What We Learned in 2010

"Anyone who stops learning is old, whether at 20 or 80," Henry Ford said.

We agree. In our quest to stay young and spry, I asked a few of my Fool colleagues what they learned in 2010. Here's what they had to say.

Anand Chokkavelu, CFA, Fool contributor: In 2010, I really solidified my belief that when it comes to beating the market, the buy-in price on stocks is underrated. Let me illustrate with two simple examples.

  • I can't think of a more steady, boring company than Coca-Cola  (NYSE: KO  ) . It's been around for decades and will continue to chug along for decades more. Its stock's volatility reflects this steadiness with a beta of just 0.59. Yet, even this low-volatility stock's shares have traded 33% higher at its highs than its lows this past year. The business ain't 33% different. 
  • BP's (NYSE: BP  ) been a disaster in 2010 because of its Gulf oil spill this past April. Even non-investors know how bad an investment it's been. However, if you would have bought near 2009's lows, you'd actually be up on your investment today. Kinda crazy.

If you're like me, once you find a great company or story stock, you have the urge to immediately buy in before you miss your chance. But I've been most successful in stock picking when I've ignored my fears of a runaway stock price and forced myself to wait and buy on weakness. Know that sometimes a stock's price will run away from you and never come back. But also know that there are thousands of stocks out there and returns tend to grow proportionately with patience.

Matt Koppenheffer, Fool contributor: Most of the best investing wisdom I've come across is pretty simple and very timeless. In fact, much of it boils down to the oft-repeated, cliched investing aphorism from Warren Buffett: "Be fearful when others are greedy, and greedy when others are fearful."

I didn't need 2010 to teach me that, but there were plenty of good reminders of that during the year. One that sticks out in particular to me is the case of BP. Following the Macondo blowout in April, the market got extremely pessimistic about the company, with reports swirling that it could go bankrupt or have its assets seized by the U.S. government.

The spill has cost BP a ton of money and the fallout isn't over with yet, but the news cycle has moved on and people have realized that the company not only will survive but still has valuable assets to move forward with. Currently, the stock trades at almost 30% less than where it was prior to the spill, but it's up 17% from where I highlighted it as an opportunity and more than 60% from the point of maximum pessimism -- and I don't think it's done recovering.

And frankly, BP wasn't even the best pick from the oil spill fallout -- both Transocean  (NYSE: RIG  ) and Halliburton  (NYSE: HAL  ) were involved in the spill and both stocks have had even stronger recoveries than BP.

Alex Dumortier, Fool contributor: To paraphrase P.T. Barnum: In 2010, I learned that the Fed can fool most of the people some of the time ... particularly when it offers those people a short-term financial incentive. The 20% run-up in stock prices since Aug. 26 -- the day before Chairman Ben Bernanke's speech hinting at QE2 -- is more of what legendary stock investor Seth Klarman described in May as a "Hostess Twinkie market ... nothing was natural." (Small-cap stocks are up 32% over the same period!) I recognize that part of the advance is attributable to improving economic data, but stocks already looked somewhat pricey at the end of August.

Many financial professionals (and pundits), who are focused on minimizing career risk rather than maximizing clients' wealth, are herding investors into the market with cries of "Don't fight the Fed!" Against this backdrop of exuberance, I'll continue to do as I've done throughout 2010, orienting stock investors toward the highest-quality segment of the market, which is by far the most attractive. As I wrote recently, it's difficult to go far wrong when you buy Gibraltar-esque franchises like Cisco (Nasdaq: CSCO  ) and Johnson & Johnson  (NYSE: JNJ  ) at a forward earnings yield of 8%, and Hewlett-Packard  (NYSE: HPQ  ) at 12%. These kinds of stocks offer good odds of a safe passage through the minefield that is this market.

Morgan Housel, Fool contributor: Almost everything got better in 2010. The Dow will finish the year up about 11%. The labor market added 82,000 jobs per month after losing almost 400,000 per month in 2009. Consumer spending rose to a new high. Corporate profits hit a new high. Debt payments as a percentage of disposable income fell to the lowest level since 1999. The list goes on.

What did I learn from it? Opportunity missed. I bought a little near the lows in March 2009 -- where stocks have rallied almost 90% from -- and tiptoed back in over the past year. But nothing like I should have in hindsight. Sure, hindsight is 20-20, but I think a lot of people, including myself, missed most of the Buffett rule Matt mentions: Be fearful when others are greedy and greedy when others are fearful.

We've repeated this line so many times it hurts. But when blatant fear came in 2009, guess what? I was fearful, too. Most of us were. Chin on the floor. Stunned. Deer in the headlights. Couldn't believe what was happening. Buffett's rule can be humbling when you realize that understanding contrarianism and being contrarian are two very different things. That's what I learned in 2010 as the magnitude of the opportunity missed became clearer, and it's something I hope to improve on come the next crisis.

What about you? Tell us what you learned in the comment section below.

Fool contributor Morgan Housel owns shares of Johnson & Johnson. Coca-Cola is a Motley Fool Inside Value recommendation. Coca-Cola is a Motley Fool Global Gains pick. Johnson & Johnson and Coca-Cola are Motley Fool Income Investor picks. The Fool has created a bull call spread position on Cisco Systems. Motley Fool Options has recommended a diagonal call position on Johnson & Johnson. The Fool owns shares of Coca-Cola, Johnson & Johnson, and Transocean. Motley Fool Alpha owns shares of Cisco Systems and Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. 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.


Read/Post Comments (7) | Recommend This Article (5)

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 December 30, 2010, at 11:33 PM, 123spot wrote:

    Housel, you're lesson is true dead on. Next time may be different-- but I will a) have dry powder, rather than be fully invested, horrified, helpless and b) take that dry powder and buy quality all the way down. Alex, much as I love you, I think Abraham Lincoln (that great trickster) is reponsible for the Barnum attribution above. Anand, even knowing the money I might have made/ might make, I would not buy BP for all the gold in China after the unmatchably precious coast of our country was raped by its carelessness. I guess I have learned that if I can make money in this market without selling my soul, I'll still be rich. Happy New Year, guys.

  • Report this Comment On December 30, 2010, at 11:33 PM, 123spot wrote:

    *you're=your

  • Report this Comment On December 31, 2010, at 12:03 AM, moseswillis wrote:

    All good company will have the day when fear is in the streets about them , that the time to move in

    BP is still,and will be a good cash cow.

  • Report this Comment On December 31, 2010, at 3:00 AM, strelna wrote:

    Total drivelling nonsense 123spot. There was carelessness but the precious coast was not 'raped', an invention inspired by the usual absurd hysteria. The President owes BP and Hayward an apology for his gross politico-media overreaction, as unpresidential as it was illegitimate. I think they photographed the same darn bird a thousand times while, even at the time, reporters flew around the ocean in helicopters saying 'where is it?'!

    My investment in BP is doing nicely.

  • Report this Comment On December 31, 2010, at 4:20 PM, 123spot wrote:

    Whatever lets you sleep, strelna. Happy New Year.

  • Report this Comment On January 02, 2011, at 7:04 PM, TMFAleph1 wrote:

    @123spot

    I actually looked into the origin of the phrase before penning the article. I found an article by a historical society according to which Lincoln did not utter it as is commonly believed (unfortunately, I can't find it now -- Google isn't perfect, apparently). However, I'm not 100% certain that P.T. Barnum said this, either -- although he is the more natural source for it, in my opinion.

    Best,

    Alex Dumortier

  • Report this Comment On January 02, 2011, at 8:39 PM, 46PercentReturn wrote:

    Mr. Housel, I respectfully disagree with you. KO was at $65+ in Jan. 2008. So, basically the markey has valued them at par compared to the price prior to the 2008 meltdown. There are too many arguments for investors of all persuasions not to consider them a buy at this time. Dividends- KO will raise their dividend in 2011. This is a given and will appeal to the seasoned, older investor interestred in cash flow. Intl Growth- forget domestic growth. KO's growth and, intrinsic value to the younger investor, is intl growth. Management- The current management is great and has the co. poised for significant growth. This should appeal to all investors especially fund managers. I hope that this is useful to the discussion and the readership.

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