Psychologist Abraham Maslow's 1943 paper A Theory of Human Motivation outlined the hierarchical needs of all human beings. According to Maslow, these needs are shaped like a five-level pyramid. At the base are physiological needs: food, drink, air, and sleep. Directly above that are safety needs: living in a stable society, medical insurance, financial stability. Next are social needs: love, family, friendship, and belonging; followed by esteem: self-respect and respect and recognition from others; and, at the top, self-actualization: creativity, objectivity, and interest in solving problems.
Great, you're saying. But what does a hierarchy of broad human needs have to do with stock market success? Let's take a step back before we go forward.
Drop-kick the average
As you surely know, throwing your hard-earned savings into the S&P 500 will return about 11% per year, as long as you sit tight. But what if you improve your average yearly compounded returns to 12%, 13%, or even 15%?
|CAGR*||Value of $1,000
in 30 Years
Achieving 15% annual returns is a lofty ambition, to be sure. But I say aim high. There are two simple steps to achieve this goal:
- Find superior stocks.
- Continue to know everything about your superior stocks.
Believe it or not, step No. 1 is the easier of the two. You can screen for vital characteristics, research annual reports, or (like me) subscribe to a service such as Motley Fool Hidden Gems. Keeping tabs of your stocks is more difficult -- particularly if you already have a full-time job.
The portfolio pyramid scheme
As for the second step, what's better than one mind? Two minds. And better than two minds is a thousand minds. That's precisely the kind of community intelligence that Hidden Gems offers to subscribers. And this is how smart investing can satisfy four of your most innate needs:
- Safety: Build a comfortable nest egg.
- Social: Share in-depth stock research with like-minded investors.
- Esteem: Get valuable feedback from your peers.
Self-actualization: Do the research to analyze and identify superior stocks.
Safety in numbers
Warren Buffett has famously implored investors to buy what they understand. Buffett himself makes a point of only investing in that which falls within his circle of competence. Buffett and Microsoft CEO Bill Gates have been friends since 1991, and Gates is an owner of Berkshire stock. But there's a Buffett anecdote floating around that, given the opportunity to buy Microsoft stock, the Oracle from Omaha declined because he could not understand the company. As a consequence, Buffett has missed out on near 400% gains.
I'm not at all questioning the master investor -- on the contrary, I agree with Buffett (I'd be crazy not to agree with the most successful investor ever). Investors should concentrate on opportunities they know and understand. Only by knowing and understanding your investments can you assess their potential.
This is where community can help you realize your investment goals. Maybe it's an investing community of your siblings and cousins. Maybe it's a group of co-workers. My own community, the Hidden Gems boards, is full of doctors, computer scientists, and fire marshals who have offered expertise to others on pharmaceutical companies, software firms, and restaurants.
My own Microsoft moment
In my own portfolio, I can attest to the success of community expertise. Transkaryotic Therapies, which develops drugs for the treatment of rare genetic diseases, was recommended in April, and I bought shares. However, a fellow Hidden Gems member from San Diego was more skeptical. He posed several pertinent questions for the CEO in the community, which, I'll admit, shook my faith.
When Tom subsequently interviewed Transkaryotic's chief, he asked those very questions -- all of which were answered in an articulate and reassuring manner. I held my shares, and today, my Transkaryotic investment is up more than 200%. (It just merged with Shire Pharmaceuticals
The community also recently helped oust the underachieving CEO of FlamelTechnologies; closely scrutinized Stride Rite's
The community keeps track of every stock that makes the Watch List -- NatusMedical
Back to Maslow
You see, the learning and information-sharing aspect of a community is every bit as valuable as stock recommendations themselves. With small-cap investing in particular there's a chance that you won't have heard of many of the companies before you research them. But your cousin or your colleague -- or someone on a message board -- may live down the street from the corporate headquarters and play golf with the CFO.
Investors of the world, ask yourselves: What do you really need? Superior returns? Yes. A way to stay on top of every stock in your portfolio? Definitely. A community of fellow shareholders analyzing SEC filings, insider selling, conference calls, and growth prospects? You bet. We all strive to be the best investors we can be, and we should make use of all our tools.
Maslow said, "A musician must make music, an artist must paint, a poet must write, if he is to be ultimately at peace with himself. What one can be, one must be." To that, I would add, "An investor must make money."
But it doesn't have to be a solo venture. If you'd like to join the vibrant Hidden Gems community, Tom Gardner is offering a free 30-day trial to the newsletter. There's no obligation to subscribe, and a trial includes access to all back issues and previous picks, mid-month reports, and to the Hidden Gems community -- my own personal stomping ground. Click here to learn more.
Emmet Savage owns shares of FARO Technologies and Transkaryotic Therapies, but no other companies mentioned in this article. The Motley Fool has a disclosure policy.