Fools Don't Rush In

I've been reading about investing for more than a decade now, and I've seen many financial magazines with features like "Five Stocks to Make You Rich" or "Where to Invest This Year." I often wonder how these predictions will pan out if revisited years later, but I don't normally follow up.

Well, the other day I was sorting through old magazines and discovered that I'd kept the Oct. 1997 issue of SmartMoney, with the cover story "10 Stocks for the Year 2000 and Beyond." Perfect, I thought. Let me see how these picks fared.

The article explained up front that these stocks were recommended for investors with five- to 10-year horizons, and that they were expected to outperform the market during that time. So keep in mind that 10 years haven't passed, although investors who put money into SmartMoney's picks for a five-year span would have been done by now.

Yesterday's darlings
A list of SmartMoney's highly touted 10 stocks follow. I've added their total percentage gains between Oct. 1997 and June 2004, and I've annualized that figure as well.

Company Total gain % Avg. ann. gain %
Adobe (Nasdaq: ADBE  ) 300 23
Boeing (NYSE: BA  ) 12.5 2
Boston Scientific (NYSE: BSX  ) 267 21
Cisco (Nasdaq: CSCO  ) 161 15
Franklin Resources (NYSE: BEN  ) 19 3
Merck (NYSE: MRK  ) 39 5
Novellus (Nasdaq: NVLS  ) 111 12
Sundstrand (acquired) - -
Tellabs (Nasdaq: TLAB  ) -70 -
Vitesse Semi. (Nasdaq: VTSS  ) -53 -
S&P 500 (AMEX: SPY  ) 35 5


How did the stocks stack up?
Five of the picks outperformed the S&P 500, as SmartMoney expected. But two stocks would have lost investors' money -- a lot of it -- had they sunk hard-earned moola into them. Another company changed names. Sundstrand was bought by United Technologies (NYSE: UTX  ) . That's not necessarily a strike against it, though. From the month of purchase, June 1999, until now, United Technologies has advanced some 59% -- an annual rate of about 10%. Not bad.

I was amused when I typed Sundstrand's old ticker, SNS, into the Fool's Quotes and Research area and discovered that the ticker now belongs to Steak n Shake (NYSE: SNS  ) . (That was my first clue that something had happened to Sundstrand.)

I wonder if any investors picked up that old copy of SmartMoney and mistakenly placed orders for shares of SNS, purchasing stock in the food industry instead of in aerospace. It wouldn't have been the first time. Many investors, for example, have ended up with shares of Sysco (NYSE: SYY  ) , a food-service distributor, instead of Cisco, the telecom equipment maker. (Fortunately, Sysco has also been a pretty compelling investment. Read more in Tim Beyers' article.)

To most 1997 investors, Boeing might have been the most familiar name on the list. But familiarity doesn't guarantee hefty profits. Boeing has struggled in recent years as it competes with Airbus. (Learn more in Brian Gorman's article.) Adobe Systems is the list's big winner, but in a recent article, Seth Jayson reviewed its progress and faults the firm for hanging on to too much money.

There is one silly aspect to the list. SmartMoney organized the companies into five categories: telecom, commercial aircraft, aerospace and defense, banking and finance, drugs and medical devices, andtechnology. I'll buy the first four categories. But technology? At Fool HQ, we often shake our heads at terms like "tech stocks." What does that really mean? Isn't an aerospace company a tech company? Isn't there a heck of a lot of technology in medical devices and even banking? Of course there is. (But I digress.)

Some thoughts
In all fairness, I can't fault SmartMoney's efforts. It's hard to imagine anyone picking 10 stocks and having them all become winners seven years later. Yeah, it happens now and then, but is it luck or skill? Still, the companies' performance is eye-opening and probably not as good as the magazine's editors and subscribers would have hoped.

The group was presented as a portfolio, probably with the expectation that many interested investors would buy all 10 companies' shares. I think that's unrealistic. Most investors probably don't want to own hundreds of firms, and that's what will happen if they buy entire recommended portfolios. It's more likely that readers would have chosen a few stocks from the 10. If so, there's a good chance they would have underperformed the market. Ouch.

There is a positive, though: The list was recommended to investors with a five- to 10-year horizon. Too often investors are given hype about stocks, with the claim that shares will surge and perform well in just the coming year. That's an unreasonable expectation, given that the market can be quite volatile and unpredictable in the short term, while generally moving upward over longer periods of time.

Lessons learned
This exercise reinforced some lessons I've learned as an investor. For starters, it's rarely a good idea to just pick stocks from lists of recommendations without doing your own research. This is particularly true for so-called technology firms -- it's likely you may not be able to understand what the company does and how strong its competitive position is, even after researching it. So, you might be better off steering clear.

After all, the recommended firms might sound compelling in a cover story, but a year or two later, some developments might tarnish that rosy prediction. As an investor, you'll want to understand what's going on and decide whether you should hang on or bail out.

With that said, all stock recommendations aren't bad. In fact, for me, they're often quite helpful. Just remember to factor in your own ideas when considering the advice of others.

Also, look for companies that are a good fit for you -- ones you can understand and would enjoy keeping up with, ones you can and will research further before investing any money. You'll even find stock recommendations (as well as mutual fund picks) among The Motley Fool newsletters: Mathew Emmert's Income Investor, Tom Gardner's Hidden Gems, Shannon Zimmerman's Champion Funds, and the Stock Advisor. Check out our free research reports, too.

What do you think?
Please share your thoughts on this article on our Fool News and Commentary board. We're offering a free trial of our discussion board community now, so give it a whirl.

Selena Maranjian produces the Fool's syndicated newspaper feature --check it out. She owns no shares of companies mentioned in this article. For more about Selena, viewher bioandher profile. She has co-writtenThe Motley Fool Money GuideandThe Motley Fool Investment Guide for Teens. The Motley Fool isFools writing for Fools.


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