It’s every investor’s dream scenario:
You find a stock that you truly believe can change the world and thrive in any economy. You make a big bet on that company — the whole basket of eggs — and it just keeps on growing, making you so much that you’re able to retire early and comfortably.
Hey, it has happened. Ask this couple, which piled into Apple (NASDAQ:AAPL) in 2004 and never looked back.
But the reality is that 99.999% of the time, putting every egg into one basket and riding it out is a fool’s errand. The landscape is littered with nest eggs that were used to back big bets in stocks that looked great a long time ago but didn’t pan out, or did succeed for some time before falling back to earth, still rotting away in some uncared-for portfolios.
Take Hewlett-Packard (NYSE:HPQ). Did anyone who bought big into HPQ say, 20 years ago, expect the company to be the mess it is today? Doubtful. HP was a true pioneer in the technology industry with one of the best R&D shops in Silicon Valley.
But it has missed the boat in so many ways for the past few years. The PC business is coming to a crawl, the inkjet world has razor-thin margins, the server market is teeming with competitors Oracle (NASDAQ:ORCL), and acquisitions like EDS and Autonomy have been busts. All the while, it hasn’t been able to keep its C-suite in order.
If you had the foresight to start buying HPQ back in 1978 … well, you’ve got a long way to go before your 8,000% share appreciation dries up. But if you bought in a lot more recently and haven’t exited, you’re looking at some awfully pared-down returns or even losses.
How about Pitney Bowes (NYSE:PBI), once the worldwide leader in mail service technology, and an innovator in its own right? Back in 1950, it would’ve been hard to imagine a world where mail wasn’t on the upswing, and it would’ve been a brilliant bet. Heck, even if you bought only 25 years ago, you’d be sitting on a 3,000% gain. But the rise of FedEx (NYSE:FDX) and UPS (NYSE:UPS), as well as the email, taught Pitney Bowes that nothing is forever; in the past 10 years, your investment would’ve lost 70% of its value.
We can learn two important things from this:
- Diversification: First and foremost, don’t put all your eggs in one basket. Yes, you could’ve ridden HPQ to its peak, then sold out a millionaire and not cared what the past few years brought. Or (and this is more likely), you could’ve ridden Webvan into the ground. So work toward some level of diversification over time.
- Nothing is forever, so don’t fall in love: You still can put a large chunk of your trust (and money) in that once-in-a-lifetime company; as long as you don’t overexpose yourself, though, you don’t have to live and die by it. But a large allocation still is an important allocation, so you can’t afford to get emotional about a stock once it has netted you some big-time gains. At various points, re-evaluate the company you have invested in. If it no longer makes sense to hang on, take some or all of your profits and head back to Step 1.
You can’t do either if you don’t do your homework, though, so keep reading as much as you can — both about the company, and the world it resides in.
And if you do think you’ve found your own “next Apple,” just remember: Most all-or-nothing bets don’t result in a Honolulu condo.
Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing, he was long PBI and AAPL.