Even if you held the keys to the fastest racecar on the track, you still wouldn't earn the checkered flag if you drove like a grandmother on the way to the early bird buffet, or a testosterone-crazed teenager delivering pizzas. Similarly, all the great market advice is worthless if you don't think like an investor.
You can find stocks that will drub the market using any valid investing strategy -- as long as you don't shoot yourself in the foot. But in the face of astonishing returns, many investors find that their own temperament can be their worst enemy.
Legendary investor Peter Lynch generated astonishing returns over a 13-year period at the helm of the Fidelity Magellan mutual fund -- a figure that crushed the market and turned small piles of money into life-changing sums. At least in theory -- as it turns out, not all Magellan shareholders did so well. According to John Train's Money Masters of Our Time:
Although he had the best overall fund management record for the decade of the 1980s, he never ranked higher than 16th in any one year. ... Lynch points out that although under his management each share of the fund gained twentyfold, there were eight declines between 10% and 30%. He has also observed that a great many investors lost money, because they held shares for an average of only four to five years, often buying at the peaks and selling at the dips.
Investors flocked to Magellan following good quarters, and fled during less-impressive periods -- buying shares at the high and selling at the low. Even though these investors were smart enough -- or lucky enough -- to put their cash in one of the greatest investment vehicles in U.S. history, they cheated themselves out of tremendous returns.
Picking great stocks is not enough. The best way to beat the market is to buy great companies trading at fair prices, then hold those companies over the long haul. And thanks to the disaster that is today's stock market, some amazing companies are available at prices that are outright ridiculous.
A quick Motley Fool CAPS screen reveals 109 large caps that are 40% to 80% off their 12-month highs. This scan identifies the major companies that are suffering mightily, but aren't as bad off as the financial firms currently teetering on the verge of bankruptcy, or the automakers relying on Washington's largesse to keep them afloat. Of these stricken-but-surviving companies, 125 earn four- or five-star ratings from the CAPS community. If CAPS is to be trusted -- and frankly, the community's track record is pretty strong -- these are great companies that happen to be available at some of the best prices in years or decades. On the list:
(NYSE:DOW)is 72% off its 12-month high. With recently announced cost-cutting measures, an added focus on higher-margin specialty chemicals through the recent Rohm & Haas (NYSE:ROH)acquisition, and a deal with Kuwait Petroleum, Dow's CEO is "positioning the company solidly for the day when we begin to see the first glimmer of an economic spring," according to Fool contributor David Lee Smith. That's good news, especially considering that Dow hasn't traded for less than $20 a share in more than a decade.
- Rival DuPont
(NYSE:DD)has similarly been pounded by the market, off about 44% from its 12-month high. Garnering four stars from the CAPS community, this is another chemical company worth watching for a return to glory, since it now trades at just $28 per share.
(NYSE:PHG)is 58% off its 12-month high. Like Dow, Philips made strong moves to focus on the higher-margin portions of its business and put the company on stronger footing in advance of the inevitable market rebound. It also stands to benefit from the increased use of LED-based lightbulbs. As a curious side note, according to CAPS, seven Wall Street trackers rate Philips an outperform, while two bears give it the red thumb: Bear Sterns and Lehman Brothers.
(NYSE:VE)has cratered, dropping 65% from its 12-month high. But the provider of water and sewage services, garbage removal, power system maintenance, and public transportation remains well-loved: 259 of the 268 All Stars who have rated Veolia deem it an "outperform." As James Early wrote in his Income Investor recommendation of the company in June, "Massive investments needed in the world's water systems will flow profits to the world's largest and most experienced water company." That still holds true, and the company is available on the cheap.
- Paychex has seen tough times, too -- it's dropped about 18% since the Income Investor team selected it in June. But it's rallied since I ran the screen, and the II team believes in it. James and team placed the country's largest provider of payroll processing services on the newsletter's "Buy First" list, and CAPS lists 928 outperform ratings against only 50 underperforms.
There are many other promising companies passing my screen, including blue chips like General Electric
The market's rallying cry of "buy low, sell high" is not just a trite catchphrase -- it's a motto to live by. If you embrace this thinking, you'll leap several steps ahead of the crowd.
Sounds easy, but there are powerful forces at work against you: fear and greed. As the field of behavioral finance teaches us, human and social cognitive and emotional biases affect our economic decisions. In short, people do things with their money that don't always make sense.
As Peter Lynch says, "Some people automatically sell the 'winners' -- stocks that go up -- and hold on to their 'losers' -- stocks that go down -- which is about as sensible as pulling out the flowers and watering the weeds. Others automatically sell their losers and hold on to their winners, which doesn't work out much better. Both strategies fail because they're tied to the current movement of the stock price as an indicator of the company's fundamental value."
Income Investor offers fundamentally great companies. As a bonus, the selections pay healthy dividends, so they're the type of companies designed to thrive in all market conditions and reward investors over the long haul. Our team believes that many of the recommendations are selling at deep discounts, too. Seizing opportunities like these helps great investors accumulate wealth.
Above all, great investors don't panic. No one -- not even the II team, which is outperforming the market by more than four percentage points -- can accurately predict what a stock will do during any given day, week, month, or year. Stocks have a tendency to rise and fall, sometimes violently. But if you can ignore the noise, calm your nerves, fight the urge to click onto your online brokerage statement several times a day, and understand that the point of investing is not to make a quick buck, but to be a long-term owner of a business that will outperform over time, then you're on your way to possessing the mind of the great investor.
Click here to claim a totally free 30-day guest pass to Income Investor. There's no obligation to subscribe.
Roger Friedman has the mind of a decent investor, the nose of a bloodhound, the fingers of an unsuccessful pianist, and the hair of a Monchichi. He owns none of the stocks mentioned. Dow Chemical, Veolia, and Paychex are Income Investor recommendations. The Fool has a disclosure policy.