Time to Invest

In the middle of 2006, I came across a stock with some unbelievable numbers. Revenue was up more than 80% per year for the past three years. Income had grown 95% over the same time. Return on equity was a robust 47%, and net margins were close to 42%. Plus, it was a player in the growing student loan market. Its name? First Marblehead (NYSE: FMD  ) .

Based on what I knew -- which wasn't much -- I gave First Marblehead 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 keeping track 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.

Hidden risks
No, I didn't buy First Marblehead. And I'm glad I didn't, considering the recent credit fears that have spooked investors, and the specter of defaults that has slashed the stock by more than 90%. But I'm not really here to criticize First Marblehead; it suffered from some events outside of its control, and several of my colleagues continue to monitor its long-term prospects.

Regardless, risk exists, and with any investment, it's important to know what you're betting on. No screen or quick peekaboo would warn you of the effect the credit markets would have on First Marblehead, or the significant exposure Merrill Lynch (NYSE: MER  ) , Citigroup (NYSE: C  ) , and Morgan Stanley (NYSE: MS  ) would have to subprime loans. Then you have companies such as Bed Bath & Beyond (Nasdaq: BBBY  ) and Blue Coat Systems (Nasdaq: BCSI  ) , which had to take charges recently because of options backdating.

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 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 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. Let's face it, either one can burn you.

Having time troubles with your investing?
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 like. 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 of 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 39 percentage points. 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.

Claiming your free 30-day trial subscription to Stock Advisor won't take long at all. Simply click here.

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. The Motley Fool owns shares of Bed Bath & Beyond. First Marblehead is a Motley Fool Inside Value recommendation. Bed Bath & Beyond is an Inside Value and Stock Advisor pick. The Motley Fool has a disclosure policy with regard to such interests.


Read/Post Comments (1) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 04, 2008, at 11:14 AM, bluedome wrote:

    This is revisionist history. FMD's meltdown began when the consumer payments on the loans in its loan packages did not match FMD's predictions based on the historical database of loan results which it used to price packages of loans. Fitch downgraded the packages (tranches), which put FMD's guarantor in jeapardy. All of this happened months before the meltdown, was entirely FMD's fault, and had nothing to do with the credit markets. MF never mentioned these downgrades in its updates on this recommmendation.

    I find it ironic that it's now being used as an example of how thorough MF's research is.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 688416, ~/Articles/ArticleHandler.aspx, 9/1/2014 3:53:44 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement