Let me begin with an apology of sorts. I'm only taking a swing at my colleague Rick Munarriz's recent article, "Tell Better Stories," because I know he can take it. He's the man behind Dueling Fools, after all, and he believes, as I do, that disagreement is an essential part of learning. And, of course, we both think that the only way to succeed as an investor is to learn as much as you can, then forge your own path, balancing the risks and rewards with fit your time frame and personality.
On Friday, Rick suggested that investors "tell better stories." The thesis is built on a borrowed Nissan catchphrase, along with Rick's love of rule-breaking stocks, stuff like Intuitive Surgical (NASDAQ:ISRG), the high-flying surgical robot-maker.
I'm going to suggest the opposite. Tell boring stories. Tell absolute stinkers.
Here's something to shoot for. When you tell your friends about your investments, they should run screaming from the room looking for anything -- even a TV tuned to C-SPAN -- hoping to wipe your hideously dull tale from their minds. Your investing stories should be so mind-numbingly boring that you refuse to tell them while you've got someone else at the wheel of your car, for fear they'll doze off and send you hurtling into the ditch.
Here's why.
Everybody loves a tall tale
I love good stories. Everyone loves good stories. Robotic surgery! That's pretty sweet, dude! Email everywhere with your Research In Motion (NASDAQ:RIMM) Blackberry? Internet-based clearance sales via Overstock.com (NASDAQ:OSTK)? Awesome. Who wouldn't love any of these concepts?
No one. And that's precisely why you should fear stocks like these, stocks that come with great stories.
Let's get real here. You think you're the first one to hear the story? Think you're the first one to be excited by the story? Think again. Everyone loves to talk about the next big thing, and that's the problem with the next big thing. Since everybody already loves it, it's priced accordingly. Intuitive Surgical: 57 times earnings. Research in Motion: 30 times. Overstock? Well, there are no earnings.
And when the Street's story-stock darlings are priced at nosebleed valuations, ugly things can happen. Keep in mind, I'm not talking about the possibility of losing money on bad businesses here. I love the whole TiVo thing as much as anyone else. But if you bought into the TiVo tale from the beginning, when everyone was telling that great story, Heaven help your portfolio.
Wakeup call
I don't want to imply that you can never get things right by investing in the next big thing. I'm just saying that the odds are stacked against you. And the more exciting the story, the worse your chances. Remember investing is a game where you have few inherent advantages over the rest of the Street. Discipline is one of them, so play the smart odds.
My cheapskate -- and I mean that in a good way -- colleagues and I at Motley FoolInsideValue think a bit differently about stocks and stories. Tell us an amazing tale, and you'll see a lot of raised eyebrows. You'll see a thought bubble rise up out of our heads reading, "Uh huh. What's this going to cost me?"
Hey, we weren't born curmudgeons; we're just students of human nature. We know how herds work. When the herd is happy, it'll pay anything for a good story. But remember, if the herd is displeased with so much as a single chapter in the epic, it'll trample you.
Pitiful cocktail-party patter
Here's the kind of story that excites us value investors. Inside Value pick Masonite International, which makes . wait for it . doors. It returned better than 40% in just a few months, and might have treated shareholders even better had it not been acquired so soon.
Or consider another pick, First Data (NYSE:FDC), which recently posted sales growth of 3%. Three percent? Zzzzzz . Huh? What's that? It's a leading provider of payment services like money transfer and credit- and debit-card transaction services. Despite its wide moat against competition, it currently trades below its historical valuation multiples and .
Zzzzz .
OK. How about something like Arden Group (NASDAQ:ARDNA), which trades at seven times EBITDA (earnings before interest, taxes, depreciation, and amortization)? It owns California real estate and runs its steady cash-generating grocery stores, Gelson's Markets, which, by the way, whomp the tar out of industry peers in every respect, be it margins, returns on equity and assets . you name it. And the stock is just recovering from a major smack down .
Can't take it any more? Yep, exactly as I expected. You're not alone. The Street's boredom with these steady money-churners is exactly why these stocks become bargains. Your pinstriped broker's attention span is too short to bother with them, and that's why such stocks often trade for less than we value folks figure is their true worth. And because these stocks have already taken their trips to the woodshed, the downside looks limited. Remember, you can't take that big, scary tumble off the Street's "It" list if you're not on the list in the first place.
Hey! Snoozy! Wake up! You're drooling on the keyboard. I'll spare you gruesome details about some of the other recent entries to my "worse than watching paint dry" list, like Mexican airport GrupoAeroportuario del Sureste (NYSE:ASR) or medical supplier Becton, Dickinson (NYSE:BDX).
Just let me give you one more dull detail: Because these companies feature stodgy, old-fashioned stuff like earnings and cash flow, we can actually get a decent idea of their true or "intrinsic" value. Compare that to the usual, story-stock valuation method which is to stick a wetted finger into the air and hope the wind continues to blow that way.
The story's happy ending
I don't buy investments to shock the crowd at the next fiesta. If I want to do that, I'll walk in sporting a miniskirt and a pair of 3-inch stilettos and perform a couple of interpretive dances. I buy investments because I want to make money. And the available evidence shows that over time, the best way to do that is value.
When something is boring and underappreciated, you've got a much better chance of buying quality goods on the cheap. And because we do that, we sleep better. Then we need only sit back and wait for the boring and obvious to dawn on everyone else.
Philip Durell isn't a boring guy, but some of his recommendations in Inside Value are. And that's a good thing. Clickhereto take a free 30-day trial to see what stocks he's picked over the past year as he's trounced the market. Or, even better, subscribe and receive, free -- which is music to a value investor's ears -- a copy of The Motley Fool's Blue-Chip Report 2005: 10 Monster Stocks for the Next Decade. Click here to learn more.
For related Foolishness:
- Here's Rick Munarriz's story that got me going.
- Learn about the trouble with the next big thing.
- Even better than boring: Profit from the panic.
- Check out First Data's latest quarterly results.
Seth Jayson looks for excitement outside his portfolio. At the time of publication, he had shares of Arden Group but no financial position in any other firm mentioned. Overstock.com and Intuitive Surgical are Motley Fool Rule Breaker picks. TiVo is a recommendation ofMotley Fool Stock Advisor. View Seth's stock holdings and Fool profilehere. Fool rules arehere.
