Motley Fool 1-2-3

Good old-fashioned buy-and-hold investing might not be exciting enough to interest daytraders. But it can nevertheless produce exciting longer-term returns — and beat out newfangled strategies.

Consider this: The three top spots in the Hulbert Financial Digest’s five-year rankings of more than 200 investment-advisory services all buy and hold quality companies. Remarkably, all three are subscription newsletters published by the same advisory firm, the Motley Fool in Alexandria, Va., which was founded by brothers Tom and David Gardner in 1993.

The newsletters’ names are Inside Value, Rule Breakers and Stock Advisor, and their model portfolios have produced average annual returns over the period of 18%, 16% and 15%, respectively, each more than doubling the 7.2% return of the overall stock market over the same period, as measured by the Wilshire 5000 index, with dividends reinvested.

Andy Cross, the firm’s chief investment officer, wrote in an email that the firm’s Inside Value service, which focuses on value stocks, searches for “great businesses at beaten-up or misunderstood stock prices.” In contrast, the Rule Breakers newsletter, which focuses on high-growth stocks, searches for “the most innovative companies, often early in their history, that are in disrupting industries.” Finally, the Stock Advisor service searches for “winning businesses with a special edge to keep them winning.”

Since very few stocks are held in common by these three top-ranked services, one must credit the firm’s underlying investment approach for their stellar performance. That philosophy, Mr. Cross said in an interview, is to invest in “great and amazing growth-opportunity businesses” whose full potential “other investors are ignoring,” typically holding them for three to five years.

One particular challenge that investors face in following the Motley Fool’s investment approach is that it requires the all-too-rare discipline of holding on to recommended stocks through bear markets. Mr. Cross points out that investors who bail out of stocks during declines seldom get back into equities in time to participate in the bulk of the subsequent recovery.

“Trying to figure out when to invest is a fool’s errand,” he says, and therefore his firm urges investors to get into “the practice of regularly investing as much as they can” in the stock market.

When questioned about the specific parameters the firm’s investment team uses when picking stocks, Mr. Cross wrote back that it focuses “on where the company, not the stock, will be in the next 3-5 years, and even beyond.” He called the approach “a business-owner mentality more than a ‘stock-buyer’ one,” listing such criteria as assets, competitive advantages, boards and managers and market opportunities.