Editor’s note: Today is the 10-year anniversary of one of Chris Wood's greatest stock picks...
On March 15, 2012, Chris recommended a rapidly growing e-commerce company called Amazon (AMZN). It would of course go on to become a world-dominator and hand out 1,500%+ gains.
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So today, we're sharing a classic essay from Chris. In it, he details how to use exponential growth to your advantage to identify megawinner stocks like Amazon...
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Fact is, making 5X your money or better on a single stock isn’t easy.
Today I’m known for my ability to consistently recommend microcaps that multiply my readers’ money.
But like most rewarding things worth doing, it took a lot of hard work to develop this skill.
I’ve honed it over tens of thousands of hours of financial analysis and real-world investing.
And truth be told, I’ve made my fair share of mistakes!
Members of Project 5X benefit from the 80+-hour workweeks my team and I put in.
I’m going to share with you a key principle that drives our research.
One that I wish I had known 15 years ago when I first started out in the investing business.
Let me show you by posing a scenario.
You have $5,000.
You must invest it in one of two stocks, which you’ll hold for two-and-a-half years.
Both stocks trade for $5 a share.
You know for certain that the two stocks will perform as follows:
Stock A will rise 10% per month.
Stock B will rise $1 per month.
Over the next two-and-a-half years, which would you rather own?
Are you tempted to go with B?
Many folks choose B because a $1 gain on a $5 stock comes out to a profit of 20%.
That, obviously, is double the 10% profit in option A.
Seeing as you’d own $5,000 worth of stock, option B would hand you a nice $1,000 profit every month.
Sounds like the better deal.
But the right answer is option A—by a longshot.
You see, option A represents “exponential growth.”
This means the growth as a percentage stays the same even as the base grows.
Mathematically, exponential growth leads to MUCH bigger gains over time.
Here’s how these two stocks stack up on a chart. The green line represents option A. The grey one represents option B:
As you can see, in the early stages, it looks wiser to choose the linear gains of option B.
But because the exponential growth stays at a constant 10%, the gains in dollar terms ramp higher and higher as time goes by.
Around the 14th month, the exponential curve catches up to the linear one.
After that Stock A leaves Stock B in the dust.
After two-and-a-half years, you’d have $87,247 if you invested in Stock A, which grew exponentially.
You’d have $35,000 if you chose option B, which grew linearly.
Let me elaborate with a real-world example…
In 2005 the share price of not-yet-dominant Amazon touched $35.
In 2018, Amazon’s stock price surpassed $1,600.
10% growth on its 2005 price of $35 doesn’t amount to anything extraordinary.
It calculates to a gain of just $3.50.
But as Amazon grew, its ability to maintain strong growth rates allowed its stock to literally mint new millionaires.
Remember that exponential curve I showed you earlier?
Here’s how the performance of Amazon’s stock from 2005–2018 looks next to it:
$5,000 turned into $186,333 by 2018.
That, my friend, is the power of exponential growth.
Here’s another example using online video pioneer Netflix, one of the biggest-gaining stocks of the past 10 years:
As you can see, it follows that same exponential growth curve.
A $5,000 investment in Netflix in 2008 turned into $428,665 by 2018.
I could show you dozens and dozens more examples of stocks following the exponential growth curve to huge profits.
In fact, almost all the greatest disruptive stocks that’ve gained 500% or more achieved it thanks to exponential growth.
So, where do we find these exponentially growing companies?
My mandate in Project 5X is to bring my readers microcaps that are set to ride exponential growth to gains of 500% or greater.
To achieve this I put dozens of stocks every month through a rigorous analysis I’ve named the CHAOS Formula.
The truth is, fewer than 1 in 85 microcaps I consider possess the true potential to deliver the exponential growth needed to 5X.
The CHAOS Formula filters out all the ones that fall short and pinpoints the true gems with 5X potential.
Regards,
Chris Wood
Editor, Project 5X