I'm a big-time hockey fan, and since there just aren't too many chances to integrate ice hockey and investment advice, I've got to take the opportunities when they come. Watching the Olympic men's hockey games over the past week or so has made me ponder whether there are some lessons here for Foolish investors.
Anything can happen, but favorites are favorites for a reason
One of the big attractions of sports, Olympics or otherwise, is that anything can happen in one game. I wouldn't bet on the Swiss beating Canada in a seven-game series, but all bets are off in a one-shot deal.
Some stocks are like this. The vast majority of today's alternative energy and biotech companies will fail. We've seen this before -- disk drive companies, Internet stocks, and so on. But while most will fail, a couple will figure out a way to succeed and make their long-term supporters very happy.
It's also true that an up-and-comer can still have a very good run before ultimately stumbling and fading away. Iomega and Gateway have amply demonstrated that they didn't have the mettle to become long-term champions, but they gave investors quite a ride, and I'm sure those who sold opportunistically don't begrudge those profits one bit.
An investor or hockey team can also try to ride a hot hand to some measure of success. If Olie Kolzig had gotten red-hot, maybe the Germans might have made it past the opening rounds. But make sure you don't confuse a hot hand with real strength.
A "hot goalie" in stocks could be a cyclical uptrend (like we've seen in copper and oil) or a hot new product (like Apple's (NASDAQ:AAPL) iPod). While all sorts of cruddy energy-related companies will fade (or vanish) when the cycle heads back the other way, a company like Apple has seen a hot hand provide a fresh burst of growth to a company that's been around a long time and is likely going to stay around.
Remember, too, that while there's a reason that underdogs are underdogs, being a favorite carries certain risks of its own. If you're expected to win all the time, the best you can ever hope to do is meet expectations. And heaven help you if or when you fall short -- much as people like building up heroes (and momentum stocks), the tear-down process seems to be just as fun for many people.
Don't believe me? Take a look at Intuitive Surgical (NASDAQ:ISRG) or Google (NASDAQ:GOOG). Both are great companies capable of changing their respective industries. But both got way too expensive as investor expectations moved from optimistic to ebullient to nutty. And while I'm certainly positive on the long-term prospects of both companies, the shares have had some tough skating of late.
Growth is a fragile thing
We've seen lately that growth stories are fragile things. Typically not a force in hockey, the Swiss team has been improving and made a good showing before falling short in the quarterfinals. In many respects, the Swiss are like many growth stocks -- they were small, nimble, and fast and had a bit of a chip on their shoulders.
If a growth story plays its cards right, it can find itself moving from the position of being a near-constant underdog to being considered a real contender. Switzerland could very well be the next Finland. So, too, for companies. It might be hard for some people to believe that companies like DuPont and IBM were once growth stocks, but they were. In both cases, the companies used their initial successes to broaden their businesses and build for future growth.
The trouble with the Swiss team, as well as with many growth stocks, is that once they go head to head with a focused major power, they risk getting bounced. Playing the role of giant-killer requires a near-constant state of vigilance and hard work. It's also a precarious state of being -- a giant can afford a multimillion-dollar screw-up that may bankrupt an emerging rival. That's why I'm suspicious of a growth story that centers around just one product or idea. Instead, I'd rather find companies with the Amazon or IACI/Interactive mentality of multiple avenues of potential future revenue.
Look for the fortress
Investing in speculative stocks can be fun and exciting, but it seems that investors often overlook the fact that yesterday's winners are frequently tomorrow's winners as well. As I've pointed out in a past piece, you can find a lot of profits in buying solid companies with a history of success.
Success compounded over time ultimately helps build a fortress around that success. Canada and Russia have been powers in hockey seemingly forever. Since these countries have had success, become accustomed to success, and understand the keys to success, they're in a better position to continue that success -- they have the experienced players, the talented coaches, the support of the public, and the near-constant influx of motivated young talent that wants to be part of that tradition of success.
In other words, these countries may lose from time to time, but they'll almost always be the favorites every time a tournament comes around, and they'll win more than their fair share.
What about in the corporate world?
Success in the business world means profits and cash flow coming into the company -- cash that can be used for R&D, marketing, and manufacturing improvements that lead to even better products to sell. That creates a virtuous circle where strength builds upon strength and the moat around the business continues to get deeper. How many software companies can match Microsoft's development resources or marketing reach? Or what about the libraries of intellectual property and know-how at health-care companies like GlaxoSmithKline (NYSE:GSK) or Medtronic (NYSE:MDT)?
It should be noted, though, that even the supposedly unassailable fortresses occasionally suffer a broken window or a leaky roof. It's certainly not unheard of for a great team or a great company to take a competitor lightly or make a strategic misstep (New Coke, anyone?). The advantage of a fortress and moat, though, is that one mistake need not be a game-ending disaster. Missing out on a medal isn't going to destroy hockey in Canada, and a bad year or two isn't going to permanently wreck a successful company like Medtronic or Pfizer (NYSE:PFE).
A key to predictable success?
Over the long haul, hard work is rewarded. No two countries typify hard work to me quite like Sweden and Finland. And by no great coincidence, both of these countries are in the semifinals in Torino. When you play the Finns, you don't have to worry about stopping just one or two superstars. Instead, you've got to stop 18 professionals who work well together and are each willing to sacrifice their personal glory for team success.
I try to make Finland-type stocks the cornerstone of my portfolio. I don't need flashy hyper-growth stocks or perennial excuse-making disappointers. I want solid companies led by humble managers with a focus on long-term success. Companies like MSC Industrial (NYSE:MSM) and Genesee & Wyoming aren't flashy, but they get the job done.
There's nothing wrong with trying to have a few superstars in your portfolio, and there's also nothing wrong with playing to your strengths. If you're good at evaluating biotechs (or cyclicals or whatever else), then it certainly makes sense to have a little more invested there than the average investor. But playing to your strengths should never be confused with putting all your eggs in one basket -- it takes a balanced approach and hard work to win in the long run, and investors should never put themselves in a position where the fickle whims of the market could ruin their long-term returns.
Some Foolish final thoughts
Just as in hockey, there's no one-size-fits-all approach for achieving success. Wall Street has seen aggressive growth stock investors build real wealth right alongside stodgier value-investing types or income-focused dividend hounds. What's more important, though, is to avoid the easy mistakes. Don't confuse a promising up-and-comer with a true stalwart, don't mistake a hot hand for underlying brilliance, and don't presume that just because a company is large and well-known it can no longer produce market-beating returns.
Intuitive Surgical is a Motley Fool Rule Breakers recommendation. GlaxoSmithKline is a Motley Fool Income Investor recommendation. Pfizer is a Motley Fool Inside Value recommendation. Take the newsletter that best fits your investing style for a 30-day free spin.
Fool contributor Stephen Simpson owns shares of MSC Industrial but has no financial interest in any other stocks mentioned (that means he's neither long nor short the shares).
