Invest Against the Headlines

Much ado about nothing
For the past several months, we've been subjected to non-stop news reporting on the run-up to yet another new record for the Dow Jones Industrial Average (DJIA). Let me make something clear from the start: I consider this an absolutely meaningless milestone. The DJIA isn't an index but a price-weighted average, and the broader-market measuring stick, the S&P 500, just crested its prior high-water mark. That's equally meaningless.

Most of the headline-hawkers out there could not possibly care less. Nor could they tell you if these highs are good or bad for investors. Remember, their job isn't to make you understand, or to help you make smarter investing decisions. Their only concern is to sell a headline.

That's why precious few of them will make it clear to you the real lesson from this rise.

Since 2000, boring stocks have been the best investments.

Just take a look at the biggest winners in the Dow from bubble-time 2000 until now: Altria has returned more than 490% since January 2000, and Caterpillar has returned more than 280%.

Need more?
Given the Johnny-come-lately pace of the S&P 500's rise toward its all-time-high, you might expect that it's been a tough place to make money over the past six years. But you'd be wrong.

A quick check of current S&P 500 stocks yields more than 200 that have doubled since January 2000. More than 110 of them have tripled. There are five dozen four-baggers.

But it hasn't been all beer and Skittles for the S&P 500 since the bubble. There were plenty of losers along the way. More than 100 S&P 500 stocks have been flat or negative since January 2000.

News you should lose
If you think your portfolio would be better off if you held more of those winners than losers, you'd be right. If you think knowing which was which would have been nearly impossible, I'd say you're mistaken.

There's one big, easily perceptible difference between the winners and losers, and that's the amount of media blabber and public adoration for the companies in question.

Let's start with a few of the losers:

Notice anything? Of course you do. During the bubble, these companies were in the news 24-7. These companies were going to lead us into the next century. They were not only changing our lives through technology, they were making millionaires all around the country. These companies could do no wrong -- unless you bought them for your portfolio in January 2000.

Let's contrast that with a few companies that weren't front-page news fodder all day, every day, back then. Note the returns:

Thinking back to 2000, it's easy to see the disconnect. While the tech bubble kept inflating, no one was interested in dusty old energy producers, energy infrastructure or, heaven forbid, tobacco. And, because these companies were ignored, or even openly reviled, their stocks were priced accordingly. When they delivered consistent growth and profits, the stock prices soared, leaving the owners of all those "can't-miss," new-world technology stocks wondering what happened.

Foolish bottom line
The news media can be an investor's biggest enemy, or an investor's greatest friend. It all depends on what you do with the news. If you latch onto the hype, heaven help your portfolio. The best investment opportunities are not to be found in the companies you hear most about. In fact, enthusiasm is always a great indicator of an overpriced stock.

The best long-term opportunities are found, as always, in companies that get little or negative press and are underpriced accordingly. (Studies prove it.) As Wall Street once again begins to hype tech of all kinds and toss aside homebuilders and energy, I'd say we may be shaping up for a repetition of history. So, the question to ask yourself is this: Do I want to buy the stuff that's getting the headlines, a la 2000? Or do I want to look where Mr. Market isn't?

Yes, ignoring the media darlings takes willpower and confidence. It's easier said than done. But there's help available. At Motley Fool Inside Value we make it a point to concentrate on the sectors no one loves. Advisor Philip Durell makes decisions based on earnings power, not excited pundits. That's why Chesapeake is an Inside Value favorite. If you'd like to take a look at a service that's not afraid to invest where the rest of the market won't, a one-month guest pass is just a click away.

This article was originally published in October 2006. It has been updated.

At the time of publication, Seth Jayson had no positions in any firm mentioned. View his stock holdings and Fool profile here. Fool rules are here.