Published: June 14, 2010
Today I'd like to introduce you to my
friend Mike. Mike is a real person and that is, in fact, his
real name. He and I met in college and have been close friends
since. He's extremely intelligent, a partner in a major law
firm, and he has, to my knowledge, never bought an individual
Mike and his lovely wife are very risk-averse. They're both
leery to the point of paranoia about stocks, and they resolutely
despise the remotest prospect of losing money. Their portfolio
is remarkably conservative. It's mostly cash.
I've told Mike until I'm blue in the face that knowledge
mitigates investment risk. I've repeatedly shown him ways to
limit his downside. And, frankly, I have a very strong track
record of picking stocks, a spate of winners that ought to
enhance my credibility and nudge him toward action. But none of
that matters. He isn't going to change.
It's going to cost him.
If Mike were to open a
savings account with $50,000 and add $1,000 to it each
month, he would rack up $306,994 in twenty years. That's not
chump change, but his total earnings would be a mere $16,994.
Over the course of that long period of time, the rate of return
offered on FDIC-insured savings accounts wouldn't even make up
In the long run, it is almost guaranteed that Mike is actually
going to see his worst fear come to pass: Without a stronger
return, he'll lose money.
My buddy Jeff is a P.R. genius in Dallas. We were neighbors in
school and have been close ever since. Jeff and I talk a little
more about investments than Mike and I do, and Jeff isn't afraid
to put money into the market, though his idea of investing is to
find a good S&P
index fund with a really low
expense ratio, park some money in ultra-safe bonds and let
both investments sit as he reinvests his gains. It's not a bad
strategy, but it does mean that he will settle for less than the
overall market's return every year.
If Jeff starts investing today with a $50,000 portfolio in such
an index fund and adds $1,000 a month, then, based on historical
averages he and his wife will capture $492,191 in gains in 20
years, which will give their account a balance of $782,191.
Both Jeff and Mike are extraordinarily talented, and each has an
admirable work ethic. In other words, Jeff and Mike have
exceptionally strong earning power.
But even with six-figure salaries, a few big bonuses and
generous retirement plans, I'm sad to say that neither of these
two friends of mine is on track to use his money to build a
That puts them in the same boat as just about everyone else, of
course. Most investors are stuck in the slow lane, passively
accepting the market's returns and failing to use equities as
the supercharging force they can be.
Before I go any further I should tell you something about the
cash Mike hoards and the ho-hum securities Jeff prefers.
There's nothing wrong with them. Not a thing.
In fact, every intelligent portfolio should contain some of
each. But, at the same time, a portion of ANY portfolio that's
aiming for seven figures has to swing for the fences. I'm not
saying it needs to be "high risk." It doesn't have to involve
complex derivatives, dicey junk bonds or commodities. The
securities allocated to this segment of the portfolio simply
have to have the potential to deliver serious gains.
I'm a father of a daughter who's in private
school, will go to college and who will need cars, trips and
someday, a wedding. I'll tell you this about my portfolio: It's
got a lot of choices that Jeff would like. About 80% of these
assets, in fact, are blue chips like Berkshire Hathaway
(NYSE: BRK-B) and General Electric (NYSE: GE). They
offer the prospect of a reasonable return over time, and neither
is so risky that I worry about risking my daughter's future.
But the other part of the portfolio? I call it the "20%
These securities are what I'm counting on to make a major
difference in my returns. I know that these companies have the
potential to deliver huge returns. One such stock has already
returned more than +200% in the past year, and the fact is I
wouldn't sell those shares if you put a gun to my head because I
think they are going to keep rising. In fact, when I add money
to the portfolio each month, it's the first company I consider
adding shares of.
Over time, big winners like that are going to move the needle on
my portfolio. They're going to make some dreams come true, and
to make sure that happens I allocate a small percentage of my
portfolio to them.
It works like this:
Say you have a portfolio with the same starting balance of
$50,000 that Mike and Jeff had in my two examples. If you
allocated 80% of that to the S&P and invested the remaining 20%
of the money into a stock that delivered knockout returns, the
picture changes dramatically. From 2000 to the end of 2009, S&P
dropped more than -20.0%. If you had a portfolio exposed to
broad market returns, you lost money. In the case of the S&P,
that $50,000 would have shrunk to $39,983.20.
If you'd allocated 20% of the portfolio to shares of Apple (Nasdaq:
AAPL), however, you'd have ended up with $113,224, as the
computer maker's +712.4% on your $10,000 in the period offset
-$8,013.42 in losses on the $40,000 allocated to the S&P.
Using the compound annual growth rate for Apple and the S&P 500
during that decade, we can observe the difference between the
two portfolios as the $50,000 grows with the addition of a
$1,000 investment each month.
The S&P 500 Portfolio, to which a total $170,000 was
contributed, incurred a -2.21% compound annual loss and ends up
But the S&P-Apple 80/20 portfolio, which also saw $170,000 in
contributions, sees a dramatically different turn of events as
Apple, despite its minority position, generates a huge
disproportionate return. Eighty percent of the portfolio, the
initial $40,000 plus 136,000 in additional contributions, is
allocated to the S&P and shrinks to $118.984. But the Apple
shares, which start out with $10,000, or 20% of the portfolio,
and to which an additional $34,000 is added, grow to $154,567,
for a total balance of $273,551, a +60.9% total return.
That's the power of a game-changing stock like Apple.
And those are the kind of stocks I focus on finding. In a number
of cases, I've found stocks that offered triple-digit returns in
a far shorter period of time. I captured a nearly +300% gain
with Rockhopper Exploration in less than 90 days as that small
oil exploration firm made a major discovery in the South
Atlantic -- sparking an international diplomatic incident in the
Another game-changing Apple-like company I discovered is a tiny
enzyme maker with a huge presence in the biofuel arena. It's
delivered a nearly +200% gain in the past year -- a rate of
return that blows the doors off the +23.3% annual growth rate
Apple achieved in the example.
What I'm saying is that the results of a portfolio with room for
big winners can be dramatically different from those that stick
to cash, fixed-income or even the returns available in the broad
As I can continue to uncover the fast-track picks like the ones
I've already found, I'll inch closer to a multimillion-dollar
net worth in a relatively short period of time.
The point is this: The returns provided by 80% of your assets
will be materially insignificant. They almost don't matter at
all. It's the big winners that propel the portfolio, not the
same blue chips that everyone else is investing in.
So, clearly, the question is how investors can find those picks.
It's an important topic. I've got a six-year-old little girl
whose face I see in my mind when I think about just how
important those returns are. And to help you find fast-track
picks for your portfolio so you too can position yourself for
supercharged results, I'm launching a new publication called
Fast-Track Millionaire. For a sneak peek at this
exciting new letter, please join me for a
free webcast on June 15, where I'll reveal some of these
game-changing companies and try to help put you on the Fast
Track to wealth!
-- Andy Obermueller
Chief Investment Strategist