In my last column, I began our discussion on the art of intelligent speculation by defining the term – and by warning what to avoid.
In my view, intelligent speculation is investing that generates high returns in a short period of time without taking undue risk.
It has nothing to do with market timing, since that is a matter of luck – not skill – and only reduces returns over time.
It is not about investing in things you don’t understand. (Which is hope and faith – not due diligence and smart risk-taking.)
It means avoiding most illiquid or expensive investments like hedge funds, annuities, collectibles, private equity or venture capital.
And it is not about taking a flier on make-or-break “opportunities” like penny stocks, commodity futures or short-term out-of-the-money calls.
So what is intelligent speculation?
It starts with a clear understanding that nothing gives you a better shot at extraordinary returns than equities.
Look at the long-term returns of other asset classes – junk bonds, real estate, precious metals, commodities, etc. – and you will quickly see that nothing delivers greater or more consistent returns than common stocks.
Or – better yet – uncommon stocks.
Because while the S&P 500 and other world bourses have outperformed every other asset class over the long term, extraordinary individual stocks have left the indexes themselves in the dust.
This should surprise no one. After all, you know about the FAANG stocks (Facebook, Amazon, Apple, Netflix and Google), which have delivered outsize returns in recent years. Each of them has risen several times over.
But they are now megacaps. Facebook – now called Meta Platforms (Nasdaq: META) – is worth $800 billion. Amazon (Nasdaq: AMZN) is worth $1.4 trillion. Apple (Nasdaq: AAPL) is worth more than $2.8 trillion.
These stocks may well double again – but they’re not going up tenfold from here anytime soon.
What companies today could generate that kind of return in the near future? That is a question my staff and I have investigated intensively.
It started two years ago when I looked at a list of the best-performing stocks of the previous decade and found many that I had recommended in my Momentum Alert trading service.
We made good money on all of them. But we did not earn as much as we could have, in part because we didn’t get into them soon enough… or hang onto them long enough.
That got me thinking.
Maybe it was time for a different type of analysis – based on smaller, relatively unknown companies with blockbuster potential – and a different sell strategy too.
The result was a new list of more speculative companies with the potential to rise tenfold or more.
We called it the Ten-Baggers of Tomorrow Portfolio, in homage to Peter Lynch.
Lynch, you may recall, was the manager of the Fidelity Magellan Fund from 1977 to 1990. During his tenure, the fund’s assets grew from $18 million to over $19 billion.
This was partly because he earned a 29.2% compounded annual return, a record that remains unmatched in the mutual fund industry.
It was also due to shareholders who rewarded this performance by plowing additional money into the fund.
What was Lynch’s great secret? He was a master at identifying successful growth stocks and, more particularly, hypergrowth stocks.
In his book One Up on Wall Street – still an investment classic – Lynch coined the term “ten-baggers.”
That was how he described stocks with prospects so explosive that they had the potential to rise tenfold or more.
Lynch invested in many of these during his time at Magellan. And you can today.
Even though ten-baggers are different companies, in different industries, run by different groups of people, they have many characteristics in common both before and during their dramatic runs higher.
What are those characteristics?
That’s exactly what I’ll discuss in my next column.
P.S. On Wednesday, August 16, at 7 p.m. ET, I’m joining Rich Checkan and Adrian Day for an exclusive live webinar. You can register here for free.