Outliers and 5 Companies That Are Changing the World

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My brothers and I are highly competitive. Though we are all grown men now, we still talk about who had the most successful high school sports careers, who went to the best college, and who performs better in Jeopardy!.

Recently, I showed them my CAPS score -- which I'm rightfully proud of -- and they said, "Big deal, take Netflix and lululemon athletica out of the equation and you're average at best."

Truth be told, these detractors have a point. It's a comment I also hear from time to time on our Stock Advisor discussion boards as well. That's because of the impact that performance outliers have on your portfolio.

Outliers and your results
Take Fool co-founder David Gardner's scorecard as an example. Earlier this week, I noticed that his average pick was up 135%. But by my calculations, when you take out his five recommendations of Netflix and two priceline.com recs, his average performance drops to 72%.

That's still impressive, compared to an S&P average return of 15%. But you can see what a big role these two companies have played in David's performance. To some, this is either cause to second-guess anyone who keeps track of their score or evidence that being in the stock market is more a matter of luck than skill.

But my response is simple: That's the whole point! If you search for tomorrow's breakthrough companies, you could be enriched many times over for your endeavors. Investing like this is a game in which the odds are stacked in your favor, especially if you follow a couple simple steps.

Find an outlier that will help you retire
It might seem overly simplistic, but there are really just two steps to finding the outliers that will boost your portfolio for years to come.

  1. Find tomorrow's leading companies -- today. Believe me, if this were easy, then everyone would be doing this, and it wouldn't be a very profitable venture. Don't worry though. I'll offer five companies as a starting place below.
  2. Hold these companies for decades. Don't let hindsight blind you. If you're going to one day hold a 20-bagger in your portfolio, you need to resist the temptation to sell after it's gone up 200%, 500%, and 1,000%. That's not easy and -- again -- that's why it can be so profitable to hold.

Five potential outliers
Westport Innovations
(NAS: WPRT) is a Canadian-based company that designs auto and truck engines to run solely on natural gas. It already has partnerships in place with manufacturing stalwart Cummins (NYS: CMI) and has a growing presence in China.

What to do next
Let me get one thing clear: I'm not saying you should devote your entire portfolio to companies that could be the world's next innovator. In fact, I've publicly called out 10 companies that I'm investing $40,000 in, all of which are already world-beaters.

What I'm suggesting is that there should still be room in your portfolio for companies that are rewriting the rules of their industry. Hopefully, the five companies I've offered are a good starting place.

If you'd like just one more idea, I'm going to offer you access to The Motley Fool's new special free report, "The Only Stock You Need to Profit From the NEW Technology Revolution." Inside you'll find out about a breakthrough technology that's changing the face of business by analyzing massive amounts of data. It's yours, absolutely free.

At the time this article was published Fool contributorBrian Stoffeldefinitely went to the best college in the family, and has recently been kicking his brother's tail in Jeopardy!. He owns shares of Intuitive Surgical. The Motley Fool owns shares of Zipcar, lululemon athletica, and Solazyme.Motley Fool newsletter serviceshave recommended buying shares of Westport Innovations, Netflix, lululemon athletica, Intuitive Surgical, priceline.com, MAKO Surgical, and Zipcar, as well asbuying puts in Netflix. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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