Invest Against the Headlines

Much ado about nothing
Before the recent market panic, investors were subjected to non-stop news reporting on the coming Dow Jones Industrial Average all-time high. Let me make something clear from the start: I considered these absolutely meaningless milestones. They told us nothing about the health of the market from there on out, and they only served to attract a few more sheep to the inevitable Wall Street slaughter, the one we're seeing these days.

Alas, most of the headline-hawkers out there could not possibly care less. Remember, their job isn't to make you understand, or to help you make smarter investing decisions. Their only concern is to sell a headline.

That's why precious few of them will make clear to you the real lesson from the late rise in the Dow Jones Industrial Average and the S&P 500, even though we're looking at the kind of times that make things obvious.

Since 2000 -- as is so often the case -- boring stocks have been the best investments.

Just take a look at some of the biggest winners in the Dow from bubble-time 2000 until now: Altria is up more than 400% since January 2000, and Caterpillar has jumped 240%.

Need more?
Let's turn to a wider market index, the S&P 500, to illustrate this point further. Because that index took a while to reach a new high, you might expect it was a pretty tough place to make a buck over the past seven years. But you'd be wrong.

A quick check of current S&P 500 stocks yields scores that have doubled since January 2000. More than 200 of them doubled. There were 129 triples, and more than four dozen five-baggers.

But it hasn't been all beer and Skittles for the S&P 500 since the bubble. There were plenty of losers along the way. Since January 2000, about a fourth of the stocks in the index went flat-line, companies like Dow Jones, Dillard's, and Goodyear. Others fell -- right off the cliff.

News you should lose
If you think your portfolio would be better off had you held more of those winners than losers, you'd be right. If you think knowing which was which would have been nearly impossible, I'd say you're mistaken.

There's one big, easily perceptible difference between the winners and losers: the amount of media blabber and public adoration they attracted.

Let's start with three of the losers.

Notice anything? Of course you do. During the bubble, these companies were in the news 24/7. These companies were going to lead us into the next century! They were not only changing our lives through technology, but they were also making millionaires all around the country! Girl Scouts got rich with these stocks! That guy who used to live beneath the underpass had a new mansion on the lake thanks to these stocks.

These companies could do no wrong -- unless you bought them for your portfolio in January 2000. Let's point out that, as companies, these entities performed quite well. They did lead us into the next (this) century. But as investments from then, they stank, because people paid insane, bubble-level, hysteria-hyped prices up front, prices that were far too rich.

Let's contrast that with a handful of companies that weren't front-page news fodder all day, every day, back then. Note the returns.

Thinking back to 2000, it's easy to see the disconnect. While the tech bubble kept inflating, fewer people were interested in dusty old insurance, oil, clothes, or audio equipment. And because these companies were ignored, or even openly reviled, their stocks were priced accordingly. When they delivered consistent growth and profits, the stock prices soared, leaving the owners of all those can't-miss, new-world technology stocks wondering what happened.

Foolish final word
The news media can be an investor's worst enemy or best friend. It all depends on what you do with the news. If you latch on to the hype, heaven help your portfolio. If you sell when things look bad, for no reason, same prayer. The best investment opportunities are not to be found in the companies you hear the most about. The time to buy isn't when everyone's excited. In fact, enthusiasm is always a great indicator of an overpriced stock. And open panic is a good time to think about getting in the game.

The best long-term opportunities are found, as always, in companies that get little or negative press and are underpriced accordingly. (Studies prove it.) As Wall Street once again begins to hype tech of all kinds and toss aside homebuilders and energy, I'd say we may be shaping up for a repetition of history. So the question to ask yourself is: Do I want to buy the stuff that's getting the headlines, a la 2000? Or do I want to look where the market isn't?

Yes, ignoring the media darlings takes willpower and confidence. Buying stuff that's hated, like Intel was a few months back, is easier said than done. But there's help available. At Motley Fool Inside Value, we make it a point to concentrate on the sectors and companies no one loves -- which is how Intel got the nod. Advisor Philip Durell makes decisions based on earnings power and price, not excited pundits. If you'd like to take a look at a service that's not afraid to invest where the rest of the market won't, and looks at dropping markets with calculated greed and glee, rather than money-burning panic, a one-month guest pass is just a click away.

This article was originally published on Oct. 17, 2006. It has been updated.

At the time of publication, Seth Jayson had no position in any company mentioned here. View his stock holdings and Fool profile here. Intel is an Inside Value recommendation. Fool rules are here.