I must get the email about once a day.
How dare you say that about _________?! (Pick one: Taser, Ipix, Sirius Satellite Radio, Altair Nanotechnolgies.)
Don't you realize that _________ (stun guns, security cameras, satellite broadcasts, nanotechnologies) are the next big thing?
How I usually respond: "Uh huh. Good luck with that."
What I usually leave unsaid: "You're going to need it."
It's not that I don't enjoy investing in companies with the capacity for monstrous growth. I do. But I keep these holdings small, because too much can go wrong with the next big thing. Finding it, and paying the right price, is far more difficult than anyone lets on. Here's why.
The next big thing may be neither big, nor next, nor even much of a thing. For every Microsoft
You'll probably be late to the party anyway. When next big thing's CEO is on the cover of the magazines, and the guy washing your car is telling you to buy the stock, it's probably too late. Consider the hype at Sirius
...the next big thing is always overpriced. You know why? Because it's the next big thing! Everybody wants it! No matter what you pay now, the story goes, it will seem cheap in retrospect, because the next big thing will grow so quickly and become so huge. The trouble is, that attitude can get your portfolio killed. Do we need to talk about Taser
The next big thing might not make any money, even if it's "successful." What do I mean? There are companies out there that achieve a great measure of success in the marketplace but rarely scrape together a dime to repay shareholders. Martha Stewart Living Omnimedia is one. TiVo
Why do people make these kinds of mistakes over and again? Greed may be a part. Everyone likes money, right? But I think it's more than that. My guess for the real reason is this: Hubris. Everyone loves to think he knows more than the next guy. Everyone loves to think he's in front of the curve. And the trouble with that pride is this: It don't goeth before a fall. In the stock market, pride leadeth directly to the fall. If you're smart, it will go afterward.
Here's a modest proposal, one we espouse at Inside Value. Toss the pride. Admit your limitations. Concentrate on the obvious. And limit your risk.
I have no faith that I can see the future better than anyone else. But there's a secret Wall Street won't tell you: You don't need to. You won't need to, because you're going to concentrate on obvious stuff that you can actually measure, like free cash flow, market position, and price.
And the best part of both these investments is that the downside risk was limited. It was limited because everyone already expected the worst, and had bid the stock down accordingly. It was limited because the firms have stellar balance sheets and brand names that command market share the world over. It was limited because the firms turn a large portion of their sales into actual cash and use the excess to reward shareholders through dividends and buybacks.
The Foolish bottom line
If you're interested in repeatable, time-tested methods for market-beating returns, stop looking for the world-beater of tomorrow. Instead, look for the obvious thing right under your nose. Anyone who's followed the stock market for even a brief period knows that it's a fickle beast at best, and an absolute psychotic most of the time. Paying bargain prices for top-notch companies is the best way to build wealth over time, and better yet, it helps you avoid those stomach-churning screamers that can turn the next big thing into the next big joke.
For related Foolishness:
- See why value wins.
- There's no trick. It's simple: Buy when the Street won't.
- It's your portfolio. Would you rather have a single superstar or a deep bench?
Interested in learning how to find those obvious, fat pitches that the Street is missing? Take a no-hassle free trial of Inside Value .
Seth Jayson likes growth, but he'll take a lead-pipe cinch on a stable cash-maker any day of the week. At the time of publication, he had positions in no company mentioned. View his stock holdings and Fool profile here . Fool rules are here .