Let's say you are a new stock investor, someone who's always invested in stock index funds but now wants to try an individual stock or two -- what Motley Fool analyst Matt Richey (TMF Matt) calls the "index plus a few" strategy. Should you buy Microsoft (Nasdaq: MSFT), Costco (Nasdaq: COST), General Dynamics (NYSE: GD), or General Electric (NYSE: GE)? What about Berkshire Hathaway (NYSE: BRK.A)?
Shakespeare's Hamlet asserts, "There is nothing either good or bad, but thinking makes it so." And that is true of stocks. Every day, you can find hundreds of published opinions about stocks. Yet not one is ever an absolute good or bad investment. Just as the word "love" is the same word whenever it's used, it means something entirely different depending on who says it and to whom, and when, why, and how. Whether a stock is or isn't appropriate depends on what you think, your strategy, your self-knowledge. Your context.
Every market's must-buys
Still, every era trumpets "must-have" stocks. During the bull market that ended in March 2000, they ranged from the highly speculative, such as JDS Uniphase (Nasdaq: JDSU), to the long-established and unsexy, such as Johnson & Johnson (NYSE: JNJ), and everything in between. In that last group, how many people do you remember saying "Cisco (Nasdaq: CSCO), can't miss. Building the Internet infrastructure. Just imagine." I'm sure I said something like that to friends in 1999. Certain stocks became talismans. Someone said the word, and everyone nodded, but few looked behind the surface meaning. "Can't miss! Get on board!"
Ditto the late 1960s and early 1970s, when I first began learning about stocks from my Dad. So-called blue chips were the must-haves, and they included my father's employer, Eastman Kodak (NYSE: EK), as well as Coca-Cola (NYSE: KO) and IBM (NYSE: IBM). Xerox (NYSE: XRX) was a go-go-technology stock, a sine qua non for risk-taking investors. Not one of these stocks then was appropriate for all investors, and certainly none is today.
Closer to home, let's say you read our Take last Friday on Microsoft -- a comprehensive opinion squeezed into a few hundred words. It was very positive on the company, too. But whether you read this or any other investment analysis, you must do your own research. We really mean it when we say don't mimic us. It's not merely a legal disclaimer. Because whether Microsoft or General Dynamics or LendingTree (Nasdaq: TREE) or Burn Your Money Today (Ticker: TIP) is a good investment depends on you.
Are you 80, 50, or 20 years old? Is the investment in an IRA or an aggressive portion of your portfolio? A college fund? Do you seek a double in five years or a way to make some money over 20 years? Do you want a dividend yield? How much? Will you be buying a little every month? And so on. These are just a few things that influence your stock choices.
It would be great if we had the investing version of Garanimals, the favorite dressing technique of Jeff Fischer (TMF Jeff), where you match your stock "clothing" by animal code. But one size does not fit all. If you had to sum up everything written here and in books and on our radio show, it's fair to say this: "There is no such thing as a good investment for everyone -- unless it's a broad-market, low-expense stock index mutual fund built steadily over 20 years." But look at that -- it already assumes at least one thing: a 20-year investing horizon. For example, your children's college funds may be shorter term and warrant different thinking.
On the other hand, there may be Garanimals for knowing what kind of investor you are, and you can use that knowledge to pick stocks. (And if you want to buy Garanimals, you can! Berkshire Hathaway has just bought the company, Garan Inc.)
Your strategy, yourself
Consider our columns and portfolios based on the Foolish 8, Rule Breaker, Rule Maker, and Drip (dividend reinvestment plan) strategies. These are ways for all of us to talk about different investing approaches and help find what works for each one of us. Some investors might have a whole portfolio based on one strategy -- though at least in the case of high risk Rule Breaker stocks, we have repeated that the strategy should make up no more than 20%, if any, of anyone's portfolio. Is there a stock that would qualify for every strategy?
Take the latest Rule Maker buy, General Dynamics. It's not a small cap on a growth tear, so it's not a Foolish 8 stock. It's hardly a top dog and first mover in an important emerging industry (defense has been around forever), so it doesn't fit the Rule Breaker strategy. But not only may it satisfy the Rule Maker investing criteria, but it might just be the steady grower for periodic or dollar cost averaging investing, the kind of investing done by Drip investors.
The inquiry doesn't end there. Is General Dynamics right for an 80-year-old? It depends on what else she owns. If she already has 100% in stocks, she might want to beef up her percentage of fixed-interest investments. Would General Dynamics be wise for a 20-year-old who wants to go back to school or buy a house in a few years? Almost certainly not, because it's best not to put money in stocks that you absolutely will need within five years. How about an IRA or other tax-advantaged account? Because the defense giant pays a small dividend, you get more of a benefit in an IRA.
The important thing is to look honestly at who you are, what you want, and find the strategies that let you sleep at night -- or nap! -- and still achieve your goals. Then it's easier to find the stocks that fit. Be patient with yourself. Learn about valuation (What does that mean? Read Assessing eBay's Valuation for a great introduction, but please adjust your time machine, because it was written in 2001). If you have a long time for investing ahead, don't let the bear market drive you from stocks into bonds and housing.
With time and experience, most people likely fit this apt description by Phil Fisher in his classic investing tome, Common Stocks, Uncommon Profits:
No investment philosophy, unless it is just a carbon copy of someone else's approach, develops in its complete form in any one day or a year. In my own case, it grew over considerable time, partly as a result of ... logical reasoning, and partly from observing the successes and failures of others, but much of it through the more painful method of learning from my own mistakes.
Please join me in Thursday's Fool on the Hill, where I'll look at three investors' strategies and how they reflect different situations. In the meantime, if you think there is a must-have stock for every kind of investor, by all means make the case on our Rule Breaker Strategies discussion board.
Have a most Foolish week! Updated port returns below.
Tom Jacobs (TMFTom9) joins the team of Motley Fool analysts to bring you deeply researched, undiscovered stock ideas every month in The Motley Fool Select. Enjoy your 30-day free trial today! At press time, Tom owned shares of LendingTree. To see his stock holdings, view his profile, and check out The Motley Fool's disclosure policy.
Rule Breaker Portfolio Returns as of 10/26/02 Market Close:
RB S&P S&P 500 Port 500 DA* Nasdaq Week -0.42% -1.05% -- 0.47% Month 10.94% 9.19% -- 12.27%
Year -23.81% -22.46% -- -32.54%
using IRR*** since 8/4/94 21.00% 8.40% 10.18% 7.60%
*Dividends added. Or, danger ahead. Whatever.
***Compound Annual Growth Rate using Internal Rate of Return. This performance measure is more meaningful than total return because we began adding cash occasionally in July 2001. In a total return calculation, or ((Current Value - All Cash Deposited)/All Cash Deposited), cash added would show up as returns. And that wouldn't be cricket!