9 Things You Should Do Instead of Buy Stocks

Last fall, we joined several of our Motley Fool Rule Breakers teammates on a weeklong "innovation tour" through Silicon Valley, where we met with executives at Intel (Nasdaq: INTC  ) , Immersion (Nasdaq: IMMR  ) , and several Rule Breakers in the making.

We also had the pleasure of meeting with Silicon Valley legends Guy Kawasaki -- 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 that 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 such as Patriot Coal (NYSE: PCX  ) and Penn West Energy Trust (NYSE: PWE  ) -- 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. First there were meltdowns at Bear Stearns, Lehman Brothers, and AIG. Then came a record year for dividend cuts and suspensions that burned investors in everything from Pulte Homes (NYSE: PHM  ) to KeyCorp (NYSE: KEY  ) .

So it's not hard 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, Morgan Stanley, and elsewhere are the same Harvard-stupid folks 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 that 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 Micron Technology (NYSE: MU  ) , 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 any more, 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 individual 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 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 our exclusive members-only website, 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 doesn’t own shares of any company mentioned. Tim Beyers is a member of the market-beating Rule Breakers team. He also didn't own shares in any of the companies mentioned in this article at the time of publication. Intel is a Motley Fool Inside Value pick. The Motley Fool's disclosure policy is thinking up new torture devices for Catbert, evil HR director, who jut took a gig consulting for some of Wall Street's biggest firms.


Read/Post Comments (4) | Recommend This Article (8)

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 August 18, 2009, at 8:32 AM, mikecyn2 wrote:

    it's stupid articles like this that drives me crazy.........all the pro's take profit off the teble all the time yet all people write about is how WE (investors)are supposed to buy and hold forever.......how about writting something for us investors in the REAL world

  • Report this Comment On August 18, 2009, at 8:58 AM, sept2749 wrote:

    your post made me myself the question "what would indeed happen if we were advised to sell and take profit now". Bet you that a lot of stocks would go way down.

  • Report this Comment On August 18, 2009, at 10:02 AM, sapereaude1 wrote:

    There's an increasing problem in the market, in the discrepancy between those who play the market and those who invest. If taxes were, say, 99% on all profits made on the sale of stocks held less than one year, people would invest carefully, and capitalism would regain some justification for its continued existence. Right now, we who invest from the hinterland are playing absentee roulette on a Wall Street wheel, and the country draws ever closer to economic collapse and class war.

  • Report this Comment On August 18, 2009, at 3:36 PM, lloydt1 wrote:

    Sounds to me like someone was long Lehman Brothers and got burned:-) You know not many things drive me harder than someone telling me "You can't do it". So when you tell me I can't make money in individual stocks, I just take my 125% profit in Ford (yes I know some of you made more but I am not greedy) and laugh at you. It takes homework and lots of study to get it right - and you will still get some incorrect. If that is not for you, then I agree leave it to the pros.

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