Things You Should Do Instead of Buy Stocks

In October of 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 Coca-Cola (NYSE: KO  ) had gone cheap after delivering strong profits, or whether big increases in mortgage rates would torpedo the stocks of MFA Financial (NYSE: MFA  ) and Annaly Capital Management (NYSE: NLY  ) . Nor were we 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 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 Wachovia and Freddie Mac (NYSE: FRE  ) 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 such as Harmony Gold Mining (NYSE: HMY  ) and Energy Conversion Devices (Nasdaq: ENER  ) . Neither company's insiders own even 1% of their respective businesses, and both stocks are down by double-digits over the past year.

Executives at these companies weren't really owners. They didn't share in the risk the way that Hasbro (NYSE: HAS  ) Chairman Dr. Alan Hassenfeld 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 these things confuse 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 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.

Austin Edwards owned shares of Coca-Cola at the time of publication. Tim Beyers didn't own shares in any of the companies mentioned. Hasbro is a Motley Fool Stock Advisor selection. Both our Inside Value and Income Investor services have singled out Coca-Cola. The Motley Fool owns shares of Hasbro. Its 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 (14)

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 March 15, 2010, at 2:09 PM, PeyDaFool wrote:

    Hi Tim and Austin,

    I've seen this article posted a few times and have always wondered about one thing. In your "So what should you do?" section, you mention:

    4. Fund your 401(k) to the maximum.

    5. Fund your IRA to the maximum

    Are these listed in order of importance? My employer does not match my 401(k), so I believe funding my Roth IRA to the max is more important.

    Any thoughts?

  • Report this Comment On March 15, 2010, at 2:25 PM, TMFMileHigh wrote:

    Hello PeyDaFool,

    We can tell you that Scott says to perform these steps in order, and we agree that is the right approach.

    As for your specific question, it really depends on your tax situation. If you want to claim the tax benefits of saving, you absolutely *should* commit what you need to in order to collect the max benefit from your 401K.

    Now, on the other hand, if your income is such that you won't receive an outsized tax benefit from contributing to your 401K, then by all means max the Roth. You're dealing with after-tax dollars anyway.

    Does this make sense? We urge you to consult a tax advisor to look into this question more carefully.

    You might also give Rule Your Retirement a try. Our colleague, Robert Brokamp, tackles questions like these monthly.

    FWIW and Foolish best,

    Tim (TMFMileHigh and @milehighfool on Twitter)

  • Report this Comment On March 15, 2010, at 2:26 PM, TMFMileHigh wrote:

    Hello PeyDaFool,

    We can tell you that Scott says to perform these steps in order, and we agree that is the right approach.

    As for your specific question, it really depends on your tax situation. If you want to claim the tax benefits of saving, you absolutely *should* commit what you need to in order to collect the max benefit from your 401K.

    Now, on the other hand, if your income is such that you won't receive an outsized tax benefit from contributing to your 401K, then by all means max the Roth. You're dealing with after-tax dollars anyway.

    Does this make sense? We urge you to consult a tax advisor to look into this question more carefully.

    You might also give Rule Your Retirement a try. Our colleague, Robert Brokamp, tackles questions like these monthly.

    FWIW and Foolish best,

    Tim (TMFMileHigh and @milehighfool on Twitter)

  • Report this Comment On March 15, 2010, at 2:33 PM, PeyDaFool wrote:

    Thanks for the clarification and recommendations. As you noted, in my specific situation, it appears more beneficial to max out the Roth IRA and shy away from the 401(k), since I do not receive a significant tax benefit. With that said, I also contribute 3% of my salary to my 401(k), since no one really knows for sure what the tax situation will be like when I plan to retire around the year 2050 and I doubt I'll be tempted to withdraw that money since the penalty implications are so great.

    I'm a big fan of Robert Brokamp's articles; I routinely read them on getrichslowly.org.

    Fool on!

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