To many investors or would-be investors, the stock market looks like a crapshoot. Each year, thousands of stocks go up, and thousands more go down, and there's no way to know for sure which will do which. It's enough to make some people just give up and buy lottery tickets.
To illustrate just how volatile the market can be, check out the rocky returns of the stocks below, many of which performed contrary to their CAPS score:
|
Company
|
CAPS Rating^
(out of 5)
|
2009 Return
|
Category
|
|
EMC (NYSE: EMC )
|
*****
|
67%
|
Highly rated, high performer
|
|
Tupperware (NYSE: TUP )
|
***
|
109%
|
Mediocre rating, high performer
|
|
Green Mountain Coffee Roasters (Nasdaq: GMCR )
|
*
|
216%
|
Poorly rated, high performer
|
|
RadioShack (NYSE: RSH )
|
*
|
65%
|
Poorly rated, high performer
|
|
Abraxis Bioscience (Nasdaq: ABII )
|
**
|
(39%)
|
Mediocre rating, poor performer
|
|
Huaneng Power (NYSE: HNP )
|
*****
|
(21%)
|
Highly rated, poor performer
|
|
Leap Wireless
|
**
|
(35%)
|
Poorly rated, poor performer
|
|
Hot Topic (Nasdaq: HOTT )
|
**
|
(32%)
|
Poorly rated, poor performer
|
Data: Motley Fool CAPS, Morningstar.^As of mid-2009.
While many stocks met the expectations of our CAPS community, one-star RadioShack gained 65% in a year, and Green Mountain Coffee Roasters, a Motley Fool Rule Breakers recommendation despite its rock-bottom rating, tripled in value!
Smoothing out the roller coaster
Several remedies can help you compensate for the market's ups and downs. If selecting individual stocks seems like a lost cause, just buy into a broad-market index fund. They're inexpensive and simple, and they'll immediately invest you in indexes as diverse as the S&P 500 or the entire U.S. stock market. In 2009, the S&P gained 26.5%, after a fall of 37% in 2008. Over many decades, it has averaged around 10% growth annually.
If you want to do better than that average, though, go for it. Remember that one year's performance for a stock isn't very telling. If you have high confidence in a company, it may well reward you, even if it takes a few years.
Market noise can do just about anything to a stock in the short run. Pundits can yell from their podiums, and investors can over- or underreact to the latest news. But over the long run, good value tends to win out.
If you've got a good feeling about a stock, and you've done the proper due diligence, don't be afraid to make a purchase. Whatever the market may think right this very minute, it could be the most lucrative investment you'll ever make.
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