I have a problem. Much as I love stocks, I don't often buy them. Sometimes that's even true when I'm really sure of the thesis. Witness:
- Taiwan Semiconductor
(NYSE:TSM), which popped up on two of the screens I revealed here at Fool.com during 2004. First there was this attempt to find cheap, unloved large caps. And then this screen, which was created with the help of It's Earnings That Count author Hewitt Heiserman, Jr. Neither time did I buy. I gave up at least a 30% gain as a result.
- Next was Google
(NASDAQ:GOOG), over which I dueled with Foolish colleague Rich Smith last September. The price of failing to buy my own argument? A 44% gain ... in one quarter.
- And, finally, how about Advanced Micro Devices
(NYSE:AMD)? I wrote in April that the chip maker would be undervalued after being separated from its Spansion (NASDAQ:SPSN)flash memory unit. That was more than 110% ago.
The research ate my returns
Part of my problem is that I'm a Fool. I'm serious. Wearing the belled cap means I take my time with my investments. I build spreadsheets. I read financial statements. I look for insider buying. I actually try to anticipate what future business prospects look like. And most importantly, I get opinions from other Fools by reading our discussion boards.
Yet this can lead to a kind of paralysis. I don't buy unless the thesis is ironclad. That's exactly why I leave generous returns on the table. And money not earned is nearly as bad as money lost.
A Foolish resolution
The good news is that it isn't too late for any of these stocks, or any of the dozens of others I've singled out here at Fool.com over the course of two years. I just need to get over my paralysis. To do something. And so I'm going public with a Foolish New Year's resolution: I will buy when I find alluring stock ideas in 2006.
There's a good reason to do so. It's called compounding. Albert Einstein once called compounding interest the most powerful force in the universe. And Warren Buffett has been known to lament not investing sooner. Both men point to a simple truth: Putting money to work can lead to riches, even over short periods of time.
Permit me an example, if you will. Let's say you have $1,000 in an investment account, and that you contribute $1,000 each year for five years. Over that period, you earn an average rate of return of 10% per year from your investments in stocks. By the end, you'll have more than $8,300. That's more than one-third of your initial investment. Not bad, right? Nope, not at all.
Just one-third of a slice, please
This is one reason that, if you're going to invest, you should do so regularly, even monthly. Slowly build positions over time. Fool co-founder Tom Gardner, for example, suggests buying in thirds. I tend to agree, though I'd also say there's no firm rule as to how much, or how little, you should buy at one time. A good guide, however, is to have commissions equal 1% or less of your cash outlay.
Eliminate portfolio paralysis
Buying in thirds won't solve the entire problem, though. There's that little issue of finding superior ideas for your investment cash. If you're a hands-off investor, you could do a lot worse than picking a low-cost index fund and playing along with "the market." (As I mentioned before, just make sure you keep commissions to 1% or less of your investment, and pay attention to the fund's expense ratio.) If you're more hands-on, then get to know a company. Learn about its management team. Compare its metrics with its own historical averages, and with other companies in its industry. Weigh the risks.
If you want to leave that job to someone else (namely, us), you can start with our annual stock-picking guides. Over the past five years, three of our five portfolios have beaten the market. In all three of those instances, our aggregate picks beat the market by more than 20%.
Stocks 2006 is off to a similarly great beginning, with more than half the selections already in the money. That includes an unusual low-tech pick that David Gardner and I made. It's up more than 15% as I write, but David and I believe it will double. And, per my resolution, I'll be buying shares soon -- the soonest the Fool's disclosure rules will allow.
Care to join me? You can click here to get a copy of Stocks 2006 now. Or sign up for any of the Fool's market-beating newsletters and get the annual free. Nada. Gratis. All you have to lose is the prospect of greater returns.
Whatever you decide, just promise me that you'll do something. The sooner you get started, the better.
Fool contributor Tim Beyers is thankful portfolio paralysis isn't as serious as the other kinds. Tim didn't own stock in any of the companies mentioned in this story at the time of publication. You can find out what is in his portfolio by checking Tim's Fool profile. The Motley Fool has an ironclad disclosure policy.