Don't Invest Like Wile E. Coyote

Thinking about investing can be dry and dull -- trust me, I've been to business school. But it doesn't have to be. You can get valuable insights almost anywhere, if you just keep thinking about how you can improve your money management.

This point hasn't been lost on Mr Juggles at longorshortcapital.com. In one of his recent articles he made an excellent point about Looney Tunes cartoons: While we admire Wile E. Coyote's dedication to catching the Road Runner, it's a shame that he never tries the same strategy twice. I'd never stopped to think about that before.  

I checked the Internet, and, wouldn't you know it, there's a list of products that The Coyote purchased from Acme, including:

• A cactus costume
• Dehydrated boulders (just add water)
• A do-it-yourself tornado kit
• A giant mouse trap
• A giant rubber band
• Rocket-powered roller skates.

Remember how The Coyote (Roadrunnerus notcatchingus) would get excited by an idea, send off to Acme for some supplies, and then try it. Not only would it not work, it usually backfired. Then, after a puff of smoke rose from his singed fur, he'd give up that scheme to try another.

When we're coyotes
This sounds like us, sometimes, when we invest. A new way to invest might occur to us, or we read about one and decide to give it a whirl. Maybe we try looking for stocks with low price-to-earnings ratios. Here are a few recent candidates:

Say we picked one or two such stocks, and they tanked after the first few months. For many of us, that'd be it -- no more looking for low P/E stocks for us!

But that's not the best way to come up with a stock-picking strategy. For one thing, a few months isn't long enough to get a fair picture of your investing performance. Many terrific stocks stall for a few months or even a year or more. As long as you bought them when they were considerably undervalued, and they're healthy and growing, you should end up making some money.

It's also not good to focus on one or two factors. Instead, look at as many metrics as you can when you evaluate companies. The more you know and look at, the clearer your understanding of the company will be.

I've met some people who've sworn off stocks entirely because they lost money in a downturn. (In other words, they failed to trap a roadrunner with their cactus costume.) I've met people who will never buy another pharmaceutical company because they invested in one long ago and they haven't made much money on it. (They got crushed by a rehydrated boulder, and the Road Runner passed them by. Beepbeep!)

Try, try again
Considering that The Coyote always emerges intact, he's clearly able to try again. He should note exactly what went wrong and adjust his approach accordingly on his second try. On perhaps his third or fourth try, he might succeed. The formula for WD-40, after all, was discovered on the 40th attempt, hence the name.

We, too can keep trying, learning from our mistakes as we go. Did that low P/E stock implode on you? Why? Perhaps there are some red flags you can spot next time you're looking at low P/E stocks. For example, try to determine whether the company is experiencing temporary tough times, or if it is facing a major, long-term crisis.

Check how fast debt, accounts receivable, and inventory are growing, for example, compared to sales and earnings growth. Check to see whether the company has enough money available to cover its debt. Is it paying out more than it can afford in dividends? Is its industry in a major slump (like the financial sector recently)?

If you'd like some leads on promising companies that appear undervalued, I invite you to test-drive, for free, our Motley Fool Inside Value newsletter.