I must get the email about once a day.
How dare you say that about _________?! (Pick one: Taser, Ipix, Sirius Satellite Radio, AltairNanotechnologies.)
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 not be big, or next, or even much of a thing. For every Dell
You'll probably be late to the party anyway. When the 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 Apple
... 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 America Online, now owned by Time Warner
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
I've no doubt nanotechnology will reshape many industries. But is Nanogen
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 the Motley Fool Inside Value newsletter. 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.
The best part about both McDonald's and Colgate is that the downside risk was limited because everyone already expected the worst and had bid the stock down accordingly. It was limited because these firms are stellar performers. It was limited because they reward shareholders with dividends and stock 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. That's what Inside Value is all about.
Click here to try a free 30-day trial and have lead analyst Philip Durell guide you along this path. Or, even better, subscribe and get a copy of The Motley Fool's first-of-its-kind Blue-Chip Report 2005: 10 Monster Stocks for the Next Decade right now -- for free. Click here to learn more.
For related Foolishness:
- There's no trick. It's simple: Buy when the Street won't.
- There's a method to finding dirt-cheap dream stocks.
- Learn how to find relentless growers.
This article was first published on May 19, 2005. It has been updated.
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 didn't have a financial position in any company mentioned. Taser is a recommendation of Motley Fool Rule Breakers, and Dell and Time Warner are picks of Motley Fool Stock Advisor. View Seth's stock holdings and Fool profilehere. Fool rules arehere.