This Business Legend Isn't Buying Stocks

While I'm no business legend, my job has certainly allowed me to meet a few.

Among them: Whole Foods (Nasdaq: WFMI  ) founder John Mackey, Intel (Nasdaq: INTC  ) CFO Stacy Smith, former Apple evangelist Guy Kawasaki, and larger-than-life (literally) venture capitalist Bill Gurley.

My most interesting meeting?
Well, that would probably have to be with a Silicon Valley legend whose name you may not instantly recognize -- but whose work you certainly will. (I'll spill the beans in just a minute).

However, it wasn't what this guy does that interested me so much as what he had to say about investing. In fact, going into the meeting, I was most looking forward to finding out what was in his portfolio – and why.

So imagine my surprise when he said he firmly believes that most people -- himself included -- simply can't beat the market with individual stocks.

The ultimate case for index funds?
Granted, he had some well-thought out reasons for swearing off stocks – including a severe distrust of the management behind many of them. Given the debacles we've seen at companies like AIG (NYSE: AIG  ) , Fannie Mae (NYSE: FNM  ) , and CIT Group (NYSE: CIT  ) it's not hard to see why he feels this way.

Nonetheless, as a Fool, his belief was a bit hard to stomach. After all, back in 1996, Motley Fool co-founders David and Tom Gardner went on record with their belief that individuals can beat the market by looking for stocks that ...

  • Are underfollowed on Wall Street.
  • Have a net profit margin of at least 10%.
  • Have earnings and sales growth greater than 25%.
  • Have insider holdings of 15% or more.

So far, so good
Early on, this approach led them to monster gains in then-little-known companies like America Online (which landed them on the cover of Fortune). And since launching their Motley Fool Stock Advisor service in March 2002, it has led them to stocks that are beating the market by more than 51 percentage points on average.

Of course, this doesn't do you much good unless you know what they're recommending now. So, in the spirit of Foolishness, I'm going to give you the details on one of their "best buys now" just for hearing me out.

A stock you've probably never heard of
Unless you work in the wireless communications industry, chances are you're not familiar with InterDigital Communications. That's because unlike Research In Motion (Nasdaq: RIMM  ) , Sony, or Verizon (NYSE: VZ  ) this company doesn't manufacture cell phones or provide wireless service.

Instead, its researchers and engineers develop and patent wireless technologies that it then licenses to these household names for a very tidy profit. In fact, InterDigital has managed to amass more than $500 million in cash – yet its current market cap is just more than twice that.

Why now is the time to get in
David Gardner recommended InterDigital for a couple of reasons. First, the intellectual property business is a great one -- revenues tend to be recurring, and they come without any direct cost to the company.

Profits more than tripled last quarter. Furthermore, this blistering growth should continue for some time as more and more people begin using 3G wireless technologies.

Who won't be buying
Given his aversion to individual stocks, I think it's safe to say that Dilbert creator Scott Adams -- the Silicon Valley legend I mentioned earlier -- won't be investing in this one. But frankly, I think he's missing out on a golden opportunity.

Of course, I wouldn't want you to invest based solely on what you've read here, so I'd like to invite you take a free 30-day trial of Stock Advisor – which will give you access to full research write-ups of InterDigital and every other stock David and Tom Gardner are recommending – including their two top picks for new money.

You'll also have full run of the members-only website – including discussion boards where you can swap investment ideas with other like-minded investors and the Stock Advisor team.

Stick with us if you like it, pay nothing if you don't. To learn more, click here.

Austin Edwards owns shares of Applewhich along with Whole Foods and InterDigital Communications are Stock Advisor picks. Intel is an Inside Value pick. Motley Fool Options recommended buying calls on Intel. The Motley Fool is investors writing for investors and has a disclosure policy.


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  • Report this Comment On January 11, 2010, at 8:21 PM, guru111melbourne wrote:

    What are their barriors to entry, what is stopping another bright engineering company from taking their market. If anyone knows I am very much interested without taking the time to read the reports.

    Thanks!

    Sam

  • Report this Comment On January 11, 2010, at 9:28 PM, SteveTheInvestor wrote:

    johnis9:

    Care to tell us where your shortened url leads to? I don't click on hidden URL's. Especially not when posted by someone who has only been a Fool member for a month. Nothing personal..... just way too many bad guys out there to take a chance like that.

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