A several part series on speculative investment and where the big payoffs come from in the stock market
Part I: Stock Market Myth
Investors covet 10-baggers, or stocks that make ten times their money, so the windfall of a Powerball jackpot, which returns millions of times the invested dollar or two, is truly incomparable mathematically. It's also off the charts in terms of the time it takes to get there. However, the impact to the quality of one's life can be similarly substantial for holders of the shares of the really big stock gainers.
Historically speaking, we recall the millions made by early investors in Berkshire Hathaway (BRK.A, BRK.B), Wal-Mart (WMT), Home Depot (HD), Microsoft (MSFT) and Apple (AAPL). In more recent times, names like Priceline.com (PCLN), Whole Foods (WFM), AutoNation (AN) and Chipotle Mexican Grill (CMG) have won the attention of stock market thrill seekers. Still, none of the gains made in these lottery stocks came overnight, and while the winners based their rise on solid footing, many windfall gains often prove fleeting on Wall Street in the end.
Chart at Yahoo Finance
In recent times, we've seen huge profits made and lost in trendy names like Crocs (CROX), Heelys (HLYS), Jones Soda (OTCQB:JSDA) and the like. Today speculation opens about the future fates of former high risers like Netflix (NFLX), Research in Motion (RIMM) and Under Armour (UA). Biotechs rise and fall on speculation about FDA approvals and novel treatments for societal spanning ailments.
Chart at Yahoo Finance
Take note of the similarities of the lasting winners mentioned atop the article. They all compete in relatively well understood businesses, but each produced disruption to their individual industries and reinvented the way things were done and from the perspective of the consumer or customer. The kinds of names winning investors are enriched by are usually produced by these types of companies providing viable goods or services in lasting markets.
Obviously, the profits have been huge in some stocks, though they have taken some time to accumulate. Still, legendary investors like Warren Buffett would never opt to chase speculative stocks with big near-term gain hype and momentum if they could do it all over again. Instead they continually choose to climb higher with small and measured steps, and yet they have reached great heights. That said, for the average investor, it is human nature (read greed) that drives a coveting of the big life changing win, and all of us are drawn to the prospects that might provide it. But it is mostly myth that a million can be made in one stock and in short time.
Part II in this series will focus on stalwart speculative sectors.