Lazy Beats the Street

Lean back and put your feet up
I've said this before, and I'll say it again. I'm a lazy, lazy man.

I don't like to work any more than I have to in order to keep my wife happy and keep the dog up to his eyeballs in kibbles and bits. But to me, laziness can be a virtue. To me, it's all about strategic sloth, harnessing your inner couch potato in order to manage your finances simply and effectively.

One of my original "habits of highly effective layabouts" is keeping expenses under control by converting everything into work units. Look at any purchase -- cheeseburger, iPod, minivan -- not in terms of dollars, but in terms of the time you need to spend to earn those dollars. Does that hot leather handbag really seem worth an entire week's work? Is that beautiful Bourget chopper worth two years of cover sheets and TPS reports?

Bring your sloth to the Street
A while back, I also suggested applying some strategic sloth to your stock picking. I was trying to find businesses that required very little babysitting, but better yet, had the potential to beat the market, not in spite of, but because of those same characteristics.

Briefly put, I figure opportunity is in Wall Street's madness. As the rest of the Wise flit from next big thing to next big thing, trying to zig when the other guys are zagging, I thought we could do better by concentrating on solid, dependable business leaders that didn't require daily checkups or keep you up at night. The same characteristics that made these investments easy on the stomach should, I thought, make them superior performers over the long term.

Could such a naive strategy possibly be profitable?

So far, the answer is yes. The Lazy 6 portfolio is up 24.4%, versus a 10% rise in the S&P 500 in the year and five months since I put it together. (That's right, I'm so lazy, I forgot the one-year checkup.)

6 rules for the lazy stock
In putting together the original six, I set a few guidelines:

1. Keep it simple. Ideally, the business should do only one or two things. Simplicity makes it far less likely that we will miss something important when we read the financial filings. What? Read through the filings? Sorry to burst your bubble, but you will have to keep on top of company performance. Remember, we are practicing the art of strategic sloth.

2. Beware the business cycle. We do not want to have to worry about cyclical industries or macroeconomic conditions. Not only is this a tough job, it takes a lot of work.

3. Invest in leaders. It is easier to assess the competition from the front of the pack than from the middle. Leaders are better able to beat on their competition when the need arises, and the game is theirs to lose. Look at it like betting on a basketball game during the third quarter when you already know the score. If one team is up by 22, you know where to place your chips.

4. Seek honest, minimalist management. Look for companies run by a team that explains things clearly and briefly. If management can't explain the business in plain English, move on to another firm. If you see phrases like "creating knowledge-based value in emerging markets" (an Enron special), someone is trying to pull the wool over your eyes, you lazy Fool. Run.

5. Forget the chart watching. We do not follow technical trends, nor do we trade. I don't know about you, but I always assume there's somebody out there who's smarter, or at least sleazier, than I am, and that's the slickster who's going to get the better end of a trade. Turn off the streamer and enjoy life.

6. Don't overdiversify. Lots o' stocks means lots o' work. Warren Buffett had his famous 20-punch card. His point was that there aren't too many really great investment ideas. He may be right about that. But even if he's not, and there are more ideas than we think, the lazy stock picker must ask herself, "How many investment ideas can I find?" and "How many stocks can I track?"

The class of 2004
Here's the original crew: Avon Products (NYSE: AVP  ) , FARO Technologies (Nasdaq: FARO  ) , Reebok (NYSE: RBK  ) , Starbucks (Nasdaq: SBUX  ) , SanDisk (Nasdaq: SNDK  ) , and World Wrestling Entertainment (NYSE: WWE  ) . I tracked these assuming a $2,000 investment in each (or as close as I could get without fractional shares), plus an $11 commission, beginning May 13, 2004, and ending at yesterday's close. All values are split-adjusted and assume a tax-free account, and the totals include dividends. The S&P return is computed from an equivalent purchase of SPDRs.

Company

Paid

Recent Price

Position Value

Gain (Loss)

Avon

$40.85

$26.54

$1,291.64

($721.01)

(35.8%)

FARO

$23.30

$18.34

$1,556.60

($458.20)

(22.7%)

Reebok

$34.20

$57.45

$3,333.26

$1,338.66

+67.1%

Starbucks

$37.85

$50.72

$2,721.55

$704.50

+34.9%

SanDisk

$24.68

$48.06

$3,924.45

$1,914.37

+95.2%

WWE

$12.08

$12.41

$2,060.06

$43.78

+2.2%

$14,887.56

$2,822.10

+24.4%*

S&P 500 return:

+10%*

Lazy Payoff:

+14.4 points



*Percentage gains in the totals include dividend income.

The triumph of torpor
So far, lazy doesn't just beat the Street. Lazy beats my better brain as well. How's that for sad? For all the extra work I've done trying to dig up bigger stock bargains for my real portfolio, my slim, languid 'n' lazy experiment has done better. As you can see, despite a couple of pretty hearty kicks in the backside from FARO and Avon, stalwarts like Starbucks, Reebok, and SanDisk more than made up the difference.

Admittedly, we're talking about a very short time period here, but if we can draw any conclusions at all, I'd say the preliminary takeaways are these: First, it may not pay to overthink. Next, though it may make us feel like a superstar to dig up that underloved small cap or future-tech wonder that no one's ever heard of, it may not be necessary to beat the market.

Foolish bottom line
There's no shame in buying an obvious business, even (gasp!) something that always looks pricey, such as Starbucks. Winning enterprises like these can continue to whip the market for years. In fact, betting on companies like these is how my colleagues, Fool co-founders Tom and David Gardner, have racked up years worth of market-beating results with Motley Fool Stock Advisor. (In fact, Reebok is among their picks. And if you really want to cut back on your investing homework, you can take a free trial that gives you access to their latest as well as past winners.)

As for the lazy six, in the coming weeks I'll be giving it a long-overdue checkup, and probably expanding it to add a few more stocks to the mix. For the record, as of today, I'm officially "selling" Reebok from the portfolio and replacing it with Nike (NYSE: NKE  ) . We'll get into the why when we check in again.

For related Foolishness:

Seth Jayson finds beer and video games to be a boon in overthought avoision. At the time of publication, he owned shares of FARO Technologies and SanDisk. View his stock holdings and Fool profile here. Reebok is a Motley Fool Stock Advisorpick. FARO is aMotley Fool Hidden Gemspick. Fool rules are here.


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