We at The Motley Fool are a law-abiding lot. We have strict rules governing our investing and writing decisions and our disclosure of them, and I think we'd all be proud to compare our compliance record to anyone else out there. What's more, many of us have railed against the cheats, sneaks, and thieves that prey upon individual investors in the hopes of lining their pockets with easy, albeit ill-gotten, gains.
And yet, that doesn't mean there might not be something to learn from thieves themselves. As anyone who gets occasional bouts of insomnia could tell you, late-night TV sometimes consists of little more than Iron Chef reruns you've seen 30 times, old dusty movies starring people who were long dead before my parents were born, and true-crime shows.
Watching those true-crime shows, I was struck by the fact that a lot of what goes into being a successful thief is applicable to succeeding in the financial markets. Now, we Fools are by no means condoning or applauding criminals or criminal behavior, but let's just see if there aren't some general principles to be gleaned from those who live their lives outside the lines of what's right.
Case the place
If the documentaries and true-crime shows have it right, successful thieves don't just run willy-nilly into a job. They case the place first -- studying the ins and outs, learning the risks and the details, and figuring out how best to avoid surprises along the way.
Individual investors would do well to do likewise. Like a group of thieves planning on storming a bank, investors need to figure out how they're going to get in and how they're going to get out. That means spending some time contemplating the company's financial future and putting it through some valuation exercises. Above all, you want to figure out what the stock in question is really worth. Once you know a fair price, you can suss out an appropriate discount at which you'd buy and an appropriate premium at which you'd sell.
But what about psychology? Could you buy a hot stock and just wait for the crowds to drive it even higher? Sure, you could do that -- sometimes it works -- but you're investing in hope at that point. Gee, I hope the vault is full of money when I get there. Gee, I hope they don't have a silent alarm. Gee, I hope my getaway driver pulls up in time. In short, it's the sort of planning that'll get you in trouble eventually.
It's also important to figure out what could trip you up. You want to know the company's equivalent of barking dogs, snoopy neighbors, or high-end laser defense systems. Does management have a track record of honesty and integrity? Does the company have real patents? Do sales hinge on one or two major customers? None of these things necessarily disqualifies a company (except in the case of dishonest management), but you need to walk in with open eyes.
Trust no one
You know the old saying "there's no honor among thieves"? Well, individual investors might do well to think much the same about the analysts, pundits, and assorted commentators. It's not that any of these people are necessarily looking to cheat, swindle, or abuse the little guy; it's more that the little guys by and large don't pay their bills and so don't come first.
Accordingly, investors should learn to develop their own methodologies and philosophies about how to analyze and manage their investments.
Doing your own due diligence is paramount. Until and unless you've rolled up your own sleeves and learned the ins and outs of the company for yourself, you're gambling on faith and not investing. Forget what Jim Cramer says, forget what I say, forget what the Gardners say -- take our advice as just that, but give every suggestion a thorough scouring of your own before buying.
A little well-guarded skepticism should also help you steer clear of the hype machine and Wall Street pickpockets. Is Google (NASDAQ:GOOG) a great company with solid leadership? Absolutely. Is the stock floating on a bubble of hot air? I would say it just might be. Ditto for ChicagoMercantile Exchange (NYSE:CME) -- another great company whose greatness is more than accounted for in its stock price.
As for the pickpockets, why pay for a mutual fund company's advertising costs or pay an entry fee just to buy shares when there are so many high-quality funds that don't have those charges? Why overpay on commissions to a broker who provides services that you don't need, want, or use? Why spend money on ridiculously overpriced software analysis tools or newsletters that don't earn their keep?
Forget the big score
Every once in a while you hear about thieves attempting or succeeding in a major heist -- like the one not so long ago who scored one of the versions of the famous Edvard Munch painting The Scream. But by and large, the really big targets are safe. Why? First of all, they're very well guarded. Second, they're all but impossible to sell.
In simpler terms, a big score means big risks. That's why a lot of your thieves prefer to snatch unattended laptops at libraries, unguarded tools from construction sites, or whatever other sellable odds and ends are just left out and unprotected.
For investors, hunting the big score means piling into dubious penny stocks and high-flying whizbangs that more often than not go "bang" before "whiz." Remember, for every 50% loss you take, you need a double to break even. The key, then, is to develop a system for repeatable long-term success.
Grabbing shares of Johnson & Johnson (NYSE:JNJ) below $60 and shares of PetroChina (NYSE:PTR) below $50, on the other hand, was like taking candy from babies. Likewise with many of the small- and mid-cap stocks I like. Sure, I might not necessarily get 100% return in a year from any one of them, but 15% to 20% annual performance is nothing to sneeze at.
It's undeniable that for some of us (myself included) risks are fun and exciting. I always make a point of having at least one biotech stock in my portfolio at all times. The key, though, is to keep the risks in perspective and under control. Putting 5% (or maybe even 10%) of your portfolio into high-risk ideas is fine; bumping that up to 30% or more might be playing with fire.
So go ahead -- buy a stock like Sirius or Evergreen Solar. Take a flier on Elan or NetEase. Just don't bet your mortgage on it, and make sure that your risky bets are more the exception than the rule.
Go where the crowds don't
Most of your successful thievery is done away from prying eyes. Sure, there are pickpockets and purse-snatchers who make their living in the hustle and bustle of big crowds, but that's pretty meager stakes for the most part. By and large, the money's made when nobody's at home.
The corollary here for investors is that values are most often hidden. Through the long years, I've made the bulk of my money from the stocks of companies that, if you asked most people in the street about them, would earn you a confused "huh?" And it makes sense, really. If there isn't a gaggle of analysts trumpeting the stock's virtues to the investing world, it's easier for it to go unnoticed and undervalued. Some of my favorite past picks were like this -- Gleason and Gundle/SLT, for instance.
Sometimes value can also be hidden in plain sight -- investors may just be so disgusted, bored, or pessimistic about huge companies that you can nab their stock at cheap prices. That could well prove to be the case today for stocks like JPMorgan Chase (NYSE:JPM), Pfizer (NYSE:PFE), or Wal-Mart (NYSE:WMT).
By and large, though, more eyes mean less opportunity. The more people who are looking at and analyzing a given stock, the less likely that a bargain is just lying out there in the open. Investors should spend a fair bit of their time looking into the forgotten corners and lifting up the overlooked rocks in the hopes of finding some appealing values within.
The Foolish bottom line
Let me say it again -- stealing is wrong; whether you wear a ski mask or wingtips. But I'm not one to overlook a lesson, no matter how unsavory the source may be. Given that professional thieves choose to live outside the boundaries of society, they have to think and act differently than the group -- and therein lie some lessons for investors.
The market is a hypercompetitive place full of smart people who are motivated by profit. Nevertheless, many of them sing from the same sheet music, so you can learn to predict their behavior and work around it to your advantage. Don't be afraid to be sneaky, clever, and opportunistic. And don't be afraid to think for yourself and boldly explore those parts of the market that the crowd has chosen to ignore. After all, there's a lot of money to be made going where the crowds won't.
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Fool contributor Stephen Simpson owns shares of Johnson & Johnson, JPMorgan Chase, and PetroChina but has no financial interest in any other stocks mentioned (that means he's neither long nor short the shares). NetEase is a Motley Fool Rule Breakers recommendation, JPMorgan Chase is an Income Investor recommendation, and Pfizer is an Inside Value recommendation. The Fool has a full disclosure policy.
