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Pre-Paid Legal Services "Inside Ownership" Offers a Capital Investment

May 26, 2010 6:12 PM ETPPD-OLD, GE, FDX, AMZN, ORCL
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In January 1978, "Take a Chance on Me," by the Swedish pop group Abba went number one on the U.S. music charts, and notwithstanding musical taste, the breezy tune proved to have staying power, if only among the leisure suit crowd.In that same year, Mark and Carole McSpadden of Ketchum, Oklahoma took their own chance when with $1,500 they purchased 60 shares of common stock in a small Oklahoma company called Pre-Paid Legal Services, Inc. (NYSE: PPD). That decision has also proven to have staying power.For 32 years, the McSpaddens have not purchased or sold any additional PPD stock, yet as a result of splits, conversions and outright corporate growth, the McSpaddens' now own 1,687 shares of stock worth an estimated $76,000 (as of May 3, 2010). That's a 5,000 percent growth and quite a pay-out for taking the right chance.It was not an easy choice for the McSpaddens. Back in 1978 the couple was raising four sons and had recently moved back to Oklahoma after living for years in Colorado and Georgia. Mark McSpadden was launching an electrical contracting business and Carole was a substitute teacher when time permitted."Fifteen hundred dollars was a lot of money for us, but we bought the stock on a recommendation from my sister and a local school official," Ms. McSpadden said. "At the time it was the only stock we owned and I guess you could say we took it on faith. It's worked out pretty well," she said.It's a BaggerThis kind of growth reflects what investment guru Peter Lynch described as a "bagger" investment. Specifically, Lynch coined the term "ten bagger," to mean an investment which increases in value by 10 times its original purchase price. ("Bagger" is a reference to the colloquial baseball term, "bag," for base.)Early this month, The Motley Fool (TMF) Analyst Rex Moore updated a TMF article, "Why This Stock is a Winner," in which he focuses specifically on "bagger investments," particularly the "25-Baggers in Five Years" investments highlighted in the Tom Gardner book (of the same title).In his article, Moore notes that one of the most important characteristics of bagger investments is reflected in "a high level of inside ownership" (along with high margins and return on equity). As Moore stated, "With their reputations, their livelihoods and their careers on the line, you can be fairly sure these managers and board members are motivated to do what's best for the company. It's like having someone on the inside, working for you. Every day."One of the seven companies highlighted in the original and updated TMF article is Pre-Paid Legal Services. This is not the only time PPD's leadership has been cited as an indicator of strong performance and investment potential.In an August 21, 2007 USA Today story -- "Firms, investors tend to prosper with founders at the helm" -- Del Jones and Matt Krantz wrote, "Investors who've notice the powerful link between founders and their companies have been rewarded." Messrs. Jones and Krantz go on to report that, based on a database study (for the previous 15 years), those corporations that retained their founders as CEOs maintained market gains four times higher than other corporations. Pre-Paid Legal Services was included among the short list of companies like FedEx, Amazon and Oracle.Cashing in on ChanceAsked about such investment "wisdom," Ms. McSpadden said neither she nor her husband are seasoned investors, although since their PPD purchase they have bought other stocks, like GE."We're the Warren Buffet kind of investors," she said. "We buy and hold until the time is right."For the McSpaddens, who now have four grown boys and grandchildren, the time is right to take advantage of a lifetime of holding on. If and when they sell the PPD stock, it will provide a superior return on investment ... a real bagger, no doubt.

Disclosure: Long PPD

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