Early in 2008, I came across a stock with some unbelievable numbers. Revenue was up more than 25% year-over-year, return on equity was a robust 49%, and it was considered one of the world’s most dominant companies. Its name? Microsoft
Based on what I knew, I gave Microsoft a lot of consideration. But did I pull the trigger? First, let me say that even thinking about making an investment without weeks of research is alien to me. I come from a value-focused hedge fund. We had all day to analyze stocks, and we used it, often burning the midnight oil.
Hedge funds have a reputation as the gunslingers of the market, but I assure you, mine was anything but. We held just a handful of stocks, and we knew them cold. But keeping track of them, and finding new ones, took a lot of time. That kind of thoroughness is what The Motley Fool is all about. When it comes to burning the midnight oil, David and Tom Gardner -- Motley Fool co-founders and lead analysts of the Motley Fool Stock Advisor newsletter -- could give the hedge-fund crowd a run for their collective money.
No, I didn't buy Microsoft. And I'm glad I didn't, considering that the economic slowdown has spooked investors, and the specter of cloud computing has helped push the stock down nearly 50%. But I'm not really here to criticize Microsoft; it has ample cash on its balance sheet, a compelling valuation, and could well make for a good investment from here.
Regardless, risk exists, and with any investment, it's important to know what you're betting on. No screen or quick peekaboo would warn you of the threats to Microsoft’s competitive position. Similarly, it would have been very difficult to predict that savvy asset managers such as Legg Mason
Some of these risks may be on the obvious side, but have you ever been burned because you missed a material piece of information? Having the time to do some diligent digging is crucial in avoiding potential blowups.
The "Are you kidding me?" formula
There's more. Years ago, I read a book about theories underlying accounting and financial statements. It spent a lot of pages on a common solvency formula: earnings available to pay fixed charges, divided by those fixed charges. With several chapters of buildup, it replaced the simple version with a "corrected" formula that made several tweaks to the numerator and denominator. Was it right? Yes -- it eliminated a lot of flaws in the raw accounting numbers. But that accuracy came at the expense of a formula so complex that individual investors would need days to calculate it.
Lack of time tends to pull investors in one of two ways. The first: making futile grasps in a blizzard of information overload. The second: tunnel vision toward stocks you've already researched. Let's face it -- either one can burn you.
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Even if you don't sign up for the newsletter, take a few moments to think about how time has affected your investing. If the answer is "negatively," consider taking some sort of action to get a better handle on your future. Investing is a critically important task -- one that shouldn't get neglected as often as it does.
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This article was originally published Feb. 23, 2005. It has been updated.
James Early does not own any of the stocks discussed in this article. Microsoft and Legg Mason are Motley Fool Inside Value recommendations. The Motley Fool owns shares of Legg Mason. The Fool has a disclosure policy with regard to such interests.