How to Keep Buying Big Winners

The telegraph was pretty nifty technology in 1844 when it first “obliterated time and space” between Washington, D.C., and Baltimore with the question, “What hath God wrought?” 

Journalism, warfare, financial markets, business — the world changed because of the telegraph. Western Union became a powerhouse of a communications company for the next century.

Started in 1851 as the New York and Mississippi Valley Printing Telegraph Company, its revenue grew 1,054% between 1858 and 1876, from $385K to $41 million. Finally dubbed Western Union, it introduced the first stock ticker machine in 1866. It then launched a standardized time service in 1870, and the first money transfer was sent a year later. 

Western Union was one of the original 11 Dow Jones Transportation Average companies. In 1914, it introduced the first credit card. Then it was faxes and microwave transmissions. In 1974 it was the first company to own and operate its own communications satellites. Parts of Western Union were sold off and became MCI (remember them?). Its 50% stake in Airfone, taken in 1981, was sold to GTE in 1986, and that company eventually became Verizon. 

Western Union was even one of the first customers for AUTODIN, the Defense Department communication project now affectionately known as the internet. 

Today, the final vestiges of Western Union are being put out to pasture by PayPal and Square’s (NYSE: SQ) Cash app, which is a remarkably convenient way to send money that I was recently introduced to by my daughter.

I love company stories like these. They hammer home the message that the best companies never stop changing, growing, and innovating. Constant change is needed to survive over a long period of time. There is a fair amount of luck involved, too. And you better watch out: One false step can signal the end.

That Last Step is a Doozy

Technologies come, have their day in the sun, and then fall by the wayside as new and better ways to do stuff come about. 

Movie night used to be pretty exciting, and I used to love going to Blockbuster stores. And I think I ordered Netflix once when they were mailing DVDs. I didn’t send the DVD back because I’m lazy like that. That DVD might actually still be sitting in a box of my stuff in a closet somewhere. 

I don’t specifically remember Blockbuster declining to buy out Netflix for $50 million back then. Needless to say, that was a bad move. Obviously, streaming movies over the internet wasn’t even a thing back then. But here we are: Netflix is worth more than Disney (which seems crazy), and Blockbuster is a cautionary tale for Business Management 101 students. Sad!

I suppose we could say Netflix founder Reed Hastings is a business genius. He put his mail order DVD idea into action, and it was viable enough for the company to make money and get a stock market listing. We could also say he was quite lucky to have made all the right moves not only as content went digital but also as platform companies (like HBO) branched out into original content.

After all, there were a whole lot of players coming up with slightly different strategies to achieve an outcome that was very uncertain. And Netflix has basically beaten the entire field (though maybe it would be more accurate to say Netflix has made it to the Final Four). 

Obviously, the luck factor makes our job as investors pretty challenging. How do you know who’s gonna be the big winner?

Well, the answer is: you don’t. 

I mean, of course we are all going to try to find the next big thing. We extrapolate out from current conditions. We research opinions from analysts and strategists. We pay attention to management teams and CEOs. 

But at the same time, we all know that most “next big things” are going to fail. If you try to hold them blindly, without continually surveying the ever-changing landscape, well, you’re going to fail, too. 

I have a couple thoughts on this that I think can be very helpful.

Let the Market Speak

Have you ever seen one of those articles or ads that says, “$1,000 in the Netflix IPO would be worth $310,000 today”? And then you think, wow, I could be rich if I’d only just bought and held Netflix — it’s so obvious and simple. 

Let me tell you something: NO ONE DID THIS. No one simply bought and held Netflix from its 2002 IPO. The shares are up over 31,000% since the company went public. Do you really believe anyone actually said, “I’m not taking my 10,000% gain because I think this stock has 30,000% written all over it”?

Trust me. No one said that. 

Netflix started 2015 at $48 a share. By August, it was worth $123. Then in three weeks, the price fell to $100. You think people weren’t taking their +100% profits? Damn right they were. Same thing from late 2012, when the stock started a one-year run from $9 to $50. 

The reality is that investors take their profits when a stock makes a nice run. But many of these same investors will reevaluate and maybe buy right back in, helping to propel the stock in its next run. 

Don’t be sucked in by headlines and statistics that tease you with “you should have made a fortune on Netflix or Apple or Amazon” profit stats. Instead, just focus on your process. Of course you should be looking for the great stocks that will produce huge gains. But even the best stocks go up and down. 

Also, never be afraid to reevaluate and re-buy a stock you’ve sold. Just because you’ve taken profits and the stock has sold off doesn’t mean the story is just done. 

Funny thing about this article: I started off writing about technologies that were awesome for a while and then got supplanted because I wanted to point out the silliness of a report that the Trump administration is considering requiring utility companies to buy a certain amount of their power from coal plants.

Coal for electricity generation is basically dead. Sure, there will be fits and starts. But it’s not going to grow. It is crazy to step in and try to force companies to use a dying technology. This just delays the innovation that comes from the transition to newly cheaper and more efficient fuels. 

I gotta say, while that’s a decent point about coal, I like this discussion about how to buy and keep buying big winners much better. 

And speaking of big winners, Jason and I think we have a great one for the June issue of The Wealth Advisory. It’s a company we think has a stranglehold on very significant part of the cloud subscription market, like Netflix does for movies and Microsoft does for business software. That issue will be out on June 20. You can get in here.

Until next time,

Briton Ryle

@BritonRyle on Twitter

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.