We all say we invest to make money, so that we can retire earlier or buy that second home. But how true is that? How many of us invest, at least partly, because it's exciting?
That feeling of risk when we lay down hundreds or thousands of dollars can give us an extra spice in our lives.
The gamble
Until recently, I reserved a very small portion of my portfolio for risky ideas. But I recently seriously rethought that strategy. Here's why.
At the end of April, I used that risky allocation to buy some shares of Dendreon (Nasdaq: DNDN). The company had a new prostate cancer treatment, Provenge, that seemed to be a surefire winner. The market opportunity is big, and an FDA advisory panel had voted overwhelmingly to recommend its approval. If everything went according to plan, the FDA would approve the drug and the stock would skyrocket.
It was fun. Every time I thought about Dendreon, I got excited. This was going to be the easiest money of my life -- famous last words, I know.
A week before I expected any news, the FDA came out with a negative recommendation, and the stock was cut in half.
The painful lesson
People who study the psychology of investing tell us that the pain of a loss is felt twice as strongly as the pleasure of a gain. Let me tell you, the pain I felt from the way that investment turned out hurt.
Pain can be a powerful incentive to learn something, though. For me, the lesson was that investing should not be about the excitement -- even for a very small part of my portfolio.
The opposite of exciting is ...
As he wrote in One Up on Wall Street, master investor Peter Lynch loved to look for investing ideas in boring industries. Because they're not talked about and don't garner a lot of news coverage, they can become attractively priced.
So what other companies might qualify for that designation today?
How about baking soda? Everyone buys the stuff, but nobody talks about it. Church & Dwight (NYSE: CHD), maker of Arm & Hammer baking soda, has been an ideal investment. The stock has returned more than 20% annually for the past decade -- and its brand recognition and operating moat give it good prospects going forward.
Then there's BorgWarner (NYSE: BWA). Before this year's Indianapolis 500, had you ever heard of it? The company manufactures powertrain systems and applications, helping autos, trucks, and SUVs become more fuel-efficient. With last few years' emphasis on fuel efficiency, it's no surprise that the stock has returned nearly 30% annually since 2002 -- and it remains an active Motley Fool Stock Advisor recommendation.
Choice Hotels International (NYSE: CHH) also qualifies, with an unexciting business and name -- another plus, according to Lynch. For investors who believed that travel would once again increase after the huge 9/11-triggered downturn, this growing hotel company would have been a good investment, returning 32% annually for the past five years.
The bottom line is that we don't need to invest in the exciting company, name, industry, or stock of the day in order to get rich. Yes, it can happen, as those who invested in Oracle (Nasdaq: ORCL), Cisco Systems (Nasdaq: CSCO), and other tech stocks in the late 1990s found out. But if you don't keep an eye on the fundamentals, exciting buys can turn into gut-wrenching and money-losing experiences. Juniper Networks (Nasdaq: JNPR) in 2001, anyone?
Bank on better ideas
We need just two things to succeed as investors: good investment ideas and patience. All too often, we mistake good investment ideas for good stories. The two, however, are quite different. A good investment idea needs a good valuation in addition to a good story -- and that's why overlooked stocks in boring industries can be such big winners.
Of course, when stocks are overlooked, they can also languish. And that's when patience comes in handy.
Over at Motley Fool Stock Advisor, Fool co-founders Tom and David Gardner have seen success with many companies that meet Lynch's boring ideal. Through a combination of picking good, even boring, companies and patience (the expected holding time is at least three to five years), the brothers have managed to beat the S&P 500 index by a sound 39 percentage points in the five-plus years they've been making recommendations.
In fact, they just finished their semiannual review of all the picks, including BorgWarner, boring and otherwise. If you'd like, you can access those reviews today with a free trial. There's no obligation to subscribe.
Fool contributor Jim Mueller likes to gamble, but hopefully he's learned not to do it anymore in his portfolio. He does not own shares of any company mentioned. The Fool's disclosure policy doesn't gamble on your future.
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