The 10 Best Stocks You Might Actually Buyhttp://www.fool.com/personal-finance/retirement/2007/10/03/the-10-best-stocks-you-might-actually-buy.aspx Seth Jayson
October 3, 2007
I'm easily obsessed with what I read. Too much Tom Wolfe and my sentences are paragraph-length head trips. If my bedtime stories come from Stephen King, it'll be a week of sewer-dwelling monster-clowns and the "coppery taste of blood and fear" on the back of my tongue.
A few months ago, I was obsessed with something a bit less frightening. In fact, it was (and is) downright uplifting. I'm talking about the numbers in Jeremy Siegel's book The Future for Investors. In it, the man who's credited with "calling the top" of the Internet bubble -- the timing of which he maintains was luck -- demolishes many of the investing tropes that lose all of us both time and money.
One of the myths he puts to rest is that obscure, unheard-of stocks are necessary if you hope to trounce the wider market. This is simply not true. And that's especially good news, I think, because I have grave doubts about whether any of us can actually find the next big thing. Don't get me wrong -- I want to find it, too, but I'm a realist, and I think my odds of catching that train are low.
Siegel's wide-ranging analysis only reinforces that suspicion, scuttling the idea that blindly chasing growth -- in hopes that one or two big winners can make up for a pile of big risks -- will make you wealthy. (Turns out, when you toss a pile of spaghetti against the wall to see what sticks, most of it really does land on the floor. The one or two noodles that remain will not provide a meal.)
Leave those rocks where they are
It's possible to generate market-beating gains with reliable, well-known companies ... the kind of stocks you might actually buy ... companies that won't give you an ulcer. Let's go to his numbers. These are five of the top 10 "survivor" stocks of the original S&P 500, from inception until post-2000, with their average annual returns.
I find this list incredible, because it shows the power of investing in well-known companies. None of these firms was a newcomer back in the 1950s. In fact, many of them were already decades old and world-famous when the index was created. Yet they all provided market-whomping returns. How is that possible?
Here's the secret: Those returns are calculated with dividends reinvested. In fact, as Siegel later explains, a healthy dividend, regularly redeployed, is the key to compounding average returns into long-term, market-beating gains.
This makes perfect sense. When strong companies suffer a down market, those dividends buy you more shares. When the markets readjust, you reap the rewards on more shares.
The longer I invest, the more I find myself adding these kinds of companies to my portfolio. Of course, being a value type, I try to buy them when they're cheapest, but I'm not afraid to pay up for quality. As the third column in the above table shows, premium companies always demand a bit of a premium price in the market. Recent prices on companies like Intel (Nasdaq: INTC ) and Microsoft (Nasdaq: MSFT ) , however, show that bargains do come to the world's best companies.
For what it's worth, these days I'm keeping my eyes open to add more shares of companies that I consider to be pharmaceutical and consumer brand powerhouses of the future -- though I'm stretching that definition a bit. Under Armour (NYSE: UA ) certainly isn't cheap, but at the right price, I think we could buy into a strong brand with lasting power. I also see potential in service outfits to cross the boundaries. Companies like Yum! Brands (NYSE: YUM