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Great Stocks Don’t Make You Think!

This article was written by The Motley Fool’s co-founder, David Gardner in 2008. It was first published on fool.com, and edited for fool.sg. 

My greatest financial investment thus far is providing the start-up capital for my company The Motley Fool. I’m not here to write about that today — maybe another time.

I’m here today to share the secret behind the second greatest financial investment I have yet made: The shares of America Online (now Time Warner (NYSE:TWX) that I bought in 1994.

By March 2000, I had made nearly 200 times my cost of just six years before. A 200-bagger! Ever had one of those — purchased as a young person in your 20s? Quite a heady impression it made on me — talk about creating a lifelong love affair with stocks.

I hope I catch another 200-bagger sometime again. But this article isn’t about hope. It’s about how. You ready?

Don’t make me think!
First, by way of explanation, let me tell you about the best book I’ve read so far in 2008. It’s called Don’t Make Me Think!, by Steve Krug, and as near as I can remember, it contains no mention of the stock market, investing, or 200-baggers. It’s just a very readable, insightful book on Web design.

Don’t Make Me Think! is not just a catchy title; it’s author Steve Krug’s first law of making a great Web page that is easy to use. He writes:

People often ask me: “What’s the most important thing I should do if I want to make sure my Web site is easy to use?” The answer is simple. It’s not, “Nothing important should ever be more than two clicks away,” or “Speak the user’s language,” or even “Be consistent.” It’s … “Don’t make me think!” … It means that as far as humanly possible, when I look at a Web page it should be self-evident. Obvious. Self-explanatory.

My single strongest piece of investment advice — distilled from more than 2 million Motley Fool books sold over the past decade — is almost the exact same point. It goes something like this: Great stocks shouldn’t make you think. When we look at a great stock it should be self-evident. Obvious. Self-explanatory.

Better — shorter — than Lynch’s two-minute drill
Does that sound simplistic? Outrageous? Famed fund manager Peter Lynch stated that we should all be able to explain our reasons for owning a stock in a two-minute pitch. Lynch is counseling us to “Keep it simple, stupid.” If you can’t explain to a friend in two minutes why you own any given stock in your portfolio, the implication is clear: Sell that stock.

I like Lynch’s point. He’s talking about understanding before acting, which leads to better actions. It’s certainly helped me. But now let me help you. I want to go a bit further — I want us to go beyond Lynch, looking not just for good actions, good stocks. We’re now looking for greatstocks. So here’s my attempt at a eureka moment:

Great stocks — those that are the true leaders of real emerging industries — don’t take 60 seconds to explain. They take one sentence to explain. If you can’t communicate convincingly to a friend in a sentence, even a mere phrase, why she should own this stock over the next five years, chances are it’s not a great stock. It might be a good stock, or a winning stock (and no complaints about that), but it won’t be a great stock.

Proof by example
Back to America Online. Let’s do our one sentence: The 1990s were the decade that America went Online. How could you not own shares?

Ready for more greatness? Try video games: “Entertainment is becoming interactive, and video games will outsell the box office.”

This simple sentence has netted Motley Fool Stock Advisor members a five-bagger, and counting, in GameStop (NYSE: GME) . My March 2003 recommendation of Activision (Nasdaq: ATVI) — hitting its five-year anniversary this month — is now a seven-bagger … and counting. Great stocks can — and often do — ride the same trend.

Are you getting the hang of this?

Do you see how “don’t make me think” stocks — what I have previously called the “obvious greats” — work? They lead you to the best investments of your generation, when bought early and held patiently for long periods of time. Google (Nasdaq: GOOG) investors know exactly what I’m talking about. Even with the stock down more than 40% from its 52-week high, Google is still a five-bagger and counting, from its 2004 IPO.

And then there’s capitalism spreading in China, one of the great stories of our time. It’s analogous in its own way to the dawn of the Internet, in terms of the opportunities for investors.

Over at my Motley Fool Rule Breakers, we’ve been calling Baidu.com (Nasdaq: BIDU) the “Google of China” for some time now — a phrase that clearly passes my one-sentence test. Baidu was the top-performing Nasdaq 100 stock last year (up more than 245%), and it’s still worth less than 1/15th of Google itself — yet it has 74% of the search engine market share in China.

What’s your line?
My intent here is not to suggest you buy Google today or hop aboard the Activision train or go load up on (God forbid) Time Warner. Nope. I’m here to shine a bright light on the mostly right-brained, big-picture thinking — or lack of over-thinking — that will improve your chances of finding the next great stocks of this generation.

So what sentences might you have in mind? (One hint: New energy sources.) And remember — if you can’t say it in a single sentence, don’t bother pitching it to me too hard.

Read how this investing advice can be applied to the Singapore context here!

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Fool co-founder David Gardner owns shares of Time Warner, Activision, GameStop, and Baidu.com. Time Warner, GameStop, and Activision are Motley Fool Stock Advisor recommendations. Baidu is a Rule Breakers pick. The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.