Investor, Check Your Sources

The presidential campaign season is over. But before we forget about politics for a while, I must share with you an important investment lesson I learned from the Nixon re-election campaign. I will use my favorite movie, a funeral home, and the flu vaccine to tell my story. What? Just relax, and read on.

The movie
My favorite movie is Oscar winner All the President's Men. If you haven't seen it yet, I am sure Netflix (NASDAQ:NFLX) has plenty of copies of this 1976 classic. The movie tells the story that during the Nixon re-election campaign, a couple of Republican operatives broke into the Watergate building to steal Democratic Party information. Bob Woodward and Carl Bernstein, then young reporters at The Washington Post, uncovered the Watergate plot and connected the dots all the way up the chain. At the top of the chain sat Richard Nixon, who, faced with the facts, had no choice but to resign.

All the President's Men shares an inescapable central message: Check your sources. Woodward and Bernstein demanded that every fact be confirmed by at least two sources. Bottom line: They got their story right and became household names for changing the course of American history.

Now that you know about the movie, let's talk finances. I believe that by having, and checking, multiple sources, your chances of investment success increase. If you act on an investment tip, sans further checking, you may luck out. But the odds are stacked against you, in my mind. The more credible sources you have, the greater your odds of success. You essentially want to make investing an open-book test. Why would you want to expose your hard-earned cash to Russian roulette? I'll use a funeral home to illustrate my point.

The funeral home
Make no mistake: Profiting from death is a little grisly. But people die, and a growing population means more deaths. Fortunately, I found a way to play this that didn't involve buying Home Depot (NYSE:HD) or Lowe's (NYSE:LOW) in anticipation of increased shovel sales.

Enter Alderwoods (NASDAQ:AWGI), one of the largest death-care operators in the United States. Earlier this year, I bought this company after evaluating more than six sources. My primary sources:

Source 1: Tips from the Two Toms (Tom Gardner and Tom Jacobs) in Motley Fool Hidden Gems. Excellent write-ups in the October 2003 and January 2004 newsletter issues.

Source 2: EDGAR Database. Boring, but crucial.

Source 3: The Value Investors Club website.

Source 4: An interview of Alderwoods' chief financial officer, Ken Sloan, conducted by Philip Durell, newsletter analyst for the Motley Fool's Inside Value newsletter.

"Source" 5: My own analysis/valuation.

Source 6: Tips and ideas from my anonymous friends -- my fellow Hidden Gems board members.

Alderwoods represents my Woodward and Bernstein moment. Lots of sources, checking, and homework. Am I assured success? No. But I must tell you, I'm confident about my odds over the next couple of years. While nobody can say that more work equals better returns, at a minimum, investors who research more will end up with stocks more suited to their preferences and investing goals.

"C'mon Pedro, make it easy for me," you say. "I hate doing homework. Isn't there an easier way?" Well, there certainly is. Enter MedImmune (NASDAQ:MEDI).

The popular flu vaccine
During the peak of last year's flu season, I read a Fool article that told me that MedImmune, maker of the flu vaccine FluMist, was healthy and cheap. Those words got my juices going. I would usually never buy a biotech company, as biotech falls outside of my circle of competence. Nevertheless, we were at the peak of flu season. There was definitely panic about the flu. I could see all those 5 million doses of FluMist sold within the next few months. Never mind that through mid-November 2003, only 400,000 had been sold. Never mind that the product was very pricey.

Did I do any more homework? No. I bought the stock, FluMist didn't sell as well as expected, and the stock tanked. All throughout 2004, MedImmune sat at the bottom of my stock heap. I could kick myself for being such a bonehead acting on a tip and not doing my homework. But then, in October 2004, a miracle occurred. Chiron (NASDAQ:CHIR), one of the United States' main flu vaccine suppliers, couldn't deliver. MedImmune hit the lottery. So in the end, this tip worked out OK. However, the ride was too much for me, and I sold the stock. Not my style of investing.

As I leave you, I encourage you to consider incorporating the lessons learned from Watergate reporting into your stock selection and maintenance process. Be thorough, and check your sources. Learn about the business you are evaluating. Learn about the competition. Read their annual and quarterly reports. Listen to the conference calls. Do your own valuation if you're up for such things. Take advantage of the knowledge provided by the community of investors. If you follow this advice, I promise you'll sleep better at night.

Until the next time, Fool on!

There's only one thing better than checking all your sources: having someone else do it for you. We did it for you with Alderwoods -- it was featured in Stocks 2004, The Motley Fool's showcase of our best stock picks for the year ahead. And by the way, those picks are up 35% with not one loser out of 11 stocks. We're going for a repeat performance this year inStocks 2005, which is now available.

Pedro Zuloaga, who owns shares of Alderwoods, continues to be in denial about how horrible the Gators are. Well, at least they are better than the Dolphins. The Motley Fool has a disclosure policy.