Some of you can undoubtedly think of dozens of different ways to occupy your weekend rather than watching supercharged, high-octane supercars travel around a track at 200-plus miles per hour for 100 or more laps.
For the rest of the nation, NASCAR auto racing remains one of the most-watched sports on television. Its growth during the early and mid-portion of last decade was phenomenal and rivaled that of football and baseball in the United States. Things changed, however, when the recession hit, as ticket sales sagged with the economy, and a recent rebound in gas prices has constrained the budgets of individuals who drive hundreds of miles to see a race.
Regardless of how you see NASCAR -- an endless parade of left turns or an exciting free-for-all of horsepower -- I see it as a perfect parallel to describe what investing is all about. Here are the first five of 10 ways that NASCAR can teach us about investing better.
1. There are 40-plus cars competing each week for the top prize
Just as there's a field or 42 or 43 cars running on a track in each given week, competing for a chance to parade around in victory lane, there are some 6,600 companies you can choose to invest in on the major exchanges. There are no guaranteed winners in NASCAR, just as there are no guaranteed companies that any stock will go higher -- yet everyone, and every stock, has a chance at being a winner. What this means as an investor is that you have to understand your investments inside and out, including its points of strength and weakness, as well as who its competitors are.
2. You're going to see a lot of left turns
Unless you happen to be watching one of the few road races, you're going to witness a lot of left turns at a NASCAR race. It may seem repetitive, but no one makes a left turn with such precision and at such high speeds as a NASCAR driver. Likewise, when you're researching for your next investment, you're going to go through many of the same repetitive motions, such as looking through balance sheets, annual reports, and recent news stories. But these repetitive actions are what will shape and define your personal investing philosophy.
This is one of the guiding principles Warren Buffett and Berkshire Hathaway (BRK.A 1.28%) (BRK.B 1.25%) invest on. Buffett truly favors what you might refer to as "repetitive" businesses whose products are always in demand and just make money. Its $23 billion purchase of H.J. Heinz (HNZ), in collaboration with Brazil's 3G Capital announced in February, is a perfect example. Known best for its ketchup, Heinz represents a boring, but stable, moneymaker whose condiments and food products regularly find their way into consumers' refrigerators and pantries. Buffett is the epitome of a NASCAR driver who's mastered turning left.
3. It's going to be a long race
NASCAR races are typically long, often lasting a few hours. The Coca-Cola (KO 0.36%) 600, for example, is set to be run in May this year and is a 600-mile race -- the longest of the season. The point is that investing is like a 600-mile race as well. You aren't going to win on the first lap, even if you get a bonus point for leading the lap.
My Foolish colleague Brian Stoffel chronicled, in a hilarious story last February, the differences of what it would be like had a short-term-minded individual owned Coca-Cola stock compared with a long-term investor. If, from February 1920 through February 2012, a long-term investor had taken Coke's dividends and reinvested them without selling a single share, he or she would have turned a $21 investment into about $9.3 million. Not surprisingly, Berkshire Hathaway is Coke's largest shareholder, with 400 million shares in its investment portfolio as of Dec. 31, 2012. Sticking with a solid company like Coke, ranked as the most valuable brand in the world by Interbrand, is certainly one strategy that could help you "win the race."
4. Chances are very good there will be a crash
If you've watched enough NASCAR races throughout the years, you'd know it's pretty rare for an entire race to go by without at least one accident. Similarly, you're not going to have an up market all the time. Stock market corrections are simply part of the natural ebb and flow of economic cycles, and the key to successful investing is not to panic just because the market is in a downdraft. My Foolish colleague Morgan Housel recently pointed to a Deutsche Bank long-term asset study confirming the point, showing that stock returns averaged 6.49% per year from 1838 through 2012 -- far better than either Treasury bonds or gold.
The point is that if you've been making all of your left turns (i.e., sticking to the investing philosophies that work for you) and conserving your energy for the long race, then a crash simply means the caution flag comes out for a few laps. Once the caution flag lifts, it's back to racing once again!
5. If everyone goes three wide into a turn, there's going to be a crash
As you might imagine, racing around a track at high rates of speed doesn't give NASCAR drivers much room for error when they head into a turn. If three or four cars go into a turn side-by-side, attempting to occupy that same space, the chances for a wreck are greatly magnified.
Warren Buffett said it best that you should "be fearful when others are greedy, and greedy when others are fearful." If too many investors are trying to get into the same crowded space at once, that's usually a very bad sign. The poster child here is social-media giant Facebook (FB 4.24%), which was valued as high as $100 billion in secondary markets before its IPO last year. However, the social-media buzz died off almost as quickly as it arrived, with disgruntled traders pushing Facebook below $19 (down 58% from its all-time high) before it finally found its footing. The lesson here is that short-term trends and fads should be treated as white noise, and you shouldn't allow yourself to be caught up in them. Otherwise, you could end up in the DNF (did not finish) column.
Stay tuned tomorrow for Part 2 of how NASCAR can teach us about investing better.