9 Things You Should Do Instead of Buying Stocks

In October 2008, as fears of all-out Financial Armageddon led hundreds of great businesses to shed billions in value, Austin and I were doing what every other investor on Earth wished they could be doing at that moment.

We were sitting in a bar, drinking beer.

Of course, we were also talking stocks ...
But we weren't debating whether great companies such as General Electric and Wells Fargo (NYSE: WFC  ) had become screaming buys overnight. We weren't dissecting the meetings we had just had with some of Silicon Valley's finest during our Motley Fool Rule Breakers Innovation Tour.

Instead, we were talking about what had been perhaps our most interesting meeting. A local business legend had told us he firmly believed that most people -- himself included -- couldn't beat the market buying individual stocks, and that many of the companies behind them were run by (ahem) "drunken chimpanzees."

Stumbling toward losses
His level of cynicism surprised us, and yet we were meeting with Dilbert creator Scott Adams at a time when once-proud institutions such as Washington Mutual (forced into the arms of JPMorgan Chase (NYSE: JPM  ) ) had been irreparably harmed by years of reckless risk-taking and managerial missteps.

So, really, we shouldn't have been surprised when Adams wondered aloud if 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.

Ridiculous? Sure. But it was the bankers at Merrill Lynch, Morgan Stanley, and elsewhere who bought into the crazy notion 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."

Adams distrusts the system that allows these Harvard-stupid weasels -- er, managers -- to have access to so much capital. It's the main reason why he's sworn off individual stocks.

Makes sense to us. Investors were right, for example, to distrust the disinterested management at DryShips (Nasdaq: DRYS  ) , Leap Wireless (Nasdaq: LEAP  ) , and JetBlue Airways (Nasdaq: JBLU  ) , each of which currently have insider ownership of less than 1% and one-year returns in the negative double digits.

Executives at these firms weren't really owners. They didn't share in the risk the way that Amazon.com (Nasdaq: AMZN  ) founder Jeff Bezos has for years. They suffered only the inconvenience of cashing big salary checks.

Is every company with low insider ownership burdened with uncaring management? No, of course not, but we prefer to stack the odds in our favor.

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:

  1. Make a will.
  2. Pay off your credit cards.
  3. Get term life insurance if you have a family to support.
  4. Fund your 401(k) to the maximum.
  5. Fund your IRA to the maximum.
  6. Buy a house if you want to live in a house and can afford it.
  7. Put six months' worth of expenses in a money market account.
  8. 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.
  9. 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.

That said, we do agree that if you're going to try to beat the market with stocks, you need to know what you're buying. You need to be able to trust the management teams 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 traveling across the country to meet with executives. And because these research trips don't pay for themselves, we invite you to accept a free, 30-day guest pass to 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.

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

Neither Austin Edwards nor Tim Beyers owned shares in any of the companies mentioned in this article at the time of publication. Amazon.com is a Motley Fool Stock Advisor selection. 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.


Read/Post Comments (6) | Recommend This Article (7)

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 15, 2010, at 10:08 AM, williamjacobs wrote:

    # 7 should be placed at # 4 if you want your best chance at fulfilling hint #8.

    Getting money out of retirement funds can incur penalties that are not in keeping with financial success and if you have a financial hiccup, that's what you might end up doing, thus #7 is a higher priority than maxing out the 401k and IRA.

    I would put in a 3.5:

    Contribute as much to your 401k as your employer matches. THIS retirement savings provides such a high yield that delaying the 6 month MMF goal is worth the risk.

    #9 only makes sense if the manager's fees don't account for a substantial amount of your portfolio. If you haven't maxed out your 401k and IRA with index funds, this means YOU.

    Take a few hours to study what index funds are and how to get them in those accounts or ask a trusted friend or relative. THIS level of finance expertise isn't hard to come by.

  • Report this Comment On January 15, 2010, at 10:17 AM, Elisahome wrote:

    Class C shares compared with Class A shares.

    I am in my early 50's, my current Broker has all of our investments in Class C shares. I was approached by a financial adviser from our bank to invest with their institution. He recommends changing all current investments to American Funds Class A shares.

    Investment amount $100,000.

    What would you recommend? Would the initial fee of 3.5% recoup with the lower over all ratio?

    Many Thanks

  • Report this Comment On January 15, 2010, at 10:39 AM, johngjertsen wrote:

    Elisahome,

    Short answer is yes, eventually the lower expenses in the A shares will recoup the fact that buying the A shares in the first place will put you 3.5% underneath the Net Asset Value (NAV) of the shares. How fast they will do that depends on the spread between the 2 expense ratios.

    You should know that you don't have to buy "A" shares or "C" shares, and that you can either go at it on your own through a discount broker or use a fee-only financial advisor (who can likely get you A shares without the sales load). Depending on your level of need and/or interest in investments, you should consider whether a model of purchasing products (from the bank adviser or your current broker) makes sense over a model of paying a fee for service, or advice, from a Registered Investment Advisor (RIA).

    For full disclosure, I am a CFP certificant and representative of a fee-based RIA in Orlando, FL.

  • Report this Comment On January 15, 2010, at 10:53 AM, JaysRage wrote:

    I actually generally agree with most of this list.

    Once you get to #8, it's worthless, however. To me, that is the point where you start investing in individual stocks to build pre-retirement wealth.

  • Report this Comment On January 15, 2010, at 11:18 AM, Elisahome wrote:

    Thank you for your response Johng. I guess I am in need of education on fee-based RIA's and discount brokers. In a nut shell could you tell me the pro's and con's. Other than the obvious that a fee is paid for each transaction, what is the fee based on, what might the pit falls be?

    Again thank you.

  • Report this Comment On January 15, 2010, at 1:20 PM, TedMurphy100 wrote:

    Get health insurance is probably #2. Generating and protecting long term health is a crucial part of generating and protecting long term wealth.

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