5 Huge Stocks to Profit From 5 Huge Investment Lessons

I may make you groan in a minute. But stay with me. By the end of this article, I will give you five stock picks that I've personally invested in.

The background
I recently visited our U.K. office with Motley Fool co-founder Tom Gardner and a couple other Fools. While there, I met with the investor relations folks at education powerhouse Pearson and alcohol giant Diageo.

But it wasn't all work. Tom and I played some low-stakes Texas hold 'em poker at one of the local casinos.

In a future column, I'll give you the scoop on Pearson and Diageo (preview: both were quite impressive), but (here's where the groaning may come in) today's five lessons come from the poker table.

I realize you may not share my love of poker, and I realize comparing poker and investing is a well-trodden road, so I'll keep my lessons brief and provide a stock pick for each lesson.

Investment lesson No. 1: Pick the easy battles
At the poker table it's fun to match your skills against the better players; but if money's a bigger priority than ego, the best strategy is to focus on getting into hands against the worst players. Why? Because the level of difficulty there is lower.

We sometimes pick overly tough battles as investors, too. It can be tempting to go contrary on the company short-sellers hate, or to try predicting the next biotech to be acquired, or to search for the crazy-high-yield REIT that actually can keep up its dividend payments. The degree of difficulty on these plays is high, so you must demand great odds -- much greater odds than if you stick to easier plays. I use Altria (NYSE: MO) and Wal-Mart (NYSE: WMT) as my baseline. If the risk-reward on the "hard" stocks isn't better than on these two efficiently operated powerhouses, why buy them?

The stock pick: ExxonMobil (NYSE: XOM  ) . It's the Altria/Wal-Mart of energy -- the biggest and baddest of Big Oil. Despite the alternative energy hype, petroleum-based energy isn't becoming obsolete anytime soon. I bought in around $65 a share. It's now around $70 a share, but it's still trading at a reasonable price. Well worth looking into.

Investment lesson No. 2: Don't underestimate the market
Even if you've correctly identified the worst players, you can lose a lot of money. Especially if you get cocky and underestimate them. To extend the analogy to the stock market, you can still lose money by buying the Altrias and Wal-Marts of the world. Make sure to get in at a good price. And don't buy and forget -- buy and monitor.

Also remember the old poker adage: If you're looking around the poker table and don't see the chump, it's probably you. Read on for a combined stock pick with lesson No. 3.

Investment lesson No. 3: Know your weaknesses
Tom Gardner had my favorite insight of the trip. After a session in which he was slightly ahead and I was down (because of failing to follow lesson No. 4), he shared his strategy. "When you don't play often, the best strategy is to be patient, play tight, and fold a lot of hands."

Exactly.

Except for a one-hand lapse, I used the same strategy myself. We both knew we weren't the best players at the table. Other folks we were playing against spent hours upon hours honing their craft. Perhaps mastering it. If this was investing -- a craft we do obsess on -- we would have been comfortable making bolder moves. But we're casual players, so we stuck to conservative strategies.

For those who don't have the time, inclination, or ability to take on the market, the conservative strategy is investing in index exchange-traded funds and mutual funds. I'll go further. I believe indexes should form the core of almost every portfolio -- from the portfolios of the chumps to the portfolios of the sharks.

The stock pick: Vanguard Total Stock Market ETF (NYSE: VTI  ) . This is one of the buy-and-hold ETFs that anchor my portfolio, freeing me up to be bolder in some of my individual stock purchases. As Morningstar puts it, this ETF "covers the entire U.S. stock market for a rock-bottom cost of 0.07% a year, and it provides investors with an excellent choice for a core equity holding."

Investment lesson No. 4: Never overplay ace-king
There was a sign in the poker room that read: "Never overplay ace-king." For background, the fourth-best starting hand in all of poker is ace-king of the same suit (behind ace-ace, king-king, and queen-queen). However, players get into trouble by overvaluing it. In fact, my biggest losing hand on the trip was because I over-aggressively played ace-king.

In investing, the lesson is to diversify. We should guard against getting cocky and putting too much money behind the latest amazing investment we've unearthed. It may be a great stock, but the unanticipated always happens. See BP.

The stock picks: Bank of America (NYSE: BAC  ) and JPMorgan Chase (NYSE: JPM  ) . Both of these banks are a bit of a gamble, but at today's prices I think there's a very attractive risk-reward opportunity for contrarians. Just don't overplay this hand!

Investment lesson No. 5: There are very few great opportunities. Be patient. Wait for your hand.
A surprising aspect of poker is that a whole day of playing usually rests on the outcome of just two or three hands. Like fishing, poker's a whole lot of waiting.

Bad players jump into tons of hands and make bets indiscriminately. Bad investors jump into tons of stocks, buying and selling indiscriminately. Action doesn't necessarily translate into returns. In fact, it's frequently the opposite. Wait for the great opportunities.

The stock pick: Cisco (Nasdaq: CSCO  ) . Some weakness in its government business sent investors fleeing from Cisco stock. The overreaction sent Cisco stock down 20% since Nov. 10 in a relatively flat market.

After backing out its enormous net cash balance, that means Cisco trades at just 9.4 times its trailing free cash flow . For a company that routinely cranks out net margins and returns on equity of around 20%, that looks to me like a great opportunity.

I've got my own money behind Cisco (and the other four stocks I've mentioned). Meanwhile, my fellow analysts and I have picked an additional five stocks for The Motley Fool's account. To explain our investment theses, we created a special report that you can download for free. To get instant access, click here -- it's free.

Anand Chokkavelu owns shares of Altria, ExxonMobil, Vanguard Total Stock Market ETF, Bank of America, JPMorgan, and Cisco. The two most dangerous poker hands for him are queen-queen and ace-queen.

Wal-Mart is a Motley Fool Inside Value and Motley Fool Global Gains selection. Diageo is a Motley Fool Income Investor pick. Morningstar is a Motley Fool Stock Advisor pick. The Fool has a bull call spread position on Cisco. The Fool owns shares of Altria, Bank of America, Diageo, ExxonMobil, JPMorgan, and Wal-Mart. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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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 November 22, 2010, at 4:10 PM, dragonLZ wrote:

    Ananad, I love your article.

    I'm not too crazy about your picks (other than BAC), but I loved your lessons from the poker table. They really made me think about the mistakes I make when investing (guilty of all 5). I'm a true believer that poker and investing have a lot of in common (both are "games" of skill, observation, patience, research, bold decisions at times, etc.)

    Thank you for a wonderful article and Good Luck!

  • Report this Comment On November 22, 2010, at 4:34 PM, Melaschasm wrote:

    Great article, and an entertaining reminder of some basic rules everyone should be following.

    Personally I think tournament poker has even more in comon with investing. In a cash game, you can always buy back in after a bad beat. In a tournament, if you go all in and lose, you lose it all. That seems more akin to the risk of putting all your money into one stock.

  • Report this Comment On November 22, 2010, at 4:38 PM, dragonLZ wrote:

    Oops.

    Anand, sorry I misspelled your name.

  • Report this Comment On November 22, 2010, at 4:42 PM, TMFBomb wrote:

    @dragonLZ,

    Thanks for the kind words (even if we only agree on 4 of the 5 stocks!).

    @Melaschasm,

    Interesting. On the other hand, in a cash game, you don't have to play (except for the blinds) when your hands aren't good. You can wait patiently for your opportunities, just like in investing.

    Of course, you could argue that, like tournament poker, the passage of time forces you to make investments at some point or risk losing to inflation.

    I've confused myself at this point. I'll say that I think the lessons are pretty valid across tournament and cash poker. We happened to be playing a cash game.

    Thanks for reading,

    Anand

  • Report this Comment On November 22, 2010, at 4:46 PM, TMFBomb wrote:

    @dragonLZ,

    Haha, no worries...I'll match yours with a typo of my own...meant to say we only agree on one of five stocks!

    -Anand

  • Report this Comment On November 22, 2010, at 4:51 PM, dragonLZ wrote:

    Melaschasm, I see your point, but I kind of disagree.

    I think many, many new investors are so scared of the stories they heard from friends or relatives about such-and-such guy "losing it all" in the stock market.

    How many people does that really happen to? I bet less than .01%.

    I mean how unfortunate (or stupid) must one be to lose all money he or she had because the stock they invested all their money to went down to zero?

    I think those stories are actually about the people who lost more than they can afford (people who borrowed money / got in debt hoping they'll strike it rich with a "HOT" pick they know).

    People like that (who borrow money they can't afford to lose) seem to "lose it all" even if they "HOT" pick goes down by 50%.

    In the poker tournament, if you lose it all you are out. And that happens all the time.

    In investing (key word Investing, not betting your life on a penny stock), even if your "best" pick loses, there is always another hand.

  • Report this Comment On November 22, 2010, at 6:56 PM, Willustop wrote:

    Why go with XOM with few years of reserves in the ground when Canadian Oil Sands Trust (COS) has 45 years in a more stable area of the world and closer to our market?

    http://online.barrons.com/article/SB500014240529702040760045...

  • Report this Comment On November 22, 2010, at 8:03 PM, MFRichard wrote:

    Great article, good tips and I`m playing options on BAC, JPM and CSCO, go calls!

  • Report this Comment On November 22, 2010, at 9:00 PM, thisislabor wrote:

    I just did a financial analysis and presentation on Exxon vs BP. and I agree with your choice of Exxon.

    BP may eventually have a value correction in the next 5 years, but starting around 1st or 2nd quarter they are suppose to resume issuing dividends at .07$ a share. fail. I want my money back sooner. Also, BP currently has a negative earnings rate.

    One caution though, I believe the whole stock market is significantly overpriced and is in line for a value correction given that the risk free rate and dividend rates are approximately the same price. (or lately that the risk free rate has been slightly negative, but that is another subject)

  • Report this Comment On November 22, 2010, at 9:02 PM, thisislabor wrote:

    @willustop because bp has just invested around 37billion total into natural gas and other energy reserves.

  • Report this Comment On November 22, 2010, at 9:06 PM, thisislabor wrote:

    @dragonLZ if you were really nervous about losing all your money you could just buy the market instead and get it's natural growth rate plus it's natural dividend return and the growth in that dividend return. it wont beat inflation by much, but it will beat a banks CD

  • Report this Comment On November 23, 2010, at 1:20 AM, scbtl wrote:

    I think an important lesson to is also to play the cards on the table. Sometimes the market adjusts or the world adjusts and presents a different scenario that would have you play it a different way. The BP vs. XOM argument is centered around this.

  • Report this Comment On November 23, 2010, at 4:12 AM, Usnzth wrote:

    Great comparisons

    The longer I invest, the happier I am with myself when I do nothing - if there is nothing worth doing. In other words, I fold a lot. Sort of like waiting for Warren Buffett's fast-moving elephants.

    By the way, I got into XOM at $61.8. I am so secure in this one that it now makes up about 15% of my holdings. If it drops below $60 I will buy more.

  • Report this Comment On November 23, 2010, at 4:19 AM, sanjibeceltic wrote:

    Really good article. The ways are just too good for earn profit. Thank your for the info.

    <a href="http://www.capmaison.com/index.html">St Lucia Hotel </a>

  • Report this Comment On November 23, 2010, at 7:55 AM, dragonLZ wrote:

    @thisislabor, maybe I wasn't clear enough, but I'm the one who said "only .01% of people lose all of their money in the stock market (99% of them are either morons or gamblers).

    I also said "there is always another hand" (just make sure you play wisely).

    So, no, I'm not the one who's concerned with losing it all (you probably got me mixed up with somebody else).

  • Report this Comment On November 23, 2010, at 9:40 AM, Skeebo06 wrote:

    Wow, you really told people to buy BAC and JPM? I don't even have to read any other part of your article to know that you are completely uninformed.

    The Irish Bailout means that in the not to distant future BAC's double Irish tax shelter is going bye bye, not to mention very real very damaging mortgage mess they have on their hands.

    JPM? JPM just had a RICO Lawsuit filed on it for silver manipulation AND they are heavily tied up in the same mortgage mess that BAC is.

    Buy these stocks if you like throwing your money away. These are currently two of the worst stock picks out there.

  • Report this Comment On November 23, 2010, at 10:05 AM, TMFBomb wrote:

    @Skeebo06,

    I explain my rationale on BAC and JPM more fully in this article:

    http://www.fool.com/investing/general/2010/11/01/its-time-to...

    Cheers,

    Anand

  • Report this Comment On November 23, 2010, at 10:12 AM, FutureMonkey wrote:

    Lesson 6: Emotions have no part in your decisions. When you find yourself reacting based on emotions or recent past events (the last few hands), it is time to get up from the table and walk around a bit to get your mind right.

    My worst investment decisions were made in moments of fear that if I didn't act quickly, I'd miss out on ______. My worst investment decisions were made based on over-playing based on recent events. to this end I rigorously avoid CNBC noise makers and short term focused "advice."

    My best investment decisions were made based on fundamental understanding of the business I was buying to fill out my portfolio, followed by dispassionate dollar cost averaging into the position. Well, that coupled with occassional large investments when offered a really excellent opportunity and I truly understood the underlying issues.

  • Report this Comment On November 23, 2010, at 10:35 AM, TMFBomb wrote:

    @FutureMonkey,

    Excellent addition! In fact, emotion had a lot to do with my overplaying ace-king in lesson #4.

    And it is one of the things I have to constantly remind myself as an investor.

    Fool on,

    Anand

  • Report this Comment On November 23, 2010, at 12:11 PM, shaileshnita wrote:

    This is a very good article for those who are not professional investors. I admire Anand for having chosen this topic and for having presented it in such a lucid manner. Choosing a pertinent topic is an art of great skill and Anand has displayed it well here.

  • Report this Comment On November 23, 2010, at 2:11 PM, TMFTomGardner wrote:

    Anand, you must tell what happened on the final hand. :) The world needs to know. I learned to respect your game!!

  • Report this Comment On November 23, 2010, at 3:35 PM, akbarcaskey678 wrote:

    Great article but I am not a fan of Xom. Its all time high is around $80 a share and I don't think it will exceed that. I rather go with KO or PG for a similar dividend, but more potential growth.

  • Report this Comment On November 23, 2010, at 5:07 PM, TMFBomb wrote:

    @TMFTomG,

    Yes, I took some of your money on the last hand we played (a flush vs. two pair I believe). But the fact remains that we both ended up down a little and you were less down than me. So, a lukewarm congrats on that...here's hoping we break positive next time!

    -Anand

  • Report this Comment On November 23, 2010, at 5:13 PM, TMFBomb wrote:

    @akbarcaskey678,

    Not to split hairs, but Exxon's all-time high is north of $90.

    If dividends are your thing, one thing to note about Exxon is that it tends to do a lot of share buybacks in addition to its modest dividend of 2.5%. I explain further in this article:

    http://www.fool.com/investing/dividends-income/2010/08/10/wh...

    -Anand

  • Report this Comment On November 26, 2010, at 12:11 PM, dhuddle wrote:

    GREAT article. Very good. I bought Cisco using the same logic.

  • Report this Comment On November 26, 2010, at 12:22 PM, magounsq wrote:

    Very incisive article and analogy!!!

  • Report this Comment On November 26, 2010, at 12:43 PM, tomd728 wrote:

    I really do not understand how anyone can expect to benefit from holding CSCO .........the stocks performance is dreadful from any view that includes a price per share !!!!!!!!!!!

    Flat........flatter............flattest

    Good luck with it though and Chambers is a heck of a CEO IMHO.

    Tom

  • Report this Comment On November 26, 2010, at 1:41 PM, TMFBomb wrote:

    @CelticRiver,

    Agreeing that the stock price is around where it was back in 2001 (and lower than its bubble heights). But what I'd point to is Cisco's fantastic earnings growth since then. For the same stock price you're getting a company with traling earnings per share of $1.36 vs. a loss of $0.14 a share (or a profit of $0.25 if you want to use 2002's).

    Fool on,

    Anand

  • Report this Comment On November 27, 2010, at 12:23 PM, aleax wrote:

    @Anand, I agree CSCO's looking fair to become the next "ex-high-growth, now value-play stalwart" to grace my portfolio (next to INTC). I just got a decent-sized position by selling (and being assigned) Nov 20 puts (sold after the crash, so got decent premium to lower my cost basis) and am watching closely to see how well they execute from here -- esp. what happens to the long-discussed plans for dividends (probably pretty modest ones to start with, just like INTC, MSFT &c did when they switched to that value strategy -- but the point, to me, is dividend sustainability and growth, not "make a fast buck" by getting unsustainable many-times-earnings dividends like, say, WWE's!-).

    I suspect a lot will depend on the possibility of repatriating the many billions of cash they own abroad without suffering a crippling tax hit -- Chambers' been pretty explicit about it (I sure do hope they don't "pull a MSFT" and sell bonds to pay dividends without repatriating cash...!).

    Will easily take a year, or nearly that long, to play out, and could end up hostage to a deadlocked congress, so, only for patient investors who realize and accept the risk involved (not risk of losing the whole investment, unless you margin up like crazy or play it all via very aggressive options -- just risk of low or slightly negative returns). I'm confident in the quality of execution, going forwards, on the actual operations; but these financial issues WILL impact price substantially. Unfortunately, not a good stock to sell covered calls on at this time (my favorite way to get income from "stalwarts" while waiting for a long-term thesis to play out) -- if the financials play out OK, then the stock is substantially undervalued, and one piece of good news on that front (liable to arrive w/o previous warning) could easily bump it up enough, fast enough, to get your calls assigned (or else you'd have to lose substantially to buy them back or roll them out). So, pretty fast-asleep money for a while... no dividends yet, no call writing income. But that's OK, a diversified portfolio can afford some fraction of such "sleeping beauties" (ATVI, anyone...?-)...

  • Report this Comment On November 27, 2010, at 2:35 PM, mkj1928 wrote:

    Hello

    I'm new and this if my first post here. I'm still learning about investing and I have a question. While BAC has upside potential isn't the future really hard to predict. I'm no expert but doesn't the real risk in the stock represent what we don't know? What I mean is, banks are hardly out of the water. That said, regardless of numbers we have no idea what's in store in the financial sector. It could be many many years before any reward might be achieved.

    On the subject of risk; Why should a erson buy BAC when a similar return can be had with other stocks who are doing well and have a more predictable future. Isn't the greatest risk not putting your money into great quality companies?

    I hope you don't mind me asking but I'm still trying to wrap my fingers are what "RISK" really represents. I have a long ways to go and as of now only invest in companies like JNJ etc.

    Thanks for your time, if anybody want to help me understand this feel free to respond.

    Mike

  • Report this Comment On November 28, 2010, at 8:32 AM, TMFBomb wrote:

    @mkj1928,

    Yes, BAC and JPM are risky stocks. The balance sheet visibility is low on both and there are many bad things that can happen from here. These aren't the type of plays for beginning investors (see lessons 2 and 3).

    However, I do think these are good bets right now for those who can handle the very real risks as part of a diversified portfolio. I make my assumptions more explicit in this article:

    http://www.fool.com/investing/general/2010/11/01/its-time-to...

    Good luck in your investing journey,

    Anand

  • Report this Comment On November 28, 2010, at 4:54 PM, hbofbyu wrote:

    Very insightful article. It would serve many well to understand that there really are "very few great opportunities out there" and not get taken by the allure of easy money.

    While I don't see a huge upside to these stocks (as our economy lags along), I don't see BAC and JPM as being THAT risky. There is always risk but the price is low because they have mud on them. Underneath the mud the operation is the same. They influence lawmakers and make huge profits touching everyone else's wealth; taking a tiny portion with sticky fingers. They don't build roads, they don't mine copper, they don't grow corn our bake our bread. They create nothing. But they do get to control the movement and allocation of assets and that is the beauty to creating a timeless business. If these banks fail to produce it will likely be because everything else in the economy is failing.

  • Report this Comment On November 28, 2010, at 7:56 PM, optionm wrote:

    Great article, I love the poker metaphor. Many really good comments here and, by the way, you do not know much about fishing.

  • Report this Comment On November 28, 2010, at 8:02 PM, optionm wrote:

    maybe it is more of an analogy

  • Report this Comment On November 28, 2010, at 10:00 PM, mkj1928 wrote:

    @ TMFBomb:

    Thank you

    I see your point. It's a good article. I always have a hard time getting away from stocks like PG, JNJ, COP, and stuff like that.

    The upside on BAC can be very large I think, it just makes me wonder when. Of course, wouldn't we all like to know that? LOL

    Thanks again

    Mike

  • Report this Comment On November 28, 2010, at 10:12 PM, TMFBomb wrote:

    @optionm,

    Very astute. My knowledge of fishing is limited to a couple pathetic attempts and some accidental glimpses on ESPN2 as I wait for football coverage.

    So if I blew the comparison, apologies!

    -Anand

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