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:
- 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 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.