Every intelligent investor's portfolio must devote assets to aggressive growth.
Because finding a winning aggressive growth stock isn't easy, I want to share with you how I do it...
I look for companies with products, technologies or other innovations that materially change the baseline assumptions for doing business in an industry.
These are the companies seeking to hit one out of the park by finding the Next Big Thing.
Last August, for example, I recommended AuthenTec, a company beginning to dominate the market for biometric readers -- fingerprint scanners on personal electronic devices.
Not too long afterward, Apple agreed to buy the company.
Another example: CalAmp (Nasdaq: CAMP), a maker of wireless communications hardware, rose 236% after I recommended it.
That's just the tip of the iceberg.
And I've done it by following three simple rules that any investor can follow.
Rule No. 1. Be realistic to the point of hyper-rationality.
I lost track years ago of how many clinical trials I've read about various drugs.
But do you know something? At the end of every report, I wanted to buy every one of the stocks behind those drugs. The studies are detailed and educational. They set up the problem and then offer a unique solution. The science, the explanation, the data and the financials are always very appealing.
But these early-stage drug-development companies are very risky. Heck, they are damn risky. No matter how good the initial trials look, there is no guarantee of approval, and a negative action by the Food and Drug Administration can cut a small drug company's stock price in half quicker than you can say Jack Robinson.
The other side of that coin, of course, is that the FDA (or one of its international counterparts) could rule in the drug's favor, in which case the little company's stock price chart resembles a space shuttle launch.
Let me quantify this for you. According to the Pharmaceutical Research and Manufacturers of America, the world's 28 leading drug companies spent $49.5 BILLION in 2011 alone looking for new drugs. That amounted to 16.7% of their total sales. But the FDA approved all of 35 drugs in 2011 -- not even one a week. The PhRMA says only 1 in 10,000 of the compounds studied by drug companies becomes a product for sale on the pharmacy shelf.
How does an investor mitigate this risk? Research, research and more research.
I began my career as a journalist, and I learned there was no substitute for good old-fashioned shoe-leather reporting. That's what brought me to one of my best picks, Athenahealth Inc. (Nasdaq: ATHN), a health care IT provider that has returned a phenomenal 256%.
How many stocks in your portfolio were able to harness the power of a game-changer like that?
Aggressive growth investors must cut through all the hype. They must prosecute every claim. They must use facts and hard data to quantify a stock's likelihood to head skyward.
Rule No. 2: Aggressive growth investors must be patient.
Gains can take time to achieve -- time that should be marked in years, not weeks or even months. Aggressive investors are by nature contrarians, as they are usually betting on developments the rest of the market has not yet perceived, and they must have strong conviction in these "buy" decisions to weather the storm. (Because sooner or later, it always storms.)
Consider Apple (Nasdaq: AAPL), a hall-of-fame game-changer if there ever was one.
The iPod, the device that began Apple's transformative march, was released in November 2001. The share price was around 20 bucks at that time, and the stock was functionally dead money for two years. But investors who had the foresight to see where Apple was headed scored big.
Thereafter, the shares rallied, though the company also saw periods where the stock turned strongly negative. But look what happened if you held Apple from 2001 through today...
To echo my earlier point: Research-driven conviction brings on confidence, and confidence brings about resiliency. The aggressive investor must nurture all of these virtues.
The third and final rule in aggressive growth investing is simple: Allocation, allocation, allocation.
I said earlier that all portfolios should have an aggressive growth component. But the aggressive growth segment of a portfolio, because of its risk profile, should be only a small percentage of total assets, and never more than 20%.
Is that too little? No. It's just prudent. That's enough upside potential to move the needle on your overall portfolio without shouldering an excessive amount of downside risk. That doesn't mean that the other 80% of your portfolio can't seek growth, it only means limiting exposure to the most aggressive securities.
Action to Take --> Following these three rules isn't easy. Heck, if it was, everyone would be rich. And I would've invested in Apple back in 2001 and be lounging on a beach right now. But these three rules have guided me to a string of triple-digit gains over the years, and there's no reason why they can't do the same for you.