9 Things You Should Do Instead of Buying Stocks

Back in October 2008, as fears of all-out Financial Armageddon led hundreds of great businesses to shed billions in value, Tim 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 like General Electric (NYSE: GE  ) and Apple (Nasdaq: AAPL  ) had become screaming buys overnight. Heck, we weren't even dissecting the meeting we had just had with Intel (Nasdaq: INTC  ) CFO Stacy Smith as part of our Motley Fool Rule Breakers Innovation Tour.

Instead, we were talking about what had been perhaps our most interesting meeting.

You see, 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 AIG (NYSE: AIG  ) and Fannie Mae (NYSE: FNM  ) 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 companies like Ambac Financial (NYSE: ABK  ) and Aetna (NYSE: AET  ) -- 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 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.

To get started, all you have to do is click here. There is no obligation to subscribe, and nothing to lose.

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

Both Austin Edwards and Tim Beyers own shares of Apple -- which, along with Amazon.com, is a Motley Fool Stock Advisor selection. Tim also has options on Apple. Intel is an Inside Value pick. Motley Fool Options has recommended buying calls on Intel. 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 (4) | Recommend This Article (22)

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 February 13, 2010, at 4:58 PM, JoeSmartMoney wrote:

    Before you begin investing, grab a copy of your credit report and make sure you finances are in good standing. Look at the information on your report and make sure that everything is accurate. Do you have any outstanding bills you have forgotten about? It does not make sense owing money somewhere and then saving money for investments. Clear any major outstanding debts you have and get into good financial shape before putting money away for investments.

    As you look through your finances and you notice you have expenses that you are not really getting any value from, such as membership accounts or subscriptions for stuff you never use, get rid of them and divert the funds into your investment. Look at the credit cards you have. Do they have high interest rates? Get rid of the high interest cards or pay them off completely so that your funds are not slowly been sucked away by high interests here and there. Set up an automatic deduction from your checking account to your investment account, so that a fixed sum of money is moved into your investment account for stock purchases. This way you are buying shares consistently and do not have to remember to do the purchasing, it is automatic.

    ------------------------------

    www.intelligentinvestingtips.com

  • Report this Comment On February 13, 2010, at 4:59 PM, demodave wrote:

    I like this. It's a good, objective article.

    Just some thoughts:

    1) Make a will: good, but also understand what estate implications you may have. I am not a lawyer, but I know one quite well, and the "death tax" is a bogus decree, because it won't affect 90+% of Americans (the threshold is higher than most people will have on the day of their death). If you own and are concerned about a family business (the typical a-topical tag-along that goes with the Death Tax), consult a lawyer on how to protect that (i.e. incorporate!).

    2) Paying off credit cards is old and very Wise Foolishness. Your debts should be your house and your car and your education. And recent economics indicate that many of us need an education on the first of these.

    Don't know about the "if's" but...

    4) At least put enough in your 401(k) to get your full company match if you have one: it's free money. If you have a long time horizon (at least enough for long-term capital gains taxation), though, the 401(k) may not always be the most advantageous vehicle for growth (long term taxes being much lower than ordinary income taxes).

    You have, of course, forgotten the Foolish advice about the value of having that pizza this week or having $1000 in retirement (loosely paraphrased). Minimizing some expenses today has compounded implications tomorrow.

  • Report this Comment On February 13, 2010, at 5:01 PM, demodave wrote:

    I like this. It's a good, objective article.

    Just some thoughts:

    1) Make a will: good, but also understand what estate implications you may have. I am not a lawyer, but I know one quite well, and the "death tax" is a bogus decree, because it won't affect 90+% of Americans (the threshold is higher than most people will have on the day of their death). If you own and are concerned about a family business (the typical a-topical tag-along that goes with the Death Tax), consult a lawyer on how to protect that (i.e. incorporate!).

    2) Paying off credit cards is old and very Wise Foolishness. Your debts should be your house and your car and your education. And recent economics indicate that many of us need an education on the first of these.

    Don't know about the "if's" but...

    4) At least put enough in your 401(k) to get your full company match if you have one: it's free money. If you have a long time horizon (at least enough for long-term capital gains taxation), though, the 401(k) may not always be the most advantageous vehicle for growth (long term taxes being much lower than ordinary income taxes).

    You have, of course, forgotten the Foolish advice about the value of having that pizza this week or having $1000 in retirement (loosely paraphrased). Minimizing some expenses today has compounded implications tomorrow.

  • Report this Comment On February 13, 2010, at 5:02 PM, demodave wrote:

    PS I believe I have found the root cause of my double posts, and much to my chagrin, it's not Flash, it's Firefox Java handling. Hopefully, the new rev 3.6 will fix that.

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