“All you need for a lifetime of successful investing is a few big winners, and the pluses from those will overwhelm the minuses from the stocks that don’t work out.”
That’s what Peter Lynch wrote in his classic book, One Up On Wall Street.
The advice — which helped Lynch average 29.2% annual returns over a 13-year stretch — could not be timelier.
The markets are jumping from crisis to crisis. Stocks, commodities, and everything else moves in lockstep up or down every day. And increasingly unpredictable government and central bank fiats now have a far greater impact on markets than fundamentals like earnings and margins.
The resulting volatility has pushed investor confidence to levels only seen at major bear market bottoms.
The world is changing — and as the world continues to change, there will be more investor angst.
This is good news…
Because where there’s change, there’s opportunity.
Here’s one of the simplest and most accurate ways to turn change into profits — and rest easy in the process.
In fact, the last time this happened, investors could have booked big gains in about two years’ time.
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The Future is Now
The thing about change — including new booms, trends, and technological innovations — is that it doesn’t happen overnight.
Yes, things are happening faster and faster…
As we noted in our first foray into the coming “Storm Computing” revolution, technological innovation is steadily accelerating.
The mainframe computer took 40 years to mature. The personal computer took about 20 years. The Internet really grew up in about a decade’s time. Google went from garage to IPO in six years. Facebook went from dorm room to $50 billion market value in four years.
But again, they’re not happening overnight.
In most of these growth trends, there’s an opportunity to buy them early on and make one of those “few big winners” Peter Lynch says makes the frustrating times more than worth muddling through.
Today I’ll tell you the best way to find them early and give you two real-world examples — plus one more that’s still in very early growth stages.
Spotting “The Cloud” Early
One of the biggest and most profitable trends of the past few years has been the emergence of cloud computing.
The concept has been around for a while. Futurists talked about in the 80s.
HP (NYSE: HP) made a foray into it in the early 90s that failed miserably. Google (NASDAQ: GOOG) and Amazon (NASDAQ: AMZN) were the first movers in 2006 when they launched Google Docs and the Elastic Compute Cloud, respectively. But these never really caught on enough to make cloud computing as big as it is today…
In 2009, the cloud finally went “mainstream” — and the profits quickly followed.
At the time, Microsoft, the epitome of mainstream, made its first big attempt at the cloud. It invested a lot to make the cloud a reality for computer users.
Since then, cloud computing has exploded, and the value of many cloud computing stocks like Salesforce.com (NYSE: CRM), VMware (NYSE: VMW), and Riverbed Technology (NASDAQ: RVBD) have followed suit:
Clearly, the importance of a technology going mainstream cannot be understated. When it hits, the profits follow.
This “mainstream” concept is bigger than a one-off example, though. It happens all the time in many different industries.
In fact, the top stocks in the oil industry over the last few years could have been spotted the exact same way, and very early on…
When Big Oil Bets Big
Back in 2005, oil was still a “low” $50 a barrel.
A handful of forecasters, including almost everyone at Angel Publishing, was pounding the table that much higher oil prices were coming.
That same year, investors would have confirmation that much higher oil prices were coming — and more importantly, where to put their money for maximum possible returns, because that was the time the Canadian oil sands went “mainstream.”
In 2005, two oil majors, Encana (NYSE: ECA) and ConocoPhilips (NYSE: COP), announced they were investing a combined $15 billion into the oil sands.
At the time, the two oil heavyweights stated their goal was to ramp up their project’s oil sands extraction rate from 50,000 barrels per day in 2005 to 400,000 barrels per day by 2015.
The big oil companies knew what was going on up there. After all, their executives watch the industry closely every day…
When they cut massive checks to get in, it was clear the oil sands were going “mainstream.”
Over the years that followed, oil sands stocks soared:
Shares of virtual pure plays on the oil sands including Suncor (NYSE: SU) and Canadian Natural Resources (NYSE: CNQ) launched over the next three years.
Sure, rising oil prices helped a lot. But the shares of the more oil sands-focused companies delivered gains as high as 415% over that time. And that was almost four times higher than ConocoPhillips’ shares, which were also riding the oil wave.
The key to this profit scenario is that the oil sands went mainstream.
And now, one new technology is doing the same — and getting a boost by one of the ultimate mainstream technology companies.
The Tech Industry’s Biggest Fear
It’s earnings season. We’re finally getting a look at company sales, costs, and profits. More importantly, we’re seeing where the big companies are investing now.
In other words, we’re seeing where the leading industry insiders who know their business best are seeing the biggest growth.
IBM (NYSE: IBM) tipped its hand when it announced as part of its quarterly earnings report:
Going forward, we continue to expand our software business both organically and through acquisitions, with a focus on higher growth segments such as Smarter Commerce, business analytics and security. We closed on the acquisition of i2 earlier this month. i2 helps customers in the public and private sectors address crime, fraud and security threats. We expect to close on the acquisition of Algorithmics and Q1 Labs later this year.
Algorithmics expands IBM’s capabilities in the financial services industry by helping clients quantify, manage and optimize their risk exposure across a range of financial risk domains. Q1 Labs helps clients more intelligently secure their enterprises by applying analytics to correlate information from key security domains and creating security dashboards for their organizations.
See a common theme there amongst all the corporate/MBA-speak?
You should. It’s security, security, security.
I2, Q1 Labs, and Algorithmics all add to IBM’s rapidly-growing cyber security business segment.
More importantly, IBM is responding to its customers. It talks to them every day. It knows what they want. It knows what they will need in the future. And it’s clear IBM is betting big on the growth of security because it knows that’s where the demand is.
Again, computer security is not new. Quite frankly, it’s not even that exciting. If you’re like me, you just pay the $39 a year or whatever it is, and everything takes care of itself.
For large firms protecting trade secrets, engineering blueprints, top-secret business plans, human resource information, credit card information, medical records, and all sorts of other data, their needs are much greater. And IBM clearly sees big opportunity in meeting them.
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Overwhelming the Minuses
In the end, investing successfully can and will be far easier than most investors make it out to be.
Sure, it’s frustrating right now. The closer you watch the markets, the more frustrating it is.
We’re in the middle of earnings season right now. And what’s driving the markets? Whether Greece and its 11 million residents will get to vote on their government’s action.
But hey, the greatest (and wealthiest) investors knew to stick it out…
Peter Lynch was right: All you need are “a few big winners” to make it all worthwhile.
Now is the time to look for those big winners… as everyone else is focused on the politics of a small Mediterranean country that history will look back on as nothing more than an economic speed bump.
Editor, Wealth Daily