Don't Listen to Stock Market Stupidity

I was recently listening to a stock market "expert" talk about the market's current state of affairs. I'm not going to name names, because that's not important. What is important is that she noted that the S&P is basically at the same level that we saw in 1998 and then quipped, "asset allocation, the old-fashioned way, doesn't work anymore."

I should expect that kind of short-sighted comment by now since I've heard similar iterations of it -- for instance, "buy and hold is dead" -- over and over again in recent years. But for some reason it really got my goat this time, and I decided that statement -- in all its various forms -- is the most idiotic, brain-dead piece of poppycock I've ever heard.

Those darn Patriots
Just how lame is this line of reasoning? Let's imagine for a moment you decide to place a bet on a football game. The game in question is the New England Patriots vs. Texas' Trinity Valley Community College. Everyone on the Patriots is in the best health of his life, while Trinity Valley CC is missing its starting quarterback to the flu and its entire starting linebacker corps is out of town doing voluntary charity work.

You cash in the kids' 529 plans, take loans of the 401(k)s, take out a third mortgage on the house, and bet everything on the Pats. When all is said and done, sure enough, the Patriots have won by a score of 147-0.

That's great, right? Not so fast. The bookie's line had the Pats by 300 points. You lose. Big.

But what's the lesson from this? That betting on the Patriots is always a bad idea? No! It's that you were a damn fool for betting on the Patriots when the line was that skewed.

Back to stocks
"Old-fashioned" asset allocation models and the strategy to own great businesses at good prices for long periods of time were not the cause of the lackluster performance of the market indices over the past decade-plus. The problem was that investors were paying moronic prices for stocks a decade ago.

I should point out that if what the anti-buy-and-hold crowd is really trying to say is that it's a bad idea to just buy stocks no matter what valuations are like, well then, bravo, you've proved a very self-evident point. Of course, since their solution seems to be short-term trades, Bollinger bands, and stop-losses, I don't actually think that was their point.

Breathe deep, buy stocks
Fortunately, there are plenty of Foolish readers who get this. In fact, they may be reading this right now thinking to themselves, "Well duh! I knew this already!" And that's a good thing. However, it's the prevalence of the comments against long-term investing that makes me concerned that there are a lot of folks out there ready to give up on it.

That's particularly disappointing considering the market environment today. Many of the stocks with the most egregious valuations a decade ago are now far more attractively valued. Tech titans Cisco (Nasdaq: CSCO  ) and Oracle (Nasdaq: ORCL  ) are perfect examples. Back in 2000, Cisco traded at an average earnings multiple of 174, while Oracle fetched a multiple of 95. Today, the stocks change hands at 16 times and 21 times, respectively, and as of next year, both will also be dividend-paying stocks.

Granted, we're not quite as awash in bargains as we were a year or a year and a half ago. For instance, I recently suggested that McDonald's -- a company that I'm a big fan of -- may have hit overvalued territory. But there are still plenty of worthwhile deals out there. By getting back to the basics -- that is, looking for reliable businesses that are producing attractive returns on equity, trading at reasonable valuations, and paying a dividend -- there are still plenty of deals out there right now.

Here are just a few of them:

Company

Return on Equity

Price-to-Earnings Ratio

Dividend Yield

Altria (NYSE: MO  )

88%

14.3

6.4%

DuPont (NYSE: DD  )

39%

13.0

3.7%

Exelon (NYSE: EXC  )

20%

11.2

4.9%

ConocoPhillips (NYSE: COP  )

15%

9.0

3.9%

Merck (NYSE: MRK  )

29%

9.3

4.2%

Source: Capital IQ, a Standard & Poor's company.

I purposely picked out a cross-section of companies from different industries to underscore that not only is it possible to find attractive stocks right now, but the opportunities are scattered broadly enough that you can build a good, diversified portfolio with them. The companies above aren't without their challenges -- Merck, for instance will have to cope with the loss of patent protection on some of its drugs, while Altria will likely forever have a big legal overhang -- but I think they all could play a solid part in a diversified portfolio.

But these are far from the only good opportunities out there right now. Have a favorite of your own? Head down to the comments section and tell me why your stock will help prove that long-term investing isn't dead.

Is it really the best time to buy stocks right now? See why Morgan Housel thinks history says "yes."

Exelon is a Motley Fool Inside Value pick. The Fool has written calls (bull call spread) on Cisco Systems. The Fool owns shares of Altria Group, Exelon, and Oracle. Try any of our Foolish newsletter services free for 30 days.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Fool contributor Matt Koppenheffer owns shares of McDonald's, but does not own shares of any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or on his RSS feed. The Fool's disclosure policy assures you no Wookies were harmed in the making of this article.


Read/Post Comments (21) | Recommend This Article (57)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 23, 2010, at 10:26 AM, MellowGuy1 wrote:

    I follow the buy and hold strategy. I buy stocks that I perceive as being undervalued and sell when I think that they are overvalued.

    It doesn't work as well as it should because companies frequently do something stupid destroying stockholder value.

    CREE has been a major success in terms of market price for me, but I need to watch it closely because it does have competitors.

  • Report this Comment On September 23, 2010, at 11:21 AM, zuma4 wrote:

    I am a buy and hold investor. My main concern is the amount of day trading that fluctuates the price of stable industries such as EXC. The stair stepping gains have been slow and steady rises followed by 2 month give backs in a 2 to 3 day period. Even though my portfolio has shown gains that fifteen years ago would seem as though you would reach your investing goals I now consider dividends issued on stocks and bonds to be my only real gains. I still remain buy at the right time and hold.

  • Report this Comment On September 23, 2010, at 2:17 PM, TMFKopp wrote:

    @MellowGuy1

    "It doesn't work as well as it should because companies frequently do something stupid destroying stockholder value."

    The fact that you're seeing this suggests that you're on the right track. Buy and hold isn't about simply buying a stock and then never thinking about it again. As you're suggesting here, you need to follow along with the company and be alert to how management is handling the company and whether it is working for or against shareholders' interests.

    Matt

  • Report this Comment On September 23, 2010, at 2:35 PM, TMFKopp wrote:

    @zuma4

    "My main concern is the amount of day trading that fluctuates the price of stable industries such as EXC"

    I agree, the daily swings can be pretty distracting at times. However, those swings can also be really beneficial at times -- as in when they swing a stock down to a good buy price.

    Matt

  • Report this Comment On September 23, 2010, at 2:48 PM, Stender89 wrote:

    Hey Matt.

    I've been reading some of your articles and thinking to myself I have to give this guy some credit some time, because I like your articles and usually they provide useful and wellwritten material. Thanks a lot for your contributions.

    Fool on! Nicklas.

  • Report this Comment On September 23, 2010, at 3:46 PM, TMFKopp wrote:

    Thanks Nicklas, much appreciated!

    Matt

  • Report this Comment On September 23, 2010, at 4:04 PM, BillyTG wrote:

    Matt, your title grabbed my attention because it sounds like the pot calling the kettle black. In the past week I've read MF articles by a CFA who is unable to analyze Warren Buffet's statements correctly and by another MF writer who doesn't seem to understand why the idea of a precious metals company having a dividend right now is absurd.

    I feel like I can sort out the nonsense pretty well, but many others cannot. Motley Fool pumps out as much nonsensical "expert" analysis as anyone these days. There is some amazing discussion on CAPS, but it takes some effort to ferret out the rascals. I wish MF would recognize those few employees who are the best and encourage the others to remain within their realms of competence.

  • Report this Comment On September 23, 2010, at 4:21 PM, TMFKopp wrote:

    @PennyLuck

    "You will want to see the price action of the stock or mutual fund. All stocks undulate as they go up or down and you want to know the major trend."

    Ugh. Not quite.

    There's a better option -- go to the source. Read company filings, watch the company's performance over time, listen to conference calls. In other words, do your own work and don't rely on what a broker sends you.

    Matt

  • Report this Comment On September 23, 2010, at 5:02 PM, NationalMatch wrote:

    I don't know whether this "expert" was on CNBC, but I'm beginning to suspect they are pulling them off the street. I'm more than glad to profit from this type of hysteria. Good article, Matt. Keep up the good work.

  • Report this Comment On September 23, 2010, at 6:30 PM, TMFMMTInvestor wrote:

    "The problem was that investors were paying moronic prices for stocks a decade ago." (MK)

    Matt,

    I've enjoyed your articles, too, on the whole. In the above quote from your piece, didn't you mean to say something like "paying moronic price multiples" or "buying at overly optimistic valuations" and not simply "prices"? After all: price is what you pay; value is what you get.

    Scott

  • Report this Comment On September 23, 2010, at 6:57 PM, stills999 wrote:

    Scott - I think your comment is a bit overly critical.

    If I said 'the price of gasoline is high these days', would I need to clarify that I meant 'the price per gallon of gasoline is high these days'??

  • Report this Comment On September 23, 2010, at 7:06 PM, TMFKopp wrote:

    @sjf2005

    You've got it right when you say "price is what you pay, and value is what you get." The value was the value back then and the prices being paid well exceeded that value in many cases. So the prices paid were high -- as in, out of line with value that you're getting.

    I think you can go either way and be correct, but there is room for confusion there, so it's a worthwhile clarification point.

    Cisco wasn't expensive back then because the dollar price of its stock was high, but rather because the price of its stock was high in relation to any reasonable (sober!) estimate of the underlying company value.

    Matt

  • Report this Comment On September 23, 2010, at 7:44 PM, JustMee01 wrote:

    I AGREE WITH YOU 100%.

    Why am I yelling?

    I find it EXTREMELY ironic that the banner ad right above your statement of truth, is some fool yapping about how "you can't fight the market" and "the market is always right". He continues to bombard us with the ridiculous statement that investors that don't get out when they are 30 or 40% down and think that the market is wrong, get hurt "time and time again". There were piles of stocks that dropped in the crash that didn't merit a sell. Selling many was a horrific mistake that only locked in capital losses.

    I find it ironic that the very same garbage content that you satirize, appears literally, right above your head. And, on a webpage hosted by individuals dedicated to the idea that markets can be wrong, and anyone smart enough and dedicated enough to the task can profit from it.

    Buffett never bought a stock when it was up.

    Fisher followed growth stocks stubbornly for years and doubled-down, backing up the truck, when they stumbled, providing value opportunities.

    These aren't dumb guys. They bought on the dip. They ignored market dynamics when fundamentals painted a different picture. And they understood that falling prices are often their friends. I suspect that they're smarter than the nimrods preaching that you should immediately set a stop loss on every stock you own.

    I know TMF needs to make money, but that banner add was just too ironic to ignore.

  • Report this Comment On September 23, 2010, at 8:08 PM, FoolSolo wrote:

    Buy and Hold has become a missused term, and there is no clear definition of what it means. If it means buy (even if you buy good value), and sock away the stocks, never looking at them for 20 years, then that is a foolish (pardon the pun) gambit. However, if it means buy undervalued stocks, monitor them regularly, lock-in profits when you can, and ride them to a nice big profit, then that is the plan I subscribe to.

    Look, there are some basic principles to investing that you should practice anyway, such as knowing how to value companies properly, and knowing how to spot an undervalued stock when you see it. There are also some basic best practices around when to sell, and how to protect yourself from big losses. I have been an avid fan of technical analysis for a long time, and feel that when the market is tanking, you shouldn't have to ride the wave down through the big corrections. If you think a stock is undervalued at $20, and the market takes a big dip like Sept/Oct 2008, then sell em and buy em back when the market turns around. Now, minor corrections are sometimes good for market health in general, and are often good opportunities to add to your favorite positions at that time. But lets be realistic, even good undervalued companies are going to take a big haircut when the rest of the market is bleeding out a 20+% correction. More importantly, why take a 20% plunge when you have profit already. That's why we have protective stops, and all sorts of automated tools. If you don't lock your profits in, you're just taking on more risk than you need to. When you're ahead, ride em as far as you can, but don't let Mr. Market take back your profits. A trade nowadays is anywhere from $4 to $20, so if you get stopped out, and then buy em back a day or two later at an even better entry point, you're just further ahead of the game. Yeah, you can get whip sawed now and then, but you will gain more than you lose if you're doing things right and keeping your emotions in check.

    Go get em!

  • Report this Comment On September 23, 2010, at 8:10 PM, OlimDives wrote:

    I enjoyed this article. I think a lot of what people don't take into account in regards to long term investing as well as tax strategy is that is changes frequently. I am 24 years old and make a very good salary for my age. I max out my 401k, Roth IRA and do not have any debt or a mortgage (yet). People ask me often, "well what do you do with the rest of your money?" They don't ask me this because I am cheap, but rather because they know I plan for my future. I simply reply "I invest it wisely." Most of the time I get dumbfounded looks, as to be expected. "Well what about the increase in this tax, and the decrease in this tax?" The simple fact of the matter is the younger generation such as myself has no idea what policies will be in play and what the taxes and markets are going to be like 30-40 years from now. What I do know is that compound interest in dividends will always outpace a market drop. Even if the market falls 50% and dividends get slashed before I retire, I will own so many shares that hopefully that pure size of the portfolio is a safety net in itself. Clearly, if one desires a outlandish luxurious lifestyle, this will not hold true. This is also not say you shouldn't have much more stable investments in bonds or M*'s. Find the companies that have been around for a long time and have a history of increasing dividends even in these dire times. Find companies that are emerging in tech and health care. If you can grow your portfolio enough to live off of cash dividend after tax and you have companies that have no history of slashing, then you are set! After all, who knows if we will have an Asian American, female, independant party president in 30 years. Invest in what you can see now!

  • Report this Comment On September 23, 2010, at 8:46 PM, oldblandy wrote:

    Nice article. I support the concept and believe that FoolSolo pointed out some valuable ideas. The concept that always hurts me is the stop loss and then the stock runs. I have not been doing those for over 3years, but when I did it was when I could not monitor the stocks and I was gone for a long time. Difficult situation if you are a nervous investor.

    In passing I own or have owned all the stocks in the table above and find that they are prettty good ones now and were essentially the reason that I did not loss my retirement dollars. In a way I agree tha the market has done much from 1998 but I haven't lost nearly the amount others have by the continual churning of their portfolio's.

  • Report this Comment On September 23, 2010, at 10:48 PM, dlomax77 wrote:

    I tend to disregard statements about how the market has done over a given number of years. Nobody buys all their assets for the year on January 1. Nobody models their portfolio exactly on the Dow 30. Market outperformance shouldn't be too much to ask from a pro when all they have to do is be better than break even.

  • Report this Comment On September 24, 2010, at 5:56 AM, engineer8 wrote:

    I don't quarrel the notion that buying and holding the good companies will be rewarding. But as individuals, we only have so large a research department. Mutual funds and zillionaire investors who move the price with their 100,000 share purchases have better research departments, plus rooms full of computers and programmers.

    The technical side of investing is attempting to use price and volume statistics on a stock to see if the institutional investors are buying or selling or doing nothing at all. The assumption is that if Buffet and Berkowitz are exiting that stock, they know something we don't and are selling out or buying in.

    Buffet's quote "In the short run, the market is a voting machine. In the long run, it is a weighing machine" is correct. But when a stock falls 5% in a day on four times normal volume, and the market isn't, some large investors are voting on the results of their weighing.

  • Report this Comment On September 24, 2010, at 1:03 PM, nietzschesport wrote:

    This is a great article that I want to link to people. Speaking of Stupidity--Jim Cramer says Johnson and Johnson(JNJ) has "terrible fundamentals" and that it should be sold.

    Not only does Cramer say that JNJ has one of ''the worst fundamentals of any pharmacutecal company", but he complains that the yield is now only 3.5% down from 4% when the stock was cheaper.

    But here is what he said in January of 2009 --"There’s also a dividend of 3.1% that’s worth owning. JNJ’s yield rarely gets to 3%. But when it does that usually means big returns for investors. It’s another reason why this is one of my favorite Dow stocks."

    What's up with Cramer? It was buy WAG at $35 in April--Don't buy it at $27 in July--and yesterday sell WAG at $30.

  • Report this Comment On September 24, 2010, at 1:05 PM, nietzschesport wrote:

    Also, -Cramer said you shouldn't buy JNJ after it was announced that Buffett bought it. Why? Because " you underperformed the S&P in most of the picks the last 3 years". ????

    see TheStreet.com for more of his conversation on JNJ.

    http://nietzschesportfolio.blogspot.com/

  • Report this Comment On September 24, 2010, at 4:13 PM, TMFKopp wrote:

    @engineer8

    "Buffet's quote "In the short run, the market is a voting machine. In the long run, it is a weighing machine" is correct. But when a stock falls 5% in a day on four times normal volume, and the market isn't, some large investors are voting on the results of their weighing."

    First off, not that it really matters to the content of the quote, but I'm pretty sure that's actually a Graham quote that Buffett has just copped.

    I hear where you're coming from, but unfortunately much of the time you really have no idea what the real reason is for a stock's decline (news events and earnings being obvious exceptions).

    It sounds really nice to think that downward price action means that "somebody knows something" or the weighing machines of somebody like Buffett or Berkowitz have judged the stock to be a poor investment, but that's a bit too pie-in-the-sky for me.

    It could be a bunch of technical analysts selling because they thought they saw some evil wiggle in the stock price -- or because the moon was too full or something ludicrous like that. It could also be terrible fund managers whom you'd never give your money to that have decided the stock is no good. It could be that a good fund manager thinks the stock is fine, but he's had redemption pressure or has found another stock that's an even better opportunity. And I could go on.

    The reason I bother investing at all is due to the idea that there are a lot of investors out there and there are a lot of stocks out there and not all the investors are going to be right about all the stocks, all the time. If I really thought that every bit of price action in a stock was intelligent action, I wouldn't bother and would just put all my money in indexes.

    Matt

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