Should You Quit Buying Stocks?

More than 2 million people saw Jon Stewart clobber CNBC's Jim Cramer during a recent episode of The Daily Show.

Stewart the comedian became Stewart the commentator -- and he sounded a lot like former presidential candidate John Edwards talking about "two Americas," one for the rich and one for the poor. Stewart said:

One [market] has been sold to us as long-term. Put your money in 401(k)s. Put your money in pensions and just leave it there. Don't worry about it. It's all doing fine. Then, there's this other market -- this real market that is occurring in the back room, where giant piles of money are going in and out and people are trading them, and it's transactional and it's fast. But it's dangerous, it's ethically dubious, and it hurts that long-term market.

Stewart and his righteous outrage were speaking for a lot of people that night. Not only have most of us lost money in the market recently, but also nearly every day brings new tales of outright deception, monetary malfeasance, and just plain unethical behavior.

It's enough to make you wonder whether you should just get out.

How about an Ethics 101 course?
And Cramer is better than most. At least the guy admits he's bent (but not broken, he says) the rules for personal gain. Many of the Wall Street players at the heart of this mess still want to claim a measure of innocence.

Ethics have never seemed to matter on the Street, and, apparently, they still don't. Witness AIG (NYSE: AIG  ) . Only in the alternative universe that we call high finance could incompetence be rewarded with $450 million in bonuses.

Stupid really is as stupid does
Mind-numbing stupidity really does appear to be the coin of the realm when it comes to banking, brokering, and regulating. Consider the FDIC. Created to protect depositors after earlier meltdowns, we're now learning that the agency failed to collect premiums from JPMorgan Chase (NYSE: JPM  ) and its peers for a decade.

So Stewart is right to at least question the fairness of the financial system as we know it. But is there really a stock market for those "in the know" and another for the suckers who aren't?

Ignorance is, in fact, bliss
Only the insiders can say for sure, but history paints a reassuring picture for those of us not "in the know" -- at least if you're committed to long-term investing:

Year

Index Return

Market Beaters*

Winners As a % of All Stocks

2008

(38.49%)

1,501

43.2%

2007

3.53%

1,223

36.2%

2006

13.62%

1,417

46.9%

2005

3.51%

1,340

47.2%

2004

9.13%

1,347

53.9%

2003

26.10%

1,107

57.7%

2002

(23.75%)

1,225

61.5%

2001

(12.36%)

1,175

64.1%

Source: Capital IQ, a division of Standard & Poor's.
* Includes only stocks that trade on major U.S. exchanges and began the year worth at least $250 million in market cap.

Notice the pattern. In most years, those who held individual stocks saw an average of 40% of their picks beat the market. In two of the three worst years, six out of 10 were market-beaters.

Sometimes, the gains during down years were huge. Amylin Pharmaceuticals (Nasdaq: AMLN  ) rose nearly 80% in 2002. Southern Copper (NYSE: PCU  ) tripled in 2003. And in 2005, Titanium Metals (NYSE: TIE  ) quintupled. You needn't have been an insider to get those gains. You needed only to be brave enough to buy, and then hold.

There are risks to buying and holding, of course. Take graphics-chip maker NVIDIA (Nasdaq: NVDA  ) . Had you bought at the dawn of 2001 and held till today, you'd have a double. But you'd have tripled your money had you sold after one year.

Either way, though, you'd have won. The market, on the other hand, has lost more than 30% of its value over the past eight years.

Kick the market when it's down
The lesson? The way to beat a broken market -- the one that Stewart so viscerally fears -- is still to bet on the best businesses over the very long term -- businesses that resemble the best stock idea I've ever seen. These are companies that:

  • Produce abundant free cash flow.
  • Sustain high rates of revenue growth.
  • Demonstrate sustainable advantages by way of expanding gross margin.

Apple (Nasdaq: AAPL  ) is a good example. That's why David Gardner has made the Mac maker one of his signature recommendations for Motley Fool Stock Advisor. Combined, his picks, along with those from his brother and Motley Fool co-founder Tom, are outperforming the market by more than 30 percentage points.

Care to learn more? Click here to join Stock Advisor free for 30 days. You'll get access to all of David's and Tom's picks, special reports, and custom stock research. And as with all of our services, there's never an obligation to subscribe.

Fool contributor Tim Beyers had stock and options positions in Apple at the time of publication. He's also a member of the Rule Breakers growth stock picking team. Apple, NVIDIA, and Titanium Metals are Motley Fool Stock Advisor selections. The Motley Fool's disclosure policy won't quit on your portfolio.


Read/Post Comments (8) | Recommend This Article (28)

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 March 28, 2009, at 8:44 AM, SteveTheInvestor wrote:

    Frankly, we need a little less emphasis on returns relative to the market. Basically, the market sucks (seems the best word for now). You're simply saying that your portfolios suck less. No matter how you slice it, the portfolios suck. Investing is about making money, not sucking less than the market.

    If you want to compare returns to some index, fine. To add some realism though, I think you need to include real returns along with it.

    My portfolio beat the index by 35% in 2008, but I'm still down, and that's what really matters.

  • Report this Comment On March 28, 2009, at 1:22 PM, marketsdown wrote:

    My portfolio is down 51%, as of today, and the market was up this week! I’ve held blue-chip stocks,for the most part, so what does that tell you?

    People used to ask me how I made such good returns, and I actually offered them advice! The smart ones listened, and kept their money more fluid. So now they still have 90-100% of their wealth, and I have lost in the seven figures. I’m shell-shocked and don’t know if I’ll ever trust the market again.

  • Report this Comment On March 28, 2009, at 3:57 PM, stockcharm wrote:

    The market has been down for the past few years and if

    warren is down over 25 bil. there must be somethng very wrong with the market.

    Two stocks I see on the rise one is research in motion

    and the other is apple.

    However I would not buy apple when fool recommends it 90% of the time they recommend a stock it goes way down for example kbh orl sold and praa etc

  • Report this Comment On March 28, 2009, at 4:34 PM, kamuirei wrote:

    Statistics....................

    So... what you're telling me is that about half the market beats the market average... and about half the market loses to the market. *trumpets*

    But because the market is not equally weighted, when a few big companies take a dive, most of the rest of the market does better than the market (which is weighted towards the aforementioned companies).

    What we have here is a loss of common sense and reliance on statistics to tell us the obvious. That's about as useful as telling me that half of the stocks in the market beat the median and half lose.

    Common Sense...........................

    Now, I don't claim to be a genius, I'm down 35% in real money (in my equities - my short term money is wisely in cash or bonds and up slightly). But I do have common sense. Common sense says that at 24, the stock market being cut in half and housing plummeting is... shaweet! It's not time to stop buying stocks, if you have the spare cash and don't need it for 5 years,buy them. Good companies make money with your money over time, simple enough.

    My common sense also informs me that the fool used to be beating the market by 60 some odd percent... now they're only beating it by 30... I'll leave you to connect the dots.

    It's sad when a comedian with Common sense can do a better job than Wall Street.

    Ethics.........................

    As for ethics, a few years back I had a friend in a business ethics course (major state university) that had 1/4 of the class fail for cheating. They ain't learnin it in scool! (typos intentional)

    Drumroll.......................

    My point is this: The fool is as much to blame as anyone else, it was heralding stocks at the top of the market, and all the way down. Stop playing the blame game, stop trying to stir people up, it does no good. Take a page from Stewart's book and stop doing the comedy, get serious, do some research. Or, in Bogle's words (and a decent book - skip to the section on life) Enough.

  • Report this Comment On March 28, 2009, at 10:49 PM, TaurusTrader wrote:

    In my opinion, it is always a stock picker's market. You spend time doing research, pick right stock/s at the right time, and sell at the right time to lock in profits ... you always win handily over index investors.

    TaurusTrader

    http://www.taurustrader.wordpress.com

  • Report this Comment On March 29, 2009, at 7:04 AM, ET114 wrote:

    There is serious doubt, the "stock market" will return to the notion that companies new, old, big or small will be based on company value, assets, profit, goals, mission, etc. Notice the term market capitalization has suddenly vanished from the scene; it was a Wall Street made-up term for glitz and hype, without value... Traders "trade"... they are in it to make money, regardless, short sell, profit taking, etc... which ever way the wind blows... So, net, net buy ETFs, index funds, etc... I own Ford, and the rest are ETFs...

  • Report this Comment On March 31, 2009, at 12:01 AM, trenton1ryan wrote:

    <You spend time doing research, pick right stock/s at the right time, and sell at the right time to lock in profits ... >

    Wise words my friend. The market is energy. It never dies, it merely changes forms. But energy shifts and moves, and you must move with it or leave your $ behind.

    The question now is (provided you have any $ to invest at this point), where is the energy concentrated(ing)?? Think about what's happening right here in the US. A couple of obvious answers from some simple deduction should aid anyone who is still interested in investing.

    gla

  • Report this Comment On March 31, 2009, at 12:49 PM, paducah5102 wrote:

    See what I mean? No useful information, really, but another "opportunity" to subscribe to Stock Advisor, which I already have. You guys are losing your creds.

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