Stop Being Stupid and You'll Make More Money

As sure as I live and breathe, I knew what was coming next.

A company in our Hidden Gems small-cap investing service, Ceragon Networks (Nasdaq: CRNT  ) , had more than doubled in the few short months since I'd recommended it in our July issue.

That's a great result, of course -- we found a little-followed small company with a great wireless technology sitting in a sweet spot in the telecommunications space. It caught fire as the general investing community discovered its worth ... right after we did.

But, as with any company that rises that fast, at some point the stock will start its trading day a little lower, and then fall ever faster, as the multiple forces of those who think "someone knows something," the technical traders, the folks with sell stops, and the short-termers all simultaneously decide that they want out. In Ceragon's case, the company closed down 14% in one day.

Admittedly, some sellers must have moved on because Ceragon hit their fair value target. I think they're wrong, but they certainly exist.

What came next, you ask?
Weeeeeellll, as Ceragon's recommender, I suddenly got flooded with emails from people wanting to know what was "wrong" with the company.

Got that? To recap: Up 80% in three months, but one big down day, and something is "wrong."

I'll tell you what was wrong with Ceragon -- it has a bunch of investors who are focusing on all the wrong stuff. Instead of focusing on its business, they're focusing on its share price. Up means they're right; down, wrong.

As far as dementias go, focusing too intently on ever-wiggling, rarely meaningful share prices can be a pretty expensive one.

Want a lower beta stock?
That's right. I said "rarely meaningful." And I called it costly. In a famous study, researchers Terrance Odean and Brad Barber looked at data from thousands of brokerage accounts, determining that the decile of investors who traded the most also generated the poorest overall returns.

For this reason, Peter Lynch famously noted that even though Fidelity Magellan turned in market-crushing returns during his time managing the fund, most people who were invested in Fidelity Magellan actually lost money. Too many people jumped in just after the fund had done particularly well, just in time to catch one of his inevitable lulls.

In this day and age of instant market access from anywhere, the neither tried nor true way to lower the volatility of the stocks you own is to quote them less often. The fact is, the desire to quote stocks many times a day (or hour) comes from a deep-seated human need to feel in control.

Well, guess what? You're not. All that stock-quoting is only driving you crazy. One of the best things you can do for both your sanity and your portfolio returns is to be a little more negligent.

And now that I've saved you all this time ...
Since you've been burning up all this kinetic energy fretting about the uncontrollable, let's refocus our energy on things that are firmly within our control. Worried about market fluctuations? They're inevitable. What the great investors focus upon is staying away from P-LOC, or "permanent loss of capital."

The best way to avoid P-LOC is to not do stupid things. Remember that time you were going to do something stupid, and then someone came up to you and said, "Hey, don't forget to not do that?" Avoiding P-LOC is a lot like that. Amazingly, if avoiding it becomes the center of what you do, you'll be in the distinct minority of investors, most of whom forget to not do stupid things all the time. To be blunt: Stop being stupid, and you'll make more money.

I've already told you about quoting your stocks less often. Even large companies like ExxonMobil (NYSE: XOM  ) will have huge 52-week ranges. (Exxon's currently spans $68 to $95.) Small-cap companies like Ceragon will tend to move even more on a percentage basis. But that's the noise part. The "making lots of money" part comes from determining how much you think a company is worth, and then waiting for the stock market to send you a meatball to clobber.

It's the advantage individuals have over institutions
P-LOC is what happens over time when investors focus on all the wrong stuff. Believe me, getting a grasp of the right stuff is hard. Why waste time on the wrong stuff? In 2004, person after person told me that I needed to take another look at Sirius Satellite Radio (Nasdaq: SIRI  ) and Taser (Nasdaq: TASR  ) because the companies were doing so well. Problem was, the companies weren't doing all that well; their stocks were.

Institutions have companies they must own; they also have ones they can't own. Companies like Coinstar (Nasdaq: CSTR  ) , Elan (NYSE: ELN  ) , and even McDonald's (NYSE: MCD  ) have had bad stretches, thus becoming companies that funds were too embarrassed to own. Incidentally, this happened at the same time when the potential for P-LOC at each of them was at rock bottom -- with McDonald's, for example, trading below the value of the land beneath its restaurants.

We at Hidden Gems tirelessly search for just these kinds of opportunities, and our results have savaged those of the market.

We haven't gotten it right every time, of course. But by focusing on whether the price offered gives us protection against permanent loss of capital, we offer the ability to invest in small-cap companies at lower risk. And that focus on both risk and gains has paid off with extraordinary returns for our subscribers.

Motley Fool Hidden Gems has achieved gains of 62% since inception in 2003, versus 25% for like amounts in the S&P 500. You can try the service free for 30 days and have full access to all of our research, ideas, and more -- including our top five small-cap stocks for new money now. Click here for all the info.

Bill Mann owns shares of Elan and McDonald's. Coinstar is a Hidden Gems recommendation. Taser is a Rule Breakers recommendation. The Motley Fool has a decidedly non-stupid disclosure policy.


Read/Post Comments (20) | Recommend This Article (218)

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 October 18, 2007, at 6:48 PM, HappyEndingz wrote:

    Bill,

    As always...You ROCK!!

    thomas

    "People may bet on hourly wiggles in the market, but it's the earnings that waggle the wiggles long term."

    --Peter Lynch

  • Report this Comment On October 18, 2007, at 9:15 PM, dls10 wrote:

    Right on Bill! You hit it right on the head, their heads. I agree with you 100% and glad you said it! Cheers.

  • Report this Comment On October 20, 2007, at 9:06 PM, dvanbure wrote:

    LOL. Please, stop beating around the bush and tell us what you really think!

  • Report this Comment On October 21, 2007, at 10:53 PM, LeonardChallenge wrote:

    You are the most insightfull financial writer I've ever read.

    When are you going to collect your investment wisdom in a book? how about now, due to the MF's commitment to financial literqcy?

  • Report this Comment On October 23, 2007, at 12:27 PM, VossPiety wrote:

    The irony here is that the sensationalist style of the Fool's advertising probably attracts the very type of investor that Bill is taking to task.

    But great article Bill, enjoyed it!

  • Report this Comment On October 23, 2007, at 5:48 PM, CatFoodMoney wrote:

    funny title

  • Report this Comment On October 23, 2007, at 7:44 PM, alon2k5 wrote:

    I was smart but still made no money.

    I found Ceragon at $5.14 and picked it for CAPS, I know of no reason why my CRNT pick should be closed.

    Unfortunately I 'forgot' to put real $$$s , that's how smart I was

    Oh well, onward to find the next Ceragon

    Great article Bill, loved it

  • Report this Comment On October 24, 2007, at 4:31 PM, WhidbeyIsland wrote:

    I have used the Fool on and off since close to its inception. I even did a little free lance writing for it at one time. I currently subscribe to one if the Fool newsletters. I don't consider myself as especially intelligent or perceptive as an investor, though I think I have learned a few useful things about investing over the years and from the Fool.

    I am reacting with mixed feelings to the constant advertising and self-promotion within the Fool. I don't have a deep problem with it, and a post like this has real information, but half the posts on the front page are essentially "infomercials," and maybe should be labeled as such.

  • Report this Comment On October 24, 2007, at 7:07 PM, TwitchyBoy wrote:

    I just re-aligned my portfolio with a definite bent toward emerging markets. And, yes, I've been watching my gems hourly and getting all bent out of shape during this stock market 'down day.' But I must remain focused. My portfolio is for a 2-5 year outlook, not a quick buck! Thanks for this article; it helps to renforce what I must keep telling myself again and again and again: I'm in it for the long haul: buy and hold good quality stocks. Thanks again!

  • Report this Comment On October 24, 2007, at 7:51 PM, chief63 wrote:

    Anyone who was worried about Ceragon going down over 10% in one day after it went up over 80% in a couple months knows very little about stock investing. Maybe less than I do if you can imagine that. Especially if they had to email you with concern. What goes up will go down and the higher they fly the harder they crash. If someones worried about a 14% drop than sell it any buy no more stocks forever. Just don't sue my man Mann at Motley Fool because you don't think that he gave you a good recommendation. Ha, ha!

  • Report this Comment On October 25, 2007, at 12:47 PM, odedia wrote:

    I bought this stock at 11.95$.

    You'd think i'd be in a 70% profit right now, right?

    Wrong.

    Being an idiot, I sold and the wrong time and bought again at the really wrong time - too high.

    In the end, I LOST 10% of my hard earned money on this stock.

    This is what made me decide that I need a different kind of attitude to investing, more likely - needing someone to tell me exactly what to buy, when, how much, and more importantly - when to sell, what and how much.

    That why I am using fool.com's latest offering. At least I don't worry about these things anymore.

  • Report this Comment On October 26, 2007, at 12:30 AM, jpowell5 wrote:

    Good article Bill. A good reminder to stay the course during market fluctuations. Too bad many of the articles on the MF are beginning to look like infomercials but I guess that's the name of the game once you reach a certain level of success. Also I'm lobying for two services for the price of one.... the current cost is just too high for the modest investor.

    Overall, love the Stock Advisor service though.

  • Report this Comment On October 26, 2007, at 12:53 AM, solomon wrote:

    As long as we are talking about being an idiot....

    I found ISRG and was in at $17. That's right. Seventeen dollars/share. One day, it tanked for no reason. Dropped from over $50 to $41. My broker called and told me I needed to sell and get back in later. He scared me and churned me. I detest him. Shortly thereafter, I moved my account away from this "genius" and managed it myself. My Foolish wife advised me to get back into ISRG which was then running $135.00. It dropped again to 90-100 range. Foolish wife told me to hang on.

    Today it is over $300. I think I'll take my new financial adviser out to dinner this weekend!

  • Report this Comment On October 26, 2007, at 12:15 PM, Beetlemania wrote:

    A lot of the stuff we discuss has to do with timing. I bot a great company CSCO, but unfortunately at a bad time (2000), paying 135 per share. Decided to hold because of the strength and reputation of the co. Fortunately, it had a 2:1 split along the way, but I'm still waiting for it to hit my ground zero of 67 (currently 31 ). Buy and hold is probably wonderful, but 7 years and holding can ruin retirement and other plans. I say better to cut your losses early and put the money in another 'great' company. Question: How would the MF scorecard look now if all of those 2002 - 2003 MF entry prices (made around the market bottom) had instead been made in 1998 - 2000 at the market top?

  • Report this Comment On October 26, 2007, at 1:20 PM, uganj wrote:

    Hi, I am new to the FOOLish way of investing, but I have always believed that the time to own something with intrinsic value is when it is unfashionable. the tide always changes. I loved the article as it shows this site is for investors who leave the day trading to the impetuous.

  • Report this Comment On October 26, 2007, at 1:54 PM, essnerific wrote:

    now you know why they all wrote to you.

    so that you would write this article!

    i think it will work too.

  • Report this Comment On October 26, 2007, at 3:01 PM, murdockcrc wrote:

    Excellent article:

    It clearly states that, for an investor to be successful, he must not forget that he OWNS part of a business as a shareholder, and that he must control his temper during the inevitable market swings.

  • Report this Comment On October 26, 2007, at 3:05 PM, duddiditforral wrote:

    I keep coming back to TMF because of articles like this....but the few times I tried a premium service I had to cancel. I have some cognitive problems due to M.S., and some of your articles prompt me to say "Keep it Simple, Stupid!" I want brevity, not long-winded writing that sidetracks me so much that I forget what I'm reading about. Also, I too dislike the infomercial appearance.

    You have valuable knowledge to impart to those of us who aren't simply trying to make a quick buck, if you would keep it straightforward and accessible.

  • Report this Comment On October 26, 2007, at 4:14 PM, lslatten wrote:

    I'm new to the MF model, but for me, the MDP makes sense, given my inexperience in investing....so far, so good. I've set the MDP up as a sub-portfolio and look forward to a 5 yr review to see where it's taken me. I'm cautiously optimistic at this point, but following the MDP team lead with enthusiasm. Fool on!

  • Report this Comment On November 09, 2007, at 9:53 AM, OuijaBoardPicks wrote:

    I don't know how you'll avoid this cycle in Hidden Gems recommendations. With so many people following HG recs the stock will pop up, then other investors will follow, then the stock goes flat or drops. With low cost online trading there's a lot of incentive to jump to another five star stock that's up 15 to 30% in the past month.

    We have something of a popularity contest with or stocks, and, despite good earnings, investors may not return to that stock and bring the price back up (LNDC or IIVI). I suppose if we're smart we'll wait until the Mutual Funds discover the company, then we'll make some money.

    Something that has worried me of late is the articles that seem to be written by people trying to keep their stock choice afloat. For instance, I got into BWLD a bit late to catch the large growth, but the chatter on Fool kept pushing the stock, so I bought some. Now that I'm thinking about it I know that BWLD is making money, but there's nothing special about a wing restaurant or sports bar. They are everywhere. I'm afraid they'll blossom like Hooters Restaurants for awhile, then people will get bored.

    I guess I've wandered off topic. Lets just say it's tough to look at those spectacular gains on the five star list and not jump ship on the HG recommendations.

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