Let's face it: Children, from toddlers on up to teens, are not known for their patience and forethought. Kids want what they want, and they want it now. It doesn't matter what it costs, or whether it's worth it. If you don't believe me, try this little experiment. I dare you. I double-dog dare you.
Buy your teen an off-brand MP3 player or jeans from Target (NYSE:TGT). Now, send her to iPod High, where you either flaunt your Apple (NASDAQ:AAPL) and American Eagle Outfitters (NASDAQ:AEOS), or you take a lunchroom seat with the paste-eaters.
How do you think that will work out? Yeah, I know. So what if I told you that every time the apple of your eye huffed and puffed or merely pouted, instead of costing you money, it might make you a few bucks?
Sound impossible? It's not. The world's biggest tantrum-tosser gives you this opportunity all the time. It's called the stock market. It's a place where all the brains and technology in the world can't overcome base and immature urges like peer pressure, childish greed, and mindless panic.
It's a place where great financial minds will encourage you to buy what's new and hip, no matter what the price. Shares of Research In Motion? Go for it, dude! It's already richly valued, but so what? Everyone likes the BlackBerry, right? Look at that top- and bottom-line growth! Never mind the lackluster returns on capital, or returns on equity that actually lag the average of the S&P 500. And pay no attention to potential competitors like Palm (NASDAQ:PALM), Dell (NASDAQ:DELL), and, oh, anyone else in the rapidly converging gadget and computer industry.
And if you think the Street's youthful exuberance can cost you, wait until it pitches a fit. That's when analysts and fund managers who are quite capable of determining a company's real financial value ignore lead-pipe bargains and scream "Sell!" Why? To be cool, like the rest of the kids.
Here's how it works in the Wall Street Romper Room: You gotta get out if you think the next guy's gonna get out, because you want to be first. Never mind what the business is worth. On the flip side, you have to buy what everyone else likes, no matter what it costs. Never mind what the business is worth. (Sounds familiar, doesn't it?) In the world of the Wise, as in the world of children, it's OK to engage in ridiculous behavior -- so long as you're not alone in your absurdity.
But there is another way: Invest like a grown-up.
And that begins with a sober evaluation of what a business is actually worth. It's a method followed by minor (and by that I mean major) successes like John Neff, Warren Buffett, David Dremen, Bob Olstein, and others. And it's a path we try to follow at Motley Fool Inside Value.
It's pretty simple, really. It's refusing the urge to fall for the overpriced hot new item. It's looking for the quality companies that the fickle kiddies have tossed aside in their Streetish fits. It's knowing enough to stay away from serial money-sinks like GM (NYSE:GM), despite the low P/E. It's snapping up shares of First American (NYSE:FAF), and seeing 50% gains, the kind of gaga returns that too many associate only with high-priced growth stocks.
Don't get me wrong; we don't expect quick bucks like these all the time, and we endure our share of sinkers -- just ask us about Fannie Mae. But by controlling our immature urges and concentrating on what a company is really worth, we expect to see our current market-beating returns continue for years to come.
If you'd like to take a break from the Street's 24/7 kiddie cavalcade and learn how to invest like a grown-up, join us at Inside Value by taking a free 30-day trial. We're beating the S&P 500 by nearly four percentage points since inception, and the risk-adjusted picks will let you sleep at night.
For related Foolishness:
- There's trouble with the next big thing.
- But there are also dirt-cheap dream stocks out there.
- Tuning out the talking heads is another part of the journey to financial adulthood.
This article was originally published on June 3, 2005. It has been updated.
Seth Jayson is a recovering growthaholic. That's right, he was addicted to growthahol. At the time of publication, he had shares of American Eagle but no position in any other firm mentioned. View his stock holdings and Fool profile here . First American and Fannie Mae are Inside Value picks. Palm and Dell are Motley Fool Stock Advisor recommendations. Fool disclosure rules arehere
