Let Me Be Your Horrible Warning

"If you can't be a good example -- then you'll just have to be a horrible warning."
--Catherine Aird

I would love to be a good example of smart investing, I really would. And in some ways, I suppose, I am. I've made much more money than I've lost, after all. I once turned $3,000 into $210,000, and I also turned a series of small investments into enough for a down payment on a nice house.

But in some ways, I'm more of a horrible warning. I once lost $200,000, after all -- and that wasn't my only mistake.

Learn from me
How, exactly, did I lose so much money? Let me count the ways.

  • I overdiversified. I've spread my investments too thinly and ensured that while one investing dud can't torpedo my portfolio, neither can an investing star improve it. For example, I put less than 2% of my portfolio's value in Intuitive Surgical (Nasdaq: ISRG  ) . It's been a stellar performer. It tripled in about a year before pulling back in the market upheaval, to what still amounts to a 70% gain. But even when it was a rocket, it never made much difference to my overall portfolio.
  • I bought companies I didn't understand. I've bought companies that dealt in semiconductors and specialized software and cures for cat allergies -- and I'm still tempted, on occasion, to do it again. I've been thinking about buying Jacobs Engineering, for example, which "provides a range of technical, professional, and construction services to a large number of industrial, commercial, and governmental clients around the world," because I've been impressed with its growth rates and past performance. But I don't have a good grasp of the industry, its position, or its prospects. This time, I'm going to pass.
  • I hung on way too long. Years ago, Time Warner (NYSE: TWX  ) was a 70-bagger for me -- but it had far surpassed its intrinsic value. I was greedy and didn't sell, in hopes that it would go up still further. When I sold, I had a 10-bagger on my hands. It was still an excellent return, but I left a lot of money on the table.
  • I gave in to simple, sloppy thinking. When Time Warner, for example, had fallen from around $70 per share to around $15, I figured it couldn't fall much further. That was dumb -- a stock's price reflects what people will pay for it, based on what they think it's worth, and nothing else. Last time I checked, it was just south of $10 per share. Gut feeling does not an investing thesis make.

What you should do
In addition to avoiding the mistakes I listed above, how should you invest? One strategy is to consider blue-chip dividend payers.

They may have a reputation as safe plays that won't net you big gains, but if you're truly a buy-and-hold investor, they'll pack a punch. According to Wharton Business School professor Jeremy Siegel, in the period from1871 to 2003, 97% of the after-inflation stock returns came from reinvesting dividends -- only 3% came from capital gains.

And in a volatile market like this one, companies with a sustainable dividend can help prop up your portfolio until prosperity returns. All of the companies below, for example, have increased their dividends every year for at least 20 years -- and that's a good indicator of their long-term prospects.

Company

Recent Dividend Yield

3M (NYSE: MMM  )

3.1%

Coca-Cola (NYSE: KO  )

3.4%

Johnson & Johnson (NYSE: JNJ  )

2.9%

Consolidated Edison (NYSE: ED  )

5.5%

Pfizer (NYSE: PFE  )

7.2%

Any investment requires more research than just looking at the dividend yield, but a history of strong dividend payments is a good place to begin.

The Foolish bottom line
I've been both a good example and a horrible warning -- and I must say, I prefer being the former. So I'm avoiding the mistakes that made me a horrible warning and focusing on companies I understand -- especially dividend payers.

If you'd like some pointers to a bunch of promising dividend payers, I invite you to test-drive, for free, our Motley Fool Income Investor newsletter service. Its recommendations have been beating the S&P 500 by several percentage points on average, and those picks sport an average dividend yield of more than 6%. Just click here for your free trial -- it will give you full access to every past issue with no obligation to subscribe.

Longtime Fool contributor Selena Maranjian owns shares of Time Warner, Intuitive Surgical, Coca-Cola, Johnson & Johnson, and 3M. Pfizer and Johnson & Johnson are Motley Fool Income Investor selections. Pfizer, 3M, and Coca-Cola are Inside Value selections. Intuitive Surgical is a Motley Fool Rule Breakers pick. The Fool owns shares of Pfizer. The Motley Fool is Fools writing for Fools.


Read/Post Comments (9) | Recommend This Article (21)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 19, 2008, at 5:02 PM, GoNuke wrote:

    My portfolio is down about 50% but I have lost almost 80% of the value of stocks recommended by your newsletter. Thanks but no thanks. Income investors track record is bad which is why I cancelled my subscription.

  • Report this Comment On November 19, 2008, at 7:06 PM, sevenofseven wrote:

    I'm down about 50% in my RIRA also. I'm thinking about cashing it in and paying off a mortgage on a rental property. (You can remove any monies contributed to a RIRA without taxes and penalties. You cannot withdrawal any earnings made off those contributions) I'm also not renewing Stock Advisor. It would be nice on occasion to hear a sell recommendation instead of always rah rah rah about how cheap stocks are. Leaving what's left of my RIRA in the market, it will take me 8-10 years to get back to even assuming this is the market low (which it probably isn't). I don't need this drama anymore.

  • Report this Comment On November 19, 2008, at 7:43 PM, Usnzth wrote:

    To the previous contributors.

    Stop peeing in the pool before you get out.

  • Report this Comment On November 20, 2008, at 11:48 AM, vest0r2 wrote:

    Would it be against some stockbroker code to announce that the market is toxic and headed to zero value? Is that giving a sucker an even break?

    It's gotta be hard to sell investment newsletter subscriptions when the market is tanking.

  • Report this Comment On November 20, 2008, at 12:17 PM, Slipswitch wrote:

    I agree with the comments. MF is too optimistic and only works in bull markets. A sell strategy/profit taking would have saved the readers who aren't in finance full-time from a lot of money.

    The advisor services may turn out to be right, but I can't keep buying down into the abyss.

    Anyone can be a cheerleader. Give some real world rational advise.

  • Report this Comment On November 21, 2008, at 4:01 PM, DarkStu wrote:

    Well I for one read MF for some insight and information, as a new (limited fund) investor I do as much "research" about a stock as I can.

    I appreciate the opinions and views I find from contributors, official and visitor ;)

    I look at a fund or company and try and decide if I like it, like the direction it's going, believe that it's sound and has a profitable product.

    If I can say yes to those, I still take a gamble when I decide to "invest".

    I never invest what I can't stand to lose (in a worst scenario)

    Anyone who's blindly buying "everything" that everyone else suggests isn't doing enough work on their own imo.

    If I'm going to lose money, I want it to be on my hands and not someone else ;)

    Call me old school maybe heh

    Regards and Good Investing,

    DS

  • Report this Comment On November 24, 2008, at 4:52 PM, oldgoldbug wrote:

    I thought it was only me. But the commentators above have got it right, it is always "buy, buy,buy". With what??? You watch losses mount up and up - are you then going to take new money and put it in? Probably not, but that is likely the best action you could take. I mean if you liked Garmin at 140 triple down at 45. The problem is "what if it goes to 10?" Then what?

    Folks, if the pros who run portfolios for a living underperform the S&P 500 80% of the time, how are part-timers going to do better? Granted, there is always an exception to the rule, but if we look at the overall performance of our portfolios in an honest way, most of us would be better off in Vanguard Index Fund. So at least know that you are speculating and use the methods of a speculator like stop losses.

    We have to realize the great Warren Buffett (and he is great) is a speculator. He takes massive positions, is undiversified, and buys more if the price drops.

    At least he has had the good sense to do it in an overall rising market. And he has the good sense to keep his powder dry for years at a time , so when the bargains show up he hasn't lost all his money doubling up 20% under the peak. Even he says his mentor, Benjamin Graham, had it much harder as he did it in the Depression. The Dow did not exceed the 1929 high until 1954!

    It is unlikely we will see a repeat of that episode, given the massive amounts of new money being created, but if we do I think it will be the Greater Depression and it won't be pretty.

    Good luck to all.

  • Report this Comment On November 25, 2008, at 2:56 PM, caving311 wrote:

    Alright, let's start slowly.

    Forget not losing money, forget never forgetting your towel.

    Rule #1 (This is the big grand freakin rule to follow):

    Never invest more than you are willing to lose.

    Rule #2:

    Don't count your chickens before they hatch.

    It's just that simple folks. These are common sense, they shouldn't have to be said, other than to get a laugh. If you're in the market to make a quick buck, this isn't the time for you; if you're worried about losing more money, you would be better off investing your money in a savings account.

    Now, let's get a little deeper, what if Garmin goes from 45 to 10? Well, you bought at the wrong time. Hang on to it for a few years, odds are it will bounce back. It always has before. If Garmin at 45 is your idea of a retirement plan, stop. No, seriously, stop. Pick up a phone and call a financial planner or wealth management counselor. I recommend LPL if you can afford them.

    The deepest I'm going to go is what happens if the markets go to 0? Well, the money in your wallet or under your mattress would be pretty much worthless. Look at it this way, investors buy stocks with the hopes a company will take that money and use it wisely, creating a profit, which drives the price of their share up. By driving the price of the share up, the investor can then sell their share for a profit, and move on. If no one is willing to pump money into any company, than no company would have capital. Without capital, they would not be able to afford to do business. If they can't afford to do business, they will get bought out, if they have any value. If they don't they may be able to be propped up by the government. If they're large enough. If not, they will go into bankruptcy. If every company on every stock exchange has this happen, then the markets can hit 0, otherwise, it won't happen. Furthermore, if the markets do hit 0, yeah, we're pretty much done as a world.

  • Report this Comment On November 30, 2008, at 9:55 AM, videofilm wrote:

    I have never really had a good job with any sort of benefits. No health care, no pension, low pay. I saved whatever I could andstarting in the '80s I realized that I was losing money by keeping it in the bank. I started out with some small investments. Things went well for awhile, but then some of the investments went south. I signed up with a Morgan Stanley for awhile and the economy was doing well in the late '80s so I reached the peak of my finances in the glory days of the '90s. Then the bubble burst and some of my biggest gainers recommended by my broker went bankrupt and I never got a recommendation to get out. I left Morgan Stanley thinking I could do no worse on my own with an online account. I signed up with the Fool newsletter to at least get some advice on investments. I followed the advice and saw some major losses even before the economy tanked. Now I am 62 and am looking at a retirement funded by minimum social security. Unless the market comes back at least to levels of about 3 months ago. I would be far better off now if I had never heard of the stock market and kept my meager savings in a bank or under the mattress. mY Subscription has expired and I am not renewing because it has cost me dearly and I am surprised that I can post this message.

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