A steady stream of positive indicators has given us increased confidence that the underlying fundamentals of our economy are solid, and that our path of growth is steady.
-- John Snow, U.S. Treasury Secretary, Dec. 2, 2005
Once again, but with even more enthusiasm: reduce risk-taking everywhere and do it now.
-- Jeremy Grantham, chairman, GMO, Oct. 19, 2005
The economy is growing, or maybe it isn't. The stock market looks to finish the year strong, but maybe it won't. Smart people, like the ones quoted above, obviously disagree on the direction that American equities will go. We don't really play that game. Instead, we seek to operate with a strategy that will outperform in a bullish economy as in a bearish economy: Find superior businesses and buy them at reasonable prices.
We launch our Stocks 2006 annual stock-picking guide with a reminder about what The Motley Fool wants to help you achieve: market-beating returns for the next 10 to 20 to 30 years. While we'd love to say that this accumulation happens in a straight line, anyone who spends any time in the markets knows that this just isn't so.
Buying to hold
Every year, a team of our best analysts offer their best investment ideas for the years ahead. As of today, Stocks 2005 is trailing the S&P 500 by four points -- 4.9% to 8.8%. And our returns are somewhat more skewed than normal: BioMarin (NASDAQ:BMRN) has gained 139%, while Deckers (NASDAQ:DECK) is down 41% at the other of our spectrum. Ceradyne (NASDAQ:CRDN) and RH Donnelley (NYSE:RHD) are among the other companies that performed well and still have room to run. But our performance isn't quite what it's been in past years.
But as stock pickers, there are years when we have to marvel at what a master like Bill Miller at Legg Mason Value Trust has done -- 14 consecutive years beating the S&P 500.
It's not just that Miller is a great stock picker -- his selections of Amazon.com (NASDAQ:AMZN) and XM Satellite Radio (NASDAQ:XMSR) at times when the overwhelming majority of people thought these companies would never turn profits have, alone, put him in the Hall of Fame. But the thing about investing -- as we say every year in these pages -- is that beating the market over a random 365-day period is just that: randomness. Great stock picks often take a considerable amount of time to come to fruition. As Miller himself has said, in no small way the fact that he has beaten the S&P for so many years is attributable to one thing: luck.
Hey, he said it, not me.
Our ideal
Yes, Stocks 2005 has underperformed to date. But it's an aberration. Stocks 2004 is up 42% (9.2% annualized) vs. 21% (4.9% annualized) for the S&P 500. Stocks 2003 is up 113% (20.9% annualized) vs. 43% (9.5% annualized) for the S&P, including one seven-bagger, one three-bagger, and two doubles. That's what can happen when you focus on finding companies like Quality Systems and Activision (NASDAQ:ATVI) that have great growth stories, catalysts, and compelling valuations. Finally, the most seasoned of the editions, Stocks 2002, is up 40.4% (8.8% annualized), vs. 23.9% (3.2% annualized) for the S&P 500.
Each one is destroying the market. This just goes to show what can happen when you focus on buying great companies at good-to-great prices. You might not get them all right. In fact, you won't get them all right. But you'll do well when your winners exceed your losers both in number and in average return.
I'll say the same thing I said when we launched Stocks 2005:
I'm always amazed that newsletters and stock-picking services guarantee big winners, every time. It doesn't work that way, it never has and it never will, not for anyone who invests in common stocks. But what we can guarantee with Stocks 2006 is that we've taken lessons we've learned in the past, from mistakes and successes, and applied them to each company that we cover. The result is a group of companies that we believe offer excellent potential for beating the market averages over the long term.
Foolish final thoughts
I'm confident that, given the firepower of the analysts who selected for Stocks 2005, that over the next three to five years, this edition will boast market- beating returns as well.
Speaking of firepower, our roster for Stocks 2006 may be our best ever.
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Inside Value lead analyst Philip Durell submits a Berkshire Hathaway clone insurance company that gets rave reviews for its management and investing talents from those who know the business, and all the excitement of a test pattern from the general market.
- Fool co-founder and growth guru David Gardner describes a company that has its hand in all sorts of growth businesses -- quietly growing from a small construction product company into an alternative energy powerhouse.
- Fool newcomer Tim Hanson dialed into one of the biggest long-term trends in the country: the rise in demand for specialty and organic health foods. Hanson found an underfollowed major player in what should be a $30 billion industry by 2007.
- And my company. Ooh la la! It's what Third Avenue Funds manager and investment legend Marty Whitman calls a "wealth creation company." This Manhattan landlord picked up assets on the cheap in 2001 and 2002, when many wondered if New York could come back from terrorist attacks. Well, New York is back in a big way.
Interested in the specifics? Stocks 2006 is available for a limited time. Click here to get your copy today and get a head start on a great investing year.
Deckers is a Motley Fool Hidden Gems recommendation. XM Satellite Radio is a Motley Fool Rule Breakers recommendation. Amazon.com, Quality Systems, and Activision are Motley Fool Stock Advisor recommendations.
Bill Mann is editor of Stocks 2006 . Bill owns shares in Berkshire Hathaway. The Motley Fool has a disclosure policy.
