The whole idea of getting your financial house in order, which this month's Financial Literacy series is helping you accomplish, is to help you save more and eventually invest what you save. At the Fool, we believe that investing will help you grow your wealth, rather than destroy it.
So far, we've given you lessons on:
Now that you're on the road to having more money, today marks a turning point in what we'll discuss. Beginning with this article, we'll start looking at what to do with that money, and how you can begin investing it to grow it into wealth for the future -- be it retirement, college, or the occasional swank vacation. In this episode of The 10 Essential Money Lessons, we give you a resource to start discovering some companies that might be worthy of your hard-earned (and now saved) investing dollars.
Not a crowd of lemmings
Have you ever heard of the wisdom of crowds? This is the phenomenon that occurs when a large group of people make unrelated guesses about the value of something, and the average of the guesses is remarkably close to the real answer. How many marbles in that large jar? How much does that steer weigh? (Maybe you've seen that one if you've ever been to a county fair.) And, for Motley Fool CAPS, is a given company worth investing in?
The key to this is the "unrelated" part of the wisdom of crowds. In CAPS, people are making their own outperform or underperform calls for many different stocks, indicating whether a given company's stock will beat or lag the broader market. The more outperform calls there are, the higher the rating of "stars" (one through five) the company receives. But then we give it a bit of a twist: Instead of weighting all the guesses equally, we give more weight to the guesses of those who have a history of being correct -- the top 20% of CAPS members, who we call our "All-Stars."
It works, baby!
And the results turn out to be remarkably accurate.
In CAPS' first couple of years, right up to about the time the markets went kablooie last September, the performance of the companies compared to the S&P 500 tracked with their star rating. Five-star stocks outperformed very well; four-star stocks outperformed fairly well; two- and one-star companies underperformed, with one-star stocks being worse; and three star stocks tended to track or match the market. When the markets imploded, things went kind of sour, but since then, we've seen a reestablishment of that trend -- performance compared to the market tracks with the star ratings.
Of course, as with all statistical measures, this tendency applies to groups of companies, not the individuals within the group. Saying that Johnson & Johnson (NYSE: JNJ ) or ExxonMobil (NYSE: XOM ) must outperform because they are five- and four-star companies, respectively, is a mistake. Rather, those star ratings indicate that the chances of them outperforming are probably higher than for companies that are rated lower. Similarly, a low rating on a company like Starbucks (Nasdaq: SBUX ) or Ford (NYSE: F ) doesn't guarantee underperformance, while a mediocre three-star rating for Apple (Nasdaq: AAPL ) doesn't mean it can't or won't beat the market going forward.
Star ratings are just the beginning
Looking through the ratings and seeing which companies are rated the highest will give you a good starting place to think about investing. But the question remains: Why should you invest in, for example, NYSE Euronext (NYSE: NYX ) or International Coal (NYSE: ICO ) ? What about these companies, besides their five-star rating, would justify your dollars?
Well, not only do we provide the usual data -- like P/E, historical price charts, and various statistics like payout ratio, dividend yield, or book value -- but we also give you:
- A history of the company's own star rating so you can see if it has moved up, indicating growing favorable sentiment.
- A sortable list of all outperform or underperform calls made on the company.
- All the pitches different CAPS members have written about the company, ranging from simple ones like "earnings are growing" to multi-page, in-depth looks.
The numbers, please
I could write a lot more about CAPS. After all, I'm the Fool editor overseeing online published articles related to CAPS. But instead, I'll leave you with some numbers showing the depth of information available at this amazing resource. As of this moment, we have:
- 3,214,720 stock recommendations, made by
- 132,886 individuals,
- 66,470 of whom have at least seven active calls on
- 5,270 stocks, and have written
- 570,002 stock pitches (for or against a company), along with
- 34,460 blog posts about anything from individual companies to a philosophy of investing to the latest news, which in turn were responded to
- 42,301 times through blog comments.
If you haven't already looked into this free resource for investing ideas, I hope you'll become No. 132,887.
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