Forget the Bold and New -- Go With the Tried and True

There is something about the first time -- the new experience -- that gets the heart beating and the juices flowing: It's impossible to relive the first solo ride on a bicycle, the first day of school, or the first date, and that's why new things are so exhilarating.

The same can be said for investing. Something new instills a sense of optimism and limitless potential. Getting in on Microsoft's IPO would have produced a 20,000% gain; Cisco Systems', a 50,000% gain; Intel's, a 15,000% gain if their shares were held to this day. That's Hollywood-starlet-attracting, Antibes-vacation-home-buying wealth.

But the odds are you won't get it. Sure, you could have bought eBay (Nasdaq: EBAY  ) , but you could just as easily have bought FreeMarket, U-Bid, or Onsale instead. Amazon.com? I'd bet there's more than one investor slapping his forehead, lamenting, "I can't believe I bought Webvan.com and Pets.com instead."

And even if you buy the right new company, there's the issue of getting the timing right as well. You bought 1,000 shares of JDS Uniphase at a split-adjusted price of $2.25 in late 1993. Did you sell JDS Uniphase at a split-adjusted price of $1,100 each in early 2000, or are you still holding it at $6.00 today?

Going old school
The fact is, new stuff, as titillating and hope-inspiring as it may be, has a difficult time gaining traction. Of the nearly 2,000 technology initial public offerings from 1980 through 2004, 5% account for more than 100% of the wealth created during that time frame, according to Stephen R. Waite's book Quantum Investing. In 2005, Benoit Mandelbrot and Nassim Nicholas Taleb noted that we live in a world of winner-take-all concentration that's difficult to crack: Half the capitalization of the stock market is in fewer than 100 companies.

And if a company gains traction, there's still no guarantee of success. In his book The Future for Investors: Why the Tried and True Triumph Over the Bold and the New, Jeremy Siegel explains why new investments are often doomed. Siegel explicates that earnings, sales, and market values of the new, successful firms grow faster than the older firms, but investors overpay for the superior performance. Siegel calls it the "growth trap" -- the tendency to overpay for shares in fast-growing companies, largely because they expect too much future growth.

Sticking with what's out there offers the better odds of creating wealth, just not the Powerball-hitting wealth of an early Microsoft or Cisco. That said, investing in established companies can still produce enviable wealth. In a 2005 Yahoo! Finance article, Siegel noted that from 1957 to 2005, Philip Morris (now Altria (NYSE: MO  ) ) yielded nearly 20% per year, outclassing the other 499 members of the venerable S&P 500 index by wide margins. If you'd put $1,000 in Philip Morris stock and reinvested dividends, you would have reaped $6 million, versus $140,000 in the S&P 500 today.

The tried-and-true grocery-store portfolio
I find the grocery store to be an excellent repository for Siegel's tried-and-true companies. Two decades ago, I saw a lot of Procter & Gamble (NYSE: PG  ) , Kraft (NYSE: KFT  ) , Kellogg (NYSE: K  ) , PepsiCo (NYSE: PEP  ) , and Heinz (NYSE: HNZ  ) populating the aisles. On my last visit to the grocery store, I saw a lot of Procter & Gamble, Kraft, Kellogg, PepsiCo, and Heinz populating the isles. And like Philip Morris/Altria, many of these companies offer a dependable source of EPS and dividend growth.

 

EPS 1999

EPS 2008

Increase

Dividends 1999

Dividends 2008

Increase

Procter & Gamble

$1.30

$3.64

180.00%

$0.57

$1.45

154.39%

Kraft

$1.21

$1.23

1.65%

N/A

$1.12

N/M

Kellogg

$0.83

$2.98

259.04%

$0.96

$1.30

35.42%

PepsiCo

$1.37

$3.21

134.31%

$0.53

$1.65

211.32%

Heinz

$1.29

$2.63

103.88%

$1.34

$1.52

13.43%

Source: Standard & Poor's. N/A = not available. N/M = not meaningful.

A "grocery-store portfolio" won't get you to Antibes anytime soon or persuade Hollywood eye candy to drape your arm, but then again, neither will most new issues that hit market.

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Fool contributor Stephen Mauzy, CFA, does not hold positions in any of the stocks mentioned above. The Fool owns shares of P&G. P&G, PepsiCo, and Heinz are Motley Fool Income Investor recommendations. Microsoft, eBay, and Intel are Inside Value picks. eBay and Amazon are Stock Advisor recommendations. The Fool's disclosure policy regulates all Fool commentaries.


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  • Report this Comment On August 06, 2009, at 2:54 PM, plange01 wrote:

    ebay is a great buy at these prices...

  • Report this Comment On August 06, 2009, at 3:01 PM, portefeuille wrote:

    In a 2005 Yahoo! Finance article, Siegel noted that from 1957 to 2005, Philip Morris (now Altria (NYSE: MO)) yielded nearly 20% per year, outclassing the other 499 members of the venerable S&P 500 index by wide margins. If you'd put $1,000 in Philip Morris stock and reinvested dividends, you would have reaped $6 million, versus $140,000 in the S&P 500 today.

    ----------------

    could you just stop writing stuff like this.

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