Not so long ago, my Fool colleague Rick Munarriz suggested that investors think about ways to "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
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 anyone else to speak with: a dentist, a systems analysts, or even (heaven forefend!) a politician. Your investing stories should be so mind-numbingly boring that your dog cries when you tell them.
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
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: 62 times earnings. Research In Motion: 54 times. Apple
And when the Street's story-stock darlings are priced at nosebleed valuations, ugly things can happen. Keep in mind, I'm not saying these story stocks are bad businesses. I love the whole TiVo
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. 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 FoolInside Value 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 MasoniteInternational, 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, 3M
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 Wal-Mart
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 three-inch stilettos and perform a couple of interpretive dances. I buy investments because I want to make money. And real-world and academic evidence shows that over time, the best way to do that is with value stocks.
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 Inside Value recommendations are. And that's a good thing. Click here to take a free 30-day trial or get your subscription for $50 off, plus a free a copy of The Motley Fool's Blue-Chip Report 2005: 10 Monster Stocks for the Next Decade.
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.
This article was originally published as "Conquer the Market With Boring Stocks" on July 21, 2005. It has been updated.
Seth Jayson looks for excitement outside his portfolio. At the time of publication, he had shares of 3M but no financial position in any other firm mentioned. Intuitive Surgical is a Motley Fool Rule Breakers pick. TiVo is a recommendation of Motley Fool Stock Advisor. View Seth's stock holdings and Fool profilehere. Fool rules are here.