Investors, stop us if you've heard this one before: Past performance is no guarantee of future results.
It's a good mantra to keep in mind. Just because a particular investment has gone up in the recent past doesn't mean it will continue to increase in value. And if one segment of the market has been outperforming the other, there is no guarantee that the trend will continue.
For investors looking to educate themselves, though, past results can help formulate your investment process, with the benefit of hindsight.
Think back over the major stock success stories over the past two decades. Which household-name company would you guess posted the highest total return? Apple? Nvidia? Tesla?
Nope. The highest 20-year return among stocks in the S&P 500 belongs to Monster Beverage. A $1,000 investment in the energy drink maker 20 years ago would be worth more than $830,000 today.
Know anyone who bought the stock back then? CNBC Make It does — even earlier, in fact. Back in September, we caught up with Joel Tillinghast, the legendary mutual fund manager who's run Fidelity Low-Priced Stock since its launch in 1989.
He identified Monster as one of his all-time best stock picks, having bought shares in 2001. Here's what he had to say about why he bought the stock, why he held on and what it can teach you about investing.
What Tillinghast's success can teach investors
Tillinghast bought Monster for $4 a share; accounting for times when the company performed stock splits, it's really the equivalent of 4 cents per share. These days, the stock costs $56.
But the company Tillinghast invested in back then didn't look anything like it does today.
"I bought Monster Beverage — at the time, they were Hansen's Natural and were a juice drink company — because I liked that they were trying an energy drink," he says. "I like companies that try a lot of experiments. They may not always work, but they do try a lot of things. And I think Monster is very innovative that way."
In other words, Tillinghast likes companies that give themselves multiple ways to win. But he doesn't just buy stock in any firm that's trying new things out. He would never touch a stock unless he felt that the company was trading at a discount to what he saw as its long-term value.
Tillinghast's ideal stock "would probably have a lower [price-to-earnings ratio] than the market, high free cash flow yields [a measure of a company's free cash versus its market value], and it would probably have growth, because the company was doing something special that clients really liked," he says.
Two rules for making big money on your best stock picks
Even if you believe in a company's financial health and long-term prospects, you still have a couple more things to do to follow Tillinghast's lead. One is to actually hold for the long term.
"You have to have above-average patience when you think something good is happening," he says.
That means holding on to a stock you think will continue to perform well, even if it hits the short-term skids.
Just look at another member of the top 10, Nvidia. Between November 2021 and October 2022, the stock surrendered more than 60% of its value. At any point during that slide, long-time investors could have sold and still made a pretty penny. After all, at its 2022 nadir, the stock sold for $112 a share — a healthy gain from the couple of bucks you could have gotten it for a decade before.
But sellers in 2022 missed out on a titanic gain following an explosion in artificial intelligence technology. Nvidia shares currently go for around $465 a pop.
Tillinghast's other piece of advice: Constantly reassess your thesis on stocks you like and add to your position if you continue to like them — with the caveat that they should make up a relatively small percentage of an otherwise well-diversified portfolio.
"To invest like me, take a long view. Think about what earnings will be in five years. Take a while to consider your possibilities," he says. "If you've got a truly fantastic long-term story that is truly undervalued, make it bigger — not necessarily 20% of your portfolio, but it's good to make it important if you think it's big."
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