1 Stock for New Investors

If you clicked on this article because you invest or are thinking about doing so, then you're already ahead of the average American.

  • 50% of American households don't have a retirement account.
  • 40% of working Americans are not saving for retirement.
  • 25% of households have no savings whatsoever.
  • 7.7% of people don't even own a bank account.

So before getting to the issue at hand -- i.e., the one stock I recommend to beginning investors -- you deserve to be congratulated. Unlike the majority of your peers, you've acted responsibly by squirreling away extra cash, and now you're ready to put that money to work in the market.

Time to take the plunge
Investing for the first time can be a harrowing experience, with thousands of stocks to choose from -- let alone mutual funds, ETFs, derivatives, and all sorts of other investments.

Yet if you're like the rest of us, you were attracted to the stock market in the hope of turning a quick and easy profit. After all, how hard could it be to pick a stock that sells for $10 today only to turn around and sell it for $20 next week or next month? Do that a few times, and you'd be ready to retire.

I ask these questions rhetorically, because this isn't how the market works in the real world. Expecting a big payoff is nothing but speculation -- the same thing you do at a horse race. The famous value investor Benjamin Graham probably said it best: "If you speculate, you will lose your money in the end." So save speculation for the racetrack, where you can also enjoy libations and revelry to boot.

The truth behind successful investing
The keys to beating the market and getting fabulously rich while doing so are patience and discipline. According to Warren Buffett, the chairman and CEO of Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) : "The most important quality for an investor is temperament, not intellect. ... You need a temperament that neither derives great pleasure from being with the crowd or against the crowd." And Buffett would know, as Berkshire has successfully bucked the crowd on numerous occasions, ranging from its tenacious avoidance of tech stocks right before the dot-com bust to its profitable capital infusions into several iconic U.S. financial companies over the past several years. As a result, shareholders who invested $10,000 in Berkshire in 1965 are above the $50 million mark today.

Perhaps some examples would help illustrate this point.

Let's look at a speculative bet first. Dryships (Nasdaq: DRYS  ) is a relatively well-known shipping company based out of Greece. Back in 2008, it traded in a range of $70-$100 a share. During the market crash soon thereafter, however, its shares sank (pun intended), and today it trades for just over $2. One of the popular theses on this stock is that it will rebound as soon as the European Union gets its fiscal house in order. What's important to recognize, though, is that this thesis amounts to little more than a speculative bet. If it's true, you could become fabulously rich from one trade. But if it's false, you could easily lose all of your money.

On the other side of the equation, you have market stalwart McDonald's (NYSE: MCD  ) -- you know, the home of the Big Mac. Over the course of 40 years, this company has proven to be a consistent money-making machine for investors. Its split-adjusted price in 1970 was just north of a quarter. A share in the fast-food giant today would set you back nearly $100. Not to mention, it's paid dividends all along the way, qualifying for inclusion in Standard & Poor's list of dividend aristocrats -- companies that have increased dividend payouts for at least the last 25 years.

What about that 1 stock?
Now that we're comfortable with this distinction, let's talk about the one stock I think you should buy for your first investment: Procter & Gamble (NYSE: PG  ) .

This is the most boring and unoriginal idea you've ever heard, right? Well that's the point. Your first few stock purchases should build the core of your portfolio. As such, you want them to be solid, stable holdings that -- most importantly -- don't lose money. There are two basic rules to investing according to Warren Buffett: "Rule No. 1 is never lose money. Rule No. 2 is never forget rule No. 1." And given the opportunity to have your cake and eat it to, you want a core holding that throws off a little cash every quarter via dividends that you can then use to reinvest and grow your portfolio.

Needless to say, Procter & Gamble fits this bill like a glove. It's a Fortune 500 corporation with a successful track record dating back to its founding in 1837. It owns 24 billion-dollar brands ranging from Tide laundry detergents to Gillette razors and more. Its globally diversified selling consumer products in more than 180 countries around the world. And it pays a respectable 3.3% dividend yield that you can take to pursue more speculative ventures if you're so inclined. Thus, while it's impossible to predict the future, so long as there is one, it seems highly likely that P&G will still be around selling its wares.

Want one more recommendation?
If you're on the hunt for another great stock to purchase for your young portfolio, take a look at our recently released free report titled: "The Motley Fool's Top Stock for 2012." It profiles an up-and-coming retailer that people are already calling the next "Costco of Latin America." To access this report while it's still available, click here now -- it's free.

Foolish contributing writer John Maxfield does not own shares in any of the companies listed above. The Motley Fool owns shares of Berkshire Hathaway. Motley Fool newsletter services have recommended buying shares of McDonald's, Procter & Gamble, and Berkshire Hathaway. 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 (16) | Recommend This Article (124)

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 January 31, 2012, at 7:41 PM, MellowGuy1 wrote:

    The tangible book value of P&G is negative. How can an investor know if the intangibles and goodwill are worth anything?

  • Report this Comment On January 31, 2012, at 8:24 PM, 411700 wrote:

    Jim Cramer is out for Jim Cramer...Sirius to hit $6 Bucks ? That was 4 - 5 years ago..I have lost 100's of thousands listening to the likes of the Jim Cramers. I do it all myself and must say my portfolio is back to where it was in 2006.

  • Report this Comment On January 31, 2012, at 9:02 PM, FlakHound wrote:

    I have to disagree with P&G. I mean, Seriously? The CEO needs to go, they are touting the same old marketing line while increasing their spend, and now they are laying off 1600 employee's.

    If they do not get with the Times New Roman, it is not going to be pretty.

    It may also be personal for me, as I refuse to invest in a company that makes careless decisions about hiring and firing. I do not partake of my own companies stock (not that it is doing very well) for the very same reason.

    P&G is not a leader, they are not growing, and they are not a forward thinking future looking company.

    They also do not seem to care about the employee's that they hire, as that huge layoff could easily be assuaged by retraining. Hiring new people into a broken system will not work, they will just be repeating the same mistakes.

    In my humble opinion, P&G is really missing the boat.

  • Report this Comment On January 31, 2012, at 9:03 PM, JohnMaxfield37 wrote:

    MellowGuy1 -

    As a general rule, you're exactly right, negative tangible book value is something you want to avoid. Hewitt Heiserman discussed this in his book "It's Earnings That Count."

    There are well-known exceptions, however, and Proctor & Gamble is one of them. Kraft is another. And IBM is right there on the brink.

    The reason these companies can operate on what otherwise appears to be the brink, is because of their durable competitive advantages and the size and predictability of their cash flow and earnings.

    And it's really the latter flows that you're buying with companies like P&G, as the likelihood of it going into bankruptcy is pretty minute -- famous last words right?

    - John

  • Report this Comment On January 31, 2012, at 9:26 PM, JohnMaxfield37 wrote:

    FlakHound -

    I understand your reservations, and feel the same way toward a number of companies myself.

    P&G obviously isn't one of them. One aspect I didn't mention in the article, though is equally significant, is that P&G stock allows you to play the growing dynamics in emerging markets from a safe distance -- as P&G sells into all of them. This exposure is going to mean more and more going forward, as a couple billion consumers come on line.

    More to the point you made, however, let me leave you with two final thoughts. First, with respect to the CEO, Peter Lynch once said "I like buying companies that can be run by monkeys -- because one day they will be." Now, I actually don't have anything against Bob McDonald, but if you don't have as much faith in him as a leader, Lynch's quote may assuage you.

    Second, Warren Buffett once said: "You go to bed feeling very comfortable just thinking about two and a half billion males with hair growing while you sleep. No one at Gillette has trouble sleeping." While this only deals specifically with one of P&G's many brands, the sentiment applies to many of them. And this is why it's such a good long-term hold.

    - John

  • Report this Comment On February 01, 2012, at 4:09 AM, Darwood11 wrote:

    Well, I can't really disagree with your recommendation of P&G. It's one of my portfolio picks.

    I own other dividend stocks and that includes MCD which is also mentioned in the article. I do understand some people's aversion to owning certain types of stocks; fast food, cigarette companies and so on.

    P&G doesn't carry any stigma that I'm aware of, and it does provide a lot of the basic necessities. Unless one has an issue with beauty products?

    For more info on what the company produces, there is a lot of info at various web sites, including several Wikipedia articles. It's really quite a company.

  • Report this Comment On February 01, 2012, at 8:07 AM, DCUDFlyer wrote:

    Not sure you can argue with either pick here, PG or MCD. Both are incredibly stable companies offering products with inelastic demand.

    I doubt either will shoot to the moon (MCD has had quite a run lately, I suppose) but for a new investor to steadily build a portoflio core including these two, I think its a wise choice.

    I'd be interested in hearing the author's other ideas for a "core."

  • Report this Comment On February 01, 2012, at 9:10 AM, TMFPennyWise wrote:

    I agree with the author and 'UDFlyer': P & G is a valid core stock choice, especially if one takes advantage of a price dip to buy. Bob McDonald and leadership are making strategic moves to improve 2012 profitability. Budget tightening, HR/ 'enrollment' adjustments, advertising strategies to take advantage of digital media, new product development, focus on Latin America and Asian markets for growth, are drivers that will steer the ship back on course. Latest webcast Q & A goes into detail on these strategies.

    As for comments about HR moves, from my perspective lay-offs and hirings seem reasonable (from the coverage we get here in Cincinnati). I know their sharper focus on South American growth will be managed by top new talent. While the lay-offs of the product placement personnel are tough to take especially in this economy, the new plan seems much more efficient.

    We own the stock and are looking forward to a good 2012.

  • Report this Comment On February 01, 2012, at 9:54 AM, JohnMaxfield37 wrote:

    DCUDFlyer -

    In terms of other core stocks -- nothing that will shock you, just nice big stable companies:

    XOM is high on my list. It's reasonably priced, supplies a necessary good, and pays a non-negligible dividend of 2.2%.

    Two tech companies are up there. INTC and MSFT fit the bill for many of the same reasons -- though if I had to pick between the two, it'd be INTC because it's not as vulnerable to piracy. The belief that tech companies are too volatile for core holdings isn't valid anymore. Alex Planes wrote a great article about INTC titled "Why Intel is a Core Stock for Your Portfolio" that I urge you to read if you're interested in the company.

    I don't like internet companies for this purpose because the good ones are priced too high and don't pay a dividend. Two examples are AMZN and GOOG -- you could argue of course that AMZN isn't an internet company, but that's beside the point. I feel the same about AAPL. All good companies; none good for core holdings.

    MCD, KO, PEP, and the other consumer products companies are good too, though P&G is the best in my book.

    - John

  • Report this Comment On February 01, 2012, at 10:23 AM, FlakHound wrote:

    I can definitely see your point John. I am just not so sure it is a great buy for a "new" investor. I feel like many new investors have a lower liquidity with a higher risk tolerance. P&G's cost versus growth is not great.

    If I only have 1k to invest, I do not feel strong enough about investing in P&G.

    Personally from your description, DRYS would be a good choice to start with. It was once a high stock, it has dropped, but has the potential to climb back up.

    I am actually starting a blog about low spend investing, where it will be a personal adventure in building a profile with only $100 dollars and using a combination of just under Pattern T tactics to build that investment using only the initial and the growth and/or loss) with very few if any long term holds, using no margin, options, or funds.

    This is all just my opinion and how I like to play the game.

  • Report this Comment On February 02, 2012, at 7:33 AM, wyzj wrote:

    Flakhound, i'm doing the same thing, but starting out with three different accounts at the same amount and watching which gains most under 3 different investing methods....

  • Report this Comment On February 03, 2012, at 1:12 PM, jlre2 wrote:

    I first must commend your thought on keeping this comment area on topic. A person can be for or aganst your opinions and still makes his/hers comments without rancor nor with offcolor language, not the word I was looking for but all know whatI mean.

    I have thought, more of an observation regadring stock prices. I have seen in the last few years stocks behaving as they did In the latter 1990's.

    I seems like another companies stock has passed over the $100.00 per share price and they have been able to hold that pricing. With many others reaching the $200.00 share mark, and up to over $400.00 per share I ask when will it end. In a sensible adjustment back to a resonable PE ratio or do we flow the path thousands followed in the 1990's the sky is the limit. One little uknown company,not necessarly domiciled in the Unoted States markets something that makes most known systems obsolete, and here again the "Techie Crash and Burn.". The loss I find credible is near $4.7 Trillion dollars, 100's of companies shut their doors, except those that within thenseves were cash flowing,had their short term and long term credit needs in order, they are still wiith us.

    I of course may be wrong on some very few items, I invite all e-mails, and appreciate the constructive reply's. Every one have a good day, and a safe one.

    jlre2

    41

  • Report this Comment On February 04, 2012, at 11:58 PM, marc5477 wrote:

    As a core of a portfolio I wouldnt go with PG. Id go with something that cannot be displaced.

    KO would be my pick for several reasons:

    No matter how many competitors go after Coka-Cola, it will never decline due to branding. PG has a lot of great brands but they are not as "brand stable" as Coke. There is no real brand loyalty to PG products. When I go shopping for household goods I could care less who made my napkins or detergents. I usually go with the best deal since they are all the same. Thus the great rise of generic brands. However, try as you might, no generic will ever challenge Coke or Pepsi for that matter. Next, Coke as amazing profit margins. They are constantly buying shares vs PG which actually has net dilution since 2002.

    PG is good but not the best imho. Id go with MCD but its a bit over valued right now and KO is fair with a div increase coming the end of this month. I also like Pepsi but their brand is not as strong as Coke. In countries where both are available Coke usually wins.

  • Report this Comment On February 07, 2012, at 5:23 PM, RichardSinFW wrote:

    I just added P&G to my stable of stocks this morning. I'm new to investing in general; but after reading some of the other articles concerning P&G I decided to pull the trigger on it. I do like that tasty 3.3% dividend yield; though I must admit I'm still trying to learn what a lot of these terms mean.

    I currently hold the following stocks: MSFT, MCD (got into that when it was in the $40s), AT&T, KFT, INTC, Hershey and P&G.

    I'm a small-time investor only putting about $150 a month into my online account.

  • Report this Comment On February 12, 2012, at 4:58 PM, framehorse wrote:

    Granted I'm of retirement age but why would anyone buy stocks at this point that pay only 2% or so? That doesn't even keep up with inflation. Unless, of course, you are expecting them to take a big raise in price in the near future. I think MCD and P&G are both too expensive to buy now. It's about as bad as putting your money in the bank and getting paid .01% on your money and then having to worry about another possible crash. I'd have to be thirty years old to invest in them, they are good companies but I still don't see them ever being anything like a three or four hundred dollar stock. My sister is 64 years old and a new investor and I wouldn't advise her to buy them unless we were to see another 2008-09 stock drop and then jump on them. (heaven forbid)

    Does this make any sense or am I a pessimist or just plain crazy???

  • Report this Comment On February 19, 2012, at 11:44 AM, thidmark wrote:

    "There is no real brand loyalty to PG products."

    You obviously don't know many women. My wife insists on Tide, Cascade and Dawn, among others. And while I'm not particularly brand loyal myself, my wife likes the smell of Old Spice deodorant.

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