Stock price gain can come from these sources.
1) One-time bargain
If a stock is worth $1 but is sold at $0.75, then when it returns to $1, we make 30% gain. The holding period often takes less than 1 year, thus providing a return rate of 30%/year.
2) Organic Growth
If a company consistantly grows ORGANICALLY at 20% (assuming its ROIC is high enough to justify the growth), and if PE remains the same, then holding it for many years can achieve a return rate of 20%/year.
Note that the growth must be organic, because inorganic growth (acquisitions) brings no extra value to the company. Many times it actually does the reverse, because the company often needs to pay above-market price for an acquisition.
3) PE Inflation
In a bull market, even if a company doesn't grow, PE can be inflated just as the index does. This can bring one-time gain up to 100~200%, sometimes even more. It often takes several years. The annual return rate is hard to know, and there is no way to predict.
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How to capture the gain?
One-time bargains are actually the most profitable, but since they are one-time, we need to constantly rake the market to find candidates to replenish our portfolio. Often when it returns to fair value, we can wait for more time, as the market momentum may continue. Let the profit run.
Growth stocks take less effort. Just buy and hold. The overall return rate eventually depends on how fast it grows. A company growing at 20% is considered a strong company, and that will not last forever. As soon as its growth permanently slows down, it is time to sell. Investors need to be realistic of their expectation of the long term return rate. Here's the long-term return rate of some of the greatest stocks in American history: NKE 15%/year, WMT 20%/year, MO 12%/year.
PE inflation is impossible to choose at our discretion. If we are lucky to be in a bull market and stay invested, we will ride the wave. Even if we don't invest in index, as long as our portfolio is diversified enough, it can enjoy roughly the same PE inflation as does index.
A stock's final gain is a composition of those sources. For example, in the best case, a stock's gain can come from all of the sources at the same time: it is an undervalued stock, has growth, and is in a bull market. Most of the time, though, we are only lucky enough to capture one or two of such sources.
In reality, a stock's gain can be buried in tumultuous market noise. Stock price can go up or down fiercely for no solid reason. Therefore, it is only theoretically possible to perceive the sources of gain mentioned above. However, for a long term investor, the ultimate gain will eventually be dominated by those sources.
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