at Benjamin Graham, Warren Buffett, Peter Lynch - I'll even throw Jim Cramer into the group.
Why are investors passionate about stocks? Because they have an interest in business, and when they buy stocks, they look at them as investing in pieces of a business. Most people don't have the capital to start their own business, but they can invest and share in the success of some of the greatest companies of all time.
Just think about it: You can invest in thousands of great companies in the United States and abroad. It might sound silly, but when you purchase shares of Pepsi, you are part owner of the company. As Pepsi grows, your shares in the company will grow. As a shareholder, you get to share in Pepsi's success.
Let me give you the statistics of some high profile companies that we all know.
In 1970, when Wal-Mart went public, the company had a market capitalization (that's the number of outstanding shares of a stock times the share price) of $25 million. In 2006, Wal-Mart's market capitalization was $195 billion. The company was one of the greatest growth stories ever during this period. And who benefited the most? Its shareholders. One dollar invested in Wal-Mart at its initial public offering would have been worth an astounding $5,809 in 2006.
I can go on. One dollar invested in Home Depot in 1981 would be worth $1,153. One dollar invested in Microsoft in 1986 would be worth $374. One dollar invested in Dell in 1988 would be worth $338. One dollar invested in Starbucks in 1992 would be worth $56.
One point I want to illustrate here is that there are a lot of great companies out there that you can invest in and that can make you money.
But what you should really take away is that the greatest returns come from discovering superior companies in their early stages, or while they are still growing rapidly.
And despite the amazing success of companies and the stock market over the past 100 years, I still think there will continue to be great growth stocks and that the early investors that discover them will be the beneficiaries.
Even recently, there have been some great stocks for early investors. For example, you could have invested in a little known juice and energy company in 2003 called Hansen Natural. I'm sure you know them. They make the oversized Monster energy drink. According to morningstar.com, $10,000 invested in Hansen in 2003 would be worth over $300,000 today.
For full disclosure purposes, I do own shares of Hansen. Unfortunately, I did not buy them until early 2006, but I was still able to make money because the company was still growing at an amazing rate.
You don't have to be the first one in the stock to make money. You just have to get into a stock before the company's true potential and prospects are priced into the stock. For example, if you invested in Wal-Mart during the 1980s or '90s, you would still have made a lot of money.
Anyone has the potential to find the next Wal-Mart, Microsoft or even Hansen Natural. But if you want to discover great stocks, you have to have the passion and drive to find them. You need to be motivated, and maybe more importantly, you have to be well educated in stock investing.
I think you should have some exposure to small, prospective companies, because as I have indicated, there is the potential for huge upside if the company hits it big. But I think that this exposure should be a small amount of your portfolio. I think a significant portion of your stock market gains can come from investing in established companies that have room for growth but are less risky.
Nevertheless, the only way you are going to find the stocks of great companies is to start learning about investing and to start looking. If you're passionate, maybe you could be the next great success story.
Information from - "How to Identify and Invest in the Hot Stocks of Tomorrow"; "Finding The Next Starbucks," by Michael Moe, 2006.
