I recently read a short piece by screenwriter Nora Ephron titled "What I Wish I'd Known." In it, she lists a bunch of life's truths that she's discovered. I found that many of them can be applied to our financial lives. For example:
- "The plane is not going to crash." This is particularly timely, because given the stock market's recent extreme volatility, some people have been bailing out of stocks entirely, seeing that the market has plunged precipitously. But it hasn't crashed as planes do -- it hasn't been destroyed, never to fly again. Most planes don't crash, and our stock market isn't likely to stop ascending forever, either. Expect bumps in the road, but over the long run, it has always recovered from even the biggest drops.
- "If only one third of your clothes are mistakes, you're ahead of the game." Even the best investors make mistakes. It's the same with our newsletter recommendations, too. Our Motley Fool Stock Advisor newsletter, for example, is whomping the overall market, with its picks recently up an average of 12% vs. a loss of around 18% for the S&P 500. But amid its many winning recommendations are a few that have yet to excel, such as Titanium Metals (NYSE:TIE), down 20% last time I checked, and Activision Blizzard (NASDAQ:ATVI), down 21% from its most recent recommendation. (An earlier recommendation of Activision Blizzard, on the other hand, is up more than 600%.)
- "Don't buy anything that is 100% wool even if it seems to be very soft and not particularly itchy when you try it on in the store." Has this ever happened to you? You read about an exciting company that you suddenly wish were in your portfolio. You look into it and find that it's got a solid profit margin and a low price-to-earnings (P/E) ratio. But it also has very high debt, or a very slow revenue growth rate, or a rapidly escalating share count. You may choose to buy it anyway, but that's risky, and you may regret it. Respect the red flags you run across. You might like the New York Times (NYSE:NYT) and its dividend yield that tops 7%, but think about the future of newspapers and the Times' prospects before you commit your dollars.
- "You can't own too many black turtleneck sweaters." In the stock market, the established blue-chip company is the black turtleneck sweater. It's hard to go wrong owning big companies that are healthy and growing. I'm talking about firms such as Johnson & Johnson (NYSE:JNJ), IBM (NYSE:IBM), Verizon (NYSE:VZ), and UPS (NYSE:UPS). They tend to pay sizable dividends, too, which will keep generating income for you even while the stock market is slumped.
- "Overinsure everything." When you buy stocks, do so with at least a little insurance. Look for a margin of safety to protect you. If you think a stock is worth $30 today and it should be worth $60 in a few years, aim to buy it for $20 or $25 per share, so that you'll have a built-in margin of safety.
- "There's no point in making piecrust from scratch." Why scour through the thousands of stocks out there on your own, to find a few for your portfolio? If you join an investment club, you can share much of the work. If you subscribe to a newsletter you trust, you can receive lots of recommendations and research them, looking for those stocks that seem like the best fit for you.
Finally, here's a last bit of Ephron wisdom: "You never know." In investing, you never know what will happen with your various investments. A few will head south, perhaps never to recover. Others will do well, meeting your expectations. And now and then one might quintuple in value for you in short order. It does happen. I tripled my money in one year once, and another time saw a stock rise 70-fold! You never know.
