Last October, as the financial world was spiraling toward all-out Armageddon, Tim and I were doing what every other investor on Earth probably wished they could be doing at that moment ...
We were sitting in a bar.
Of course, we were also talking stocks ...
But we weren't debating whether Goldman Sachs (NYSE: GS ) and Morgan Stanley (NYSE: MS ) would go the way of Bear Stearns and Lehman Brothers, nor were we discussing the future of Copart (Nasdaq: CPRT ) and the other companies we had just met with on our Motley Fool Rule Breakers Innovation Tour.
That's because we had just met with a Silicon Valley business legend and he'd dropped a major bombshell on us ...
In fact, he told us that he firmly believed most people couldn't beat the market buying individual stocks, and that many of the companies behind them were run by "drunken chimpanzees."
Granted, drunken chimps can't do much
Not to mention, we were meeting with this guy at a time when once-proud institutions like Bank of America (NYSE: BAC ) and Citigroup (NYSE: C ) were being forced to pay for years of reckless risk-taking and managerial missteps.
So it's not hard to understand why Dilbert creator Scott Adams quipped 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 were 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 why he's sworn off individual stocks. Makes sense to us. Investors were right to distrust the optimists at Ambac Financial (NYSE: ABK ) and Yahoo! (Nasdaq: YHOO ) , among others.
So, what should you do?
Adams gave us nine steps that he says can help you to generate (and protect) wealth when performed in order. 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 avoiding individual stocks altogether? We respectfully disagree.
However, 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 does whatever it takes to stay on top of the companies we recommend -- like travel across the country to meet with top management. And because these research trips don't pay for themselves, we invite you to take a free, 30-day trial of Motley Fool Rule Breakers.
You'll get full access to our members-only website, including full research and write-ups on every stock on our scorecard. Stay with us if you think it will make you money, pay nothing if you don't.
To get started, all you have to do is click here. There is no obligation to subscribe, and nothing to lose.
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This article was originally published Oct. 23, 2008. It has been updated.
Neither Austin Edwards nor Tim Beyers owns shares of any of the companies mentioned. Copart is both a Stock Advisor and Rule Breakers selection. The Motley Fool's disclosure policy is thinking up new torture devices for Catbert, evil HR director, who just took a gig consulting for some of Wall Street's biggest firms.
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