Ready for a stock market horror story?
Early in 2005, I came across a stock with some unbelievable numbers. Revenue was up nearly 40% per year for the past three years. Income had grown 50% over that same time. Return on equity was a robust 27%, and net margins were close to 70%. And it was a major player in the strengthening housing market. Its name? Doral Financial
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 service -- could give the hedge-fund crowd a run for their collective money.
Hidden risks
No, I didn't buy Doral. And I'm glad I didn't, considering the company has dropped nearly 95% since that time because of some aggressive valuations (since restated) on its mortgage-backed securities and management infighting that a cursory browse on Yahoo! Finance wouldn't have revealed beforehand. But I'm not really here to criticize Doral; it could still rebound.
Regardless of the stock, 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 video game makers like Electronic Arts
The "Are you kidding me?" formula
Years ago, I read a book about theories underlying accounting and financial statements. There were plenty of pages 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 numerous 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 of these can burn you.
Having time troubles with your investing?
If so, then the best investment you can make is one 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 -- given for each selection. To date, David and Tom's picks are beating the market by nearly 39 percentage points. Hands-on or hands-off, it's your choice.
Take a few moments to think about how time has affected your investing. If the answer is "negatively," work 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.
This article was originally published Feb. 23, 2005. It has been updated.
James Early does not own any of the stocks discussed in this article. Electronic Arts is a Stock Advisor recommendation. Doral Financial is a former Inside Value pick. The Motley Fool has a disclosure policy.
