9 Things You Should Do Instead of Buying Stocks

A few months back, we joined several of our Motley Fool Rule Breakers teammates on a week-long "innovation tour" through Silicon Valley, where we met with executives at Exelixis (Nasdaq: EXEL  ) , VWware (NYSE: VMW  ) , and several other Rule Breakers companies.

We also had the pleasure of meeting with Silicon Valley legends Guy Kawaski -- an early software evangelist for Apple -- and venture capitalist Bill Gurley -- who served as lead analyst on the Amazon IPO.

But perhaps our most interesting meeting was with another man who is no doubt familiar to just about everyone in the business world ...

We watched him work his magic on a touch-sensitive PC that we're still salivating over. We got a closer look at one of the two local eateries that he owns. We even got firsthand details on his new book.

Then we struck a nerve
Little did we know, his passion for personal finance is matched only by his utter disdain for stocks. You see, this keen observer of business and management trends believes that most people, himself included, cannot beat the market buying individual stocks, especially when the companies behind those stocks are run by drunken chimpanzees.

It's a fair point: Drunken chimps can't do much. Yet according to finance professor Kenneth French -- one-half of the team that revealed the market-beating potential of small-cap value stocks -- investors paid $99.2 billion in fees trying to beat the market during 2006, and were on pace to spend more than $100 billion in 2008.

Confusing the confusopolies
And that doesn't even address today's business climate. After meltdowns at Bear Stearns, Lehman Brothers, and General Motors (NYSE: GM  ) , as well as a record year for dividend cuts -- investors in Ford (NYSE: F  ) , DryShips (Nasdaq: DRYS  ) , and Gannett (NYSE: GCI  ) were among those affected -- it's easy to see why Dilbert creator Scott Adams quips that Dogbert, CEO of Confusopoly Corp. (TICKER: HUH), could convince the world's bankers that an active market for commercial paper would melt Greenland. Or that ritual cat sacrifices are the key to saving America's auto industry.

Laugh all you want, but bankers at Merrill Lynch, Citigroup, and elsewhere are the same Harvard-stupid morons who thought that credit derivatives weren't all that risky. Who's to say they wouldn't believe a cartoon character? Or that they wouldn't find synergies between CDOs and cat sacrifices? They're eerily similar, after all -- both begin with the letter "c."

Bottom line, Adams told us his severe distrust of weasels -- er, management -- is the main reason for his swearing off individual stocks. Makes sense to us. Investors were right to distrust the optimists at Bank of America (NYSE: BAC  ) , among others.

So what should you do?
Adams gave us nine steps that he says, when performed in order, can help you to generate (and protect) wealth. We think his suggestions are pretty Foolish, and thus, with his permission (thanks, Scott), we publish them here:

  • Make a will.
  • Pay off your credit cards.
  • Get term life insurance if you have a family to support.
  • Fund your 401(k) to the maximum.
  • Fund your IRA to the maximum.
  • Buy a house if you want to live in a house and can afford it.
  • Put six months' worth of expenses in a money market account.
  • Take whatever money is left over and invest 70% in a stock index fund and 30% in a bond fund through any discount broker, and never touch it until retirement.
  • If any of this confuses you, or you have something special going on (retirement, college planning, tax issues), hire a fee-based financial planner.

You're not in Elbonia anymore, Dilbert
Adams' nine steps look pretty familiar to us Fools; we've always advocated paying off debt, saving for retirement, and having a substantial emergency fund. But avoid stocks altogether? We respectfully disagree.

But we do agree that if you're going to try to beat the market with stocks, you need to know what you're buying -- and you need to be able to trust the management of the companies you own.

That's why our Motley Fool Rule Breakers team traveled across the country to meet with management at many of our recommended companies.

If you'd like to get the full story on what we discovered, read in-depth write-ups of each company we visited, and gain full access to all of our growth-stock research – including every recommended stock on our scorecard -- we invite you to take a free, 30-day trial of Motley Fool Rule Breakers.

To get started, all you have to do is click here -- there is no obligation to subscribe.

Already subscribed to Rule Breakers? Log in at the top of this page.

This article was originally published Oct. 23, 2008. It has been updated.

Austin Edwards owns shares of Apple, which is a Motley Fool Stock Advisor recommendation. Tim Beyers also owns shares of Apple and is a member of the market-beating Rule Breakers team, which counts Exelixis and VMware among its recommendations. Amazon is a Stock Advisor choice. The Motley Fool owns shares of Exelixis. The Fool's disclosure policy is thinking up new torture devices for Catbert, evil HR director, who just took a gig consulting to some of Wall Street's biggest firms.


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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 May 20, 2009, at 9:12 AM, Deepfryer wrote:

    I think paying off your credit card should be listed as step #1, because most of your other options are limited until you pay the credit card off. This really seems to be the factor that limits most American's ability to save money and accumulate some wealth.

    Stop going out to dinner if you have to, cut some costs where you can, but get those cards paid off! They limit your ability to get any returns in the stock market, or to purchase a house, car, or anything else. Credit cards are like ticks, leeches, vampires... whatever blood-sucking analogy you want to use.

    People generally say that each month, you should spend no more than 25% of your pay on your rent or mortgage... well, if you have a large credit card debt, maybe you should consider living in a cheaper place and reducing this number to 20%, until you can get the card paid off. It'll make a big difference in the long run. Just my 2 cents.

    But yes, people should buy individual stocks, assuming they have no credit card debt and have plenty of "extra" money sitting in the bank.

  • Report this Comment On May 20, 2009, at 12:28 PM, arici2 wrote:

    Although I agree that credit cards should be our number 1 priority to pay off, I am getting tired of hearing all the negatives about credit cards. If used responisbly credit cards can serve many needs.

    Obviously, people who complain about the credit card industry have had a bad experience, most likely due to improper use (not paying bills on time). There has to be some responsibility on the consumer side. Let's take accountability for our actions as consumers and stop blaming everyone else for our problems.

    If you want an industry to complain about lets look at the cell phone industry which for whatever reason now has the ability to act as a credit card and provide third party billing of products that are billed to the customer. What about their service charges and hidden fees - have you ever reviewed your bill in detail?

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