Did the Rally Leave You Behind?

Is there anything worse than watching the market surge ahead while the stocks you own seem to be moving in the opposite direction? Even though the broad index has gained 65% in 2009, I guarantee there are many of us waiting on the sidelines, wondering when or how the heck to get back in.

Throw this philosophy in the trash
A few weeks ago, a good friend was bragging to me about the recent money he had made in the market. Last year, a colleague of his had suggested he buy shares of Aircastle (NYSE: AYR), so he did -- even though he knew nothing about the company. He passed the recommendation on to me, but uninformed about commercial cargo leasing and uninterested in speculating, I turned down the advice.

Well, Aircastle netted a 264% return last year -- and to be honest, I wish I had done more due diligence. Today the company trades at 11 times forward earnings and should grow by about 25% over the next five years -- a pretty good-looking stock on the surface, though I certainly wish I'd looked into it before the big run-up.

Regardless, the experience my friend had is the worst you can possibly have as an investor -- it taught him to make a bet on a company he didn't understand. Now it's a lesson that I can't possibly undue, because he's already looking to the rumor mill for the next great stock.

Ignore the short term
What I tried to tell my friend was that despite his earnings, he was too concerned with the short term. He got in at exactly the right time with hardly any analysis -- basically, he got lucky! However, it's hard to tell someone to ignore the short term when they just made a pile of cash.

But I do want to illustrate to the thousands of Motley Fool Stock Advisor readers to beware of something called "short-termism" -- an unhealthy focus on short-term results while ignoring long-run fundamentals. The last year has seen a tremendous rally, and some of you may have shot upward with it, and some may not have. If you feel like the rally left you behind, trust me, it has not. In the whole scheme of investing, a year is a drop in the bucket -- at the very least, you should be looking at five-year returns to evaluate any sort of financial success.

For example, take a look at three stocks that saw some of last year's biggest gains:

Granted, shareholders of Dollar Thrifty had reason to be happy when it seemed as though the company was going to avoid imminent bankruptcy. But today, it's sporting an outrageous debt-to-equity ratio of 463%. Earnings are lower than they were five years ago and aren't expected to return to 2005 levels for another few years, and it's trading at 23 times earnings. Doesn't exactly sound like a great investment today.

Select Comfort saw shares surge by 20% when the company reported positive earnings, but now the stock is trading for 22 times forward earnings -- a pretty steep price for a company that's only supposed to grow 9% annually over the next five years.

Credit card issuers face some major challenges these days as legislation will make it more and more difficult to raise rates. Capital One saw a nice boost in the last year, but its immediate future holds some significant barriers as issuers will have to adjust to more stringent fee restrictions.

Think about the quality of these stocks, then compare them to the gains of the following three stocks:

What's left to say about McDonald's that you don't already know? Great brand, global presence, stable company. McDonald's has that perfect combination of growth and income; over the past 30 years, it's doubled the return of the S&P 500, and it also sports a nice dividend yield of 3.1%.

Activision Blizzard is arguably one of the world's biggest publishers of video games and has a hoard of franchise products like Warcraft and Call of Duty. It has the best operating margins in the business and continues to pump out great hits, and over the past 10 years, it's had an annualized return of 36%! Oh, and did I mention it also has a 1.4% dividend yield?

Last but not least is Altria Group. Socially responsible investors, cover your eyes -- because there's really only great things to say about this stock. It pays out 6.7% to investors in the form of a dividend, it is as recessionary-proof a stock as there is, and it's also beaten the market in the last 5, 10, 20, and 30-year time periods.

Focus on the long-run
Sure, it's certainly interesting that many of the lesser known stocks have seen enormous gains over the last year. But when we look at proper data in the proper context, it becomes all too clear who the real winners are.

The first group of stocks contains only one company that has beaten the S&P over the past five years; in fact, each has had negative five year annualized gains. On the contrary, every stock in the second group has totally walloped the S&P 500.

If you think the rally has left you behind, think again. These figures just go to show that the market can be highly irrational in the short term. Wild swings can make stocks go sky-high, but they can also push them drastically down. As you begin to focus more on long-term results, you'll realize that the most important thing you can do for your portfolio is to make sure your investments are based on strong fundamentals and businesses with a history of success.

At Motley Fool Stock Advisor, that's what we've been doing since 2003. David and Tom Gardner, co-founders of The Motley Fool, provide two stock picks each month, and since inception, they're beating the market by over 35 percentage points. That's not luck -- that's sticking to the essentials of investing and ensuring that each pick is based only on the soundest of reasoning.

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Jordan DiPietro owns shares of General Electric. Activision Blizzard is a Motley Fool Stock Advisor selection. Motley Fool Options has recommended a synthetic long position on Activision Blizzard. The Fool owns shares of Activision Blizzard. The Fool has a disclosure policy that's been on a steady black bean and salsa diet.