You see this question on the Internet, especially in stock investing message boards, investment-focused social media groups and communities, all the time. You probably even hear this question asked, in real life, when you speak to people about money and investing. How do you find stocks like Microsoft, Amazon, or Netflix before they get really big, when their stock price runs up 10,000+%? I mean, following the financial news usually is not very helpful because by the time a company hits the news, it is already too late to get in at a low price. Your uncle and grandma probably could not help you much here because even if they have been investing all their lives, they are probably too engrossed with the old way of thinking…put your money in an index fund or buy safe and stable companies, which is good advice, but this will not help you get those yuuge percentage gains you are looking for.
So, how does one go about this dilemma? There are some different ways people can find the next big stock before everybody else knows about it. One of the methods involves being an insider (or getting info from an insider), which I highly NOT recommend. You can join the Illuminati, if you can get in…or if there even is an Illuminati to begin with. You can throw darts at a list of stocks, visit a fortune teller, play the Ouija board (which was something I actually did in the past, but would never do again – reason not so much about the investing part, but more about the paranormal experience part), or you can play eeny, meeny, miny, moe. These are all not-so-great options, but let’s discuss something that is practical and more probable in the real world.
Conceivably, the best ways to discover the next “10 Bagger” – meaning a stock that returns 10X the original investment, or a 9,000%+ return – is to read A LOT, experience life, pay attention to things, and do your due diligence on your findings. Huh? What does this mean? Let me explain…
Let’s take Netflix (NFLX) for example. NFLX was a company, which originally rented out DVD’s to their subscribers, a couple of years ago. I still remember being in the Army, and occasionally working in the mailroom, where I would see an occasional disc-filled red envelope. I used to think to myself “Netflix…what a mediocre business model”. This company is not going to result into anything big.
When NFLX went public, I thought to myself “Are you kidding me? This DVD rental company is going to be a public company??? How are they going to make money for their shareholders in the long-run, and how is their business going to evolve into something that’s more innovative and sustainable to stand the constant changes in technology. Of course, little did I know about Netflix’s plans for digital content distribution. Nor did I know of the company’s plans to be a leader in content creation.
Where did I go wrong here? I mean Netflix was staring me right in the face. Yet, I did not know anything of their future plans, at the time. How could I be so blind? … Of course, I was not blind. I could see perfectly (with the help of contact lenses and eye glasses). Where I went wrong was I DID NOT READ. I used to see articles about NFLX all the time. But, every time I saw such articles, I would just skip over them, thinking that I already know their business…they are just a DVD mail rental service. Oh, what was that? They are putting Blockbuster out of business? That’s nice. What’s for lunch? I was definitely not paying attention and my curiosity was non-existent. Not good
Two of my biggest investments include Amazon (AMZN) and CMG (Chipotle Mexican Grill). Both of these companies are considered “10 Baggers”, to say the least. So, how did I discover these companies? No, I am not a genius, and no, I did not perform any financial magic voodoo to conjure up stock market spirits, telling me to get into these companies. (And that Ouija Board session I participated in did not indicate anything related to AMZN or CMG.) What got me into these stocks was my own customer experience with these companies. Of course, I liked their products/services, and I noticed a lot of people who I know, and a lot of people who I do not know, also liked their products/services.
I still remember AMZN hit me when I was shopping for Christmas, back in the early 2000’s, and I realized that their Free Shipping on orders $25 or above was great value and made me buy extra things when I was browsing their site. After all, why pay for shipping when you can buy an extra item to reach the $25 threshold? I noticed many people thought the same way.
Amazon sells just about everything, especially things I loved, at great prices. Whenever I receive their shipments, all the items are packed nicely and the merchandise are in pristine condition. I was always a satisfied customer when I purchased from their site. I knew that Amazon was going to dominate the online retailing business due to my personal customer satisfaction, along with their vast assortment of product offerings, and their discounted prices (with free shipping). I just loved buying from Amazon. It was not until later on when I realized that AMZN had one of the best Customer Relationship Management (CRM) systems in the world, which allowed them to constantly recommend products customers love, creating shopaholics and return customers.
Something I noticed about Chipotle was the constant long lines at every one of their restaurants…this was way back in mid 2000’s. All my friends would always tout CMG. Where do guys want to go for lunch? There would be a few seconds of dead silence until someone yells out “Chipotle!” and then our whole group would nod with consensual agreement. Every time we went to a CMG, there would be a long line, as mentioned before. However, the wait was never too long. Their menu was simple, streamlined to only a few items. And their food was delicious and very filling. I knew that every time I go to CMG, both my taste buds and stomach will be sufficiently satisfied. On top of all this, their menu is relatively healthy compared to most fast-food chains.
Before CMG IPO’ed, I noticed a lot of new restaurants popping up all over the West Coast, at the time. When I came back to NYC for a visit, I noticed they were opening up restaurants in the East Coast, as well. And guess what? Every single one of these restaurants had long lines when they opened up. I did not see any empty CMG restaurants any time during the mid-2000’s. So, I knew that this restaurant was going to be extremely successful. And of course, I later found out that the Mexican Restaurant Chain was originally a majority-owned subsidiary of McDonald’s, in which CMG adopted a lot of the King of Fast Food restaurant’s business model.
Another example, in which I do not have a personal stake in, is Costco (COST). Just about all of COST’s members love the Warehouse Retailer. They sell great products, in bulk, at good prices. All their products are of great quality and their customer service is second to none. Every time you go to one of their warehouses, you will see tons and tons of families roaming around their stores, carrying out piles and piles of merchandise, putting them into their cars, as they drive out of the largely filled parking lots. I have yet to have a bad experience with Costco. The only terrible thing is that I did not find out about COST until the stock already had a huge run up. COST still has a lot of upside potential; however we could have gotten the stock at a much lower price.
If you follow Warren Buffett at all, then you will notice that he has always been against investing in the Airline industry. The costs associated with maintaining aircraft, purchasing aircraft, volatile energy prices, coupled with unionized employees and legacy costs make airlines horrible investments. However, he’s placed large stakes on airlines recently. But, why?
At first, I thought he must have found great value in airline stocks, considering the industry’s been beaten down for so many years. He probably calculated all of the airlines’ net assets and determined that the companies’ fair values are below their stock prices. After all, isn’t this what Warren Buffett does best – Benjamin Graham style – aka The Father of Value Investing? Perhaps
Of course, nothing is as simple as we may think. After some deep digging and due diligence, I found out that Mr. Buffett recently travelled around in Europe via rail train. And in his European travels, he asked long distance travelers how much they paid for their rail tickets. The passengers told him that they paid, on average, over $500 in fares. Warren was surprised to find out how much rail train ticket prices have gone up. So, he figured why not travel via plane, instead of train? You essentially save yourself a lot of time for about the same price. This sparked Warren’s curiosity, which led him to further examine the travel industry.
Now, whether airline stocks are going to shoot up a couple of thousand percent in the future, we do not know. Warren Buffett is a human being and he has made bad investment calls in the past. However, the main take away here is that The Greatest Investor in the World was living life, paying attention, and did his homework. That’s how he was able to amass billions in his lifetime.