Months ago, I came across a stock with some unbelievable numbers. Sales were up fivefold since 2003. Income had quintupled since 2004. Return on equity was a nice 16%, and net margins were close to 20%. And it was a player in the growing personal wireless device market. Its name? Research In Motion (Nasdaq: RIMM ) .
Based on what I knew -- which wasn't much -- I gave it a lot of consideration, but did I pull the trigger? First let me say that even thinking about making an investment without weeks of research is alien to me. I come from a value-focused hedge fund. We had all day to analyze stocks, and we used it, often burning the midnight oil. Hedge funds have a reputation as the gunslingers of the market, but I assure you mine was anything but. We held just a handful of stocks, and we knew them cold. But staying abreast of them -- and finding new ones -- took a lot of time. That kind of thoroughness is what The Motley Fool is all about. When it comes to burning the midnight oil, David and Tom Gardner -- Motley Fool co-founders and lead analysts of the Motley Fool Stock Advisor newsletter -- could give the hedge-fund crowd a run for their collective money.
No, I didn't buy Research In Motion. And I'm glad I didn't, considering the company has dropped nearly 20% since September because of increasing competition and some threats to its BlackBerry patent that a cursory browse on Yahoo! Finance wouldn't have revealed beforehand. But I'm not really here to criticize RIM; it could still make for a fine long-term investment -- although I'd keep an eye on the competition going forward, particularly with Microsoft (Nasdaq: MSFT ) and Nokia (NYSE: NOK ) recently announcing plans to partner up.
Regardless, risk exists, and with any investment it's important to know what you're betting on. No screen or quick peekaboo would clue you in to the fact that firms as diverse as Coca-Cola and Navistar have some asbestos liability risk. You wouldn't have found out in a jiffy that a former Patterson-UTI (Nasdaq: PTEN ) officer allegedly embezzled $70 million from the company. Or that insiders at Endwave (Nasdaq: ENWV ) and Coldwater Creek (Nasdaq: CWTR ) have been doing an awful lot of selling of late. Or that companies selling internationally, such as Hewlett-Packard (NYSE: HPQ ) and Abbott Laboratories, have taken earnings hits because of the costs of repatriating cash. Granted, these risks may all be on the obvious side, but have you ever been burned because you missed a material piece of information?
Having the time to do some diligent digging is crucial in avoiding potential blowups.
The "Are you kidding me?" formula
There's more. Years ago, I read a book about theories underlying accounting and financial statements. It spent a lot of time on a common solvency formula: earnings available to pay fixed charges divided by those fixed charges. Via several chapters of buildup, it replaced the simple version with a "corrected" formula that made several tweaks to the numerator and denominator. Was it right? Yes -- it eliminated a lot of flaws in the raw accounting numbers. But that accuracy came at the expense of a formula so complex that individual investors would need days to calculate it.
Lack of time tends to pull investors in one of two ways. The first: making futile grasps in a blizzard of information overload. The second: tunnel vision toward stocks you've already researched. Either one can burn you.
Having time troubles with your investing?
Then the best investment you can make is an investment in your time management. And I've got ideas for you. The first is simple: Develop screens and hone your criteria for investments. With 10,000 stocks and a day job, you absolutely have to develop efficient methods for cutting to the ones you're likely to bite on. Second, spread the load among trusted compatriots. Start an investing club with like-minded investor friends.
If you're still pressed for time, consider a free trial to Motley Fool Stock Advisor. The harried will like that two stock recommendations come floating their way every month, while the detail-oriented will appreciate the investment theses, complete with counterpoints, provided behind each selection. To date, David and Tom's picks are beating the market by more than 40 percentage points. Hands-on or hands-off, it's your choice. And you're never far from an investing club of sorts, since Stock Advisor membership comes with access to exclusive discussion boards, where members can share thoughts, insights, and questions without the plague of profane and inane comments typical of boards elsewhere.
Even if you don't sign up for the newsletter, take a few moments to think about how time has affected your investing. If the answer is "negatively," consider taking some sort of action to get a better handle on your future. Investing is a critically important task -- one that shouldn't get neglected as often as it does.
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This article was originally published on Feb. 23, 2005. It has been updated.
James Early does not own any of the stocks discussed in this article. Coca-Cola and Microsoft are Motley Fool Inside Value recommendations. The Motley Fool has adisclosure policy.