Gains of 27%, 56%, and even 183%... What's Next?

For more on Andy's quest for game changers, read on...
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Bob: What's your analysis of Medbox? At what price would you be a buyer?

Andy:  Medbox is an important story for investors to be aware of. I hope that the huge returns catch people's attention. But let me be clear: I would not be a buyer of Medbox at anything near its current valuation. The stock flew too high, too fast. It is unlikely to be able to produce results thatwill justify its current prices.

But there is nevertheless alot to learn from the phenomenon, a lot to take away from the idea that a stock can skyrocket because of an externalcatalyst .

First, a confession. I didn't conceive of the marijuana initiatives as an investment opportunity. So that has to be the first lesson: Never let a failure of imagination limit your investment choices. Do not confine your cerebral activity to the interior of an enclosed rectangular space. Or, toput it another way, "Think outside the box." I didn't on this one. I wish I had.

But having said that, let's look at Medbox. It's not actually in the marijuana business. It doesn't even make money from the sale of medicine. It simply provides machines that verify documentation and identity and then dispense. Now, as I mentioned in the newsletter, there's a lot of detail work in that -- tons ofred tape to wade through. Medbox came up with a nifty tool to do just that. But CareFusion -- a stock I have recommended in the past -- has the same sort of dispensary, and with a much stronger brand and vastly superior market position. The Medbox technology is good, but it's not the only competitor in its field, nor is it the best. That's lesson two, then: Always invest in stocks with the best technology coupled with the best industry position.

Finally, and maybe more importantly, heed the words of country music legend Kenny Rogers, who tells us to "know when to walk away, and know when to run." Investors have to be clear-eyed as to whether a trend has played out. This one has. It played out on Election Day. MedBox was long on ink and light on squid. There is perspective to be gained, but that's the extent to which I would seek toprofit from theseshares at this point.

Bob: Some of the stocks I mentioned above, including Medbox, achieved game-changing status relatively quickly. But that's not always the case, is it?

Andy: Let me bring your attention to Obermueller's rule number two when it comes to investing in potential game changers: The aggressive growth investor must be patient. Or, to put it another way, "A nut has to stand his ground for a long time to become an oak."

If you look at companies that built and kept strong businesses, the stock chart is revealing. Typically, not all the years were good ones, and most success stories took years to make the journey from nano cap tomega cap .

In the most recent issue of Game-Changing Stocks , I cite the example of  Apple (Nasdaq: AAPL) . The iPod, the device that began Apple's transformative march, was released in November 2001. The share price was around twenty bucks at that time, and the stock was functionally dead money for two years. Thereafter, the shares rallied, though the company also saw periods where the stock turned negative.

That's why I frame my advice about patience in terms of its cousin, confidence. When you really understand why a stock is a real game changer, then you have confidence. Confidence must be present for patience to triumph.

Bob: What are some of your other rules for investing in game-changers?

Andy: The first rule is: Be realistic to the point of hyper rationality. There's a lot to know before investing, and that reality -- those realties -- have to be acknowledged and accepted for what they are. Being realistic means collecting and assimilating a lot of information. I know that might sound obvious, even silly, but I see people skip this every day. I get 100 emails a month from otherwise intelligent people who fail to heed the most basic information about theirinvestments .

My third rule is aportfolio manager 's most important job: allocation, allocation, allocation. Investors have to find a mix of securities that meets their needs and fits their risk profile. Aggressive growth should never make up more than 20% of a portfolio, and that might be high for some investors.

Bob: What are you looking at these days?

Andy: Health care, energy and some pure science - the next "big thing" stuff. I'm also interested in taking a global view of growth this year and investigating where the next boom will hit (my initial guess is Mongolia, though two other countries also intrigue me) I also see a whole lot of tech companies with a whole lot ofcash on hand, and I'm interested to see what the early acquisitions in 2013 will foretell. So I'm all over the map. Basically, I hit the reset button every year and begin a new search. It might sound a bit chaotic, but I see a lot of areas to be really hopeful and excited about. I looked at the performance of the first year of second terms, and the average market gain since 1965 (Nixon 1973, Reagan 1985, Clinton 1997 and Bush 2005) was 13.8%, versus a historical average total S&P return of 10.9%. What's more, in two of those four years, the total return exceeded 30%. Given the relatively lowearnings multiple of the market, 2013 might well be another breakout year.

[ Note: As Andy is fond of saying, " all it takes is one solid game changer to move the needle on an entire portfolio. " And Andy's had a number of them recently, including a pharmaceutical company that surged 55% in the five months following his recommendation... a biotech stock that is already up 183%... and a business development company that has gained 27% since he brought it to his subscribers' attention a few months ago.

To get Andy's latest pick, or to learn more about Game-Changing Stocks , you can follow this link here. ]