Going Big Can Make You Rich

Aaron Hodson Jul 20, 2014

Despite the proven risk-reduction benefits of portfolio diversification, it cannot be argued that one of the ways to get truly rich from equities is to have an exceptionally concentrated portfolio. If a stock is going to go up 10- or 20-fold, then owning a giant position in one great stock is a sure way to riches.

Some aggressive investors will double down on winning positions as a way to further concentrate their portfolio positions. Here are five tips on how to determine which companies to double down on and when to do it.

See how a company fared in the last recession

Doubling down on a position obviously involves taking on more risk. The last thing you want to do is own more of a company just prior to the onset of an economic recession. But if you own a company that can still prosper in a recession, your larger stock position might be less risky.

Priceline Group Inc. (PCLN: Nasdaq), for example, almost tripled its earnings from 2008 to 2010 in the midst of the financial crisis. If a company can grow like that in bad times, it should be reasonably safe when economic conditions are good.

Don’t double down unless the industry is growing

We would never recommend taking big positions in companies in declining or cyclical industries. You want a company that has new or disruptive technology, or an industry that is simply poised to grow for a long time.

Resource stocks can do well, but their fortunes are often tied to commodity prices, which are outside of a company's control, so they do not make good double-down candidates. Industries such as publishing might also not be poised for big growth.

The technology sector, on the other hand, continually offers new and exciting growth opportunities for concentrated investments. Investors right now are getting excited about iGate Corp. (IGTE: Nasdaq), which has more than doubled in the past year.

Look for new analyst coverage

As much as we like to beat up on analysts and the brokerage industry, you need others to know about it if you are going to get a company whose shares keep rising.

You want to own a decent-sized company that is just starting to get analyst coverage. More investors paying attention means more will keep buying if the company continues to do well on a fundamental basis.

Insider buying is a good sign, sometimes great

Insider buying is almost always a good sign for future stock performance, regardless of company size. However, if a company’s shares have already doubled, and insiders continue to buy, it is often a great sign.

Rather than take money off the table and diversify their personal investment holdings as you might expect, these executive investors are doubling down, which often means you should, too.

Pick companies with accelerating growth/dominant industry position

One of the best signs of future investment performance is an acceleration of growth rates. A fast-growing company that speeds up is often a big long-term winner.

Look at quarterly growth rates for signs of improving market share or new product acceptance. Make sure to compare company growth rates with industry growth rates to find those that are truly standing out.

If you can find companies that also have a dominant industry position, you may also have a long-term winner. Facebook Inc. (FB: Nasdaq) has its supporters and detractors, but few could argue against its 1.4 billion users and dominant social media position right now.

Doubling up or even tripling up on winning stocks is certainly not advised for everyone. If something goes wrong with a giant portfolio position, it can take years to recover from the loss.

However, if you can manage to find an investment gem and increase its portfolio position as it grows, you then really only need one stock in your whole investment career to make yourself wealthy.



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