Invest Against the Headlines

Much ado about nothing
For several giddy weeks at the end of the summer, we were subjected to non-stop news reporting on the run-ups to new records for the Dow Jones Industrial Average (DJIA) or S&P 500. These are completely meaningless milestones, especially since they're usually discussed in 30-second sound bites that never bothered to explain how the indexes differ or what the results meant in inflation-adjusted terms. Were they signs of a healthy appreciation or of a dangerous bubble? Did they mean anything at all?

Most of the headline-hawkers out there could not possibly care less. Nor could they tell you if those highs were good or bad for investors. Now they're hyping the recent drops. ... No! Wait! The big two-day rally! Forget them, Fool. 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 an important lesson from the rise (and fall).

Since 2000, boring stocks have been some of the best investments.

Just take a look at the biggest winners in the Dow from bubble-time 2000 until now: Since January 2000, yawn-worthy Ball -- yes, the maker of cans and food containers -- advanced some 379%, and it's one of the laggards among the boring businesses I'm going to discuss below.

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

A quick check of current S&P 500 stocks yields 212 that have doubled since January 2000. More than 130 of them have tripled. There are more than 100 stocks that have quadrupled in just fewer than eight years.

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 120 S&P 500 stocks have gained a mere 10% or less 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 easily perceptible difference between many of 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 kinds of 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 typically front-page news fodder all day, every day. 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 junk like health care or food products. And because these companies were ignored, or maybe 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. 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 30-day 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 owned shares of Quest Diagnostics but no position in any other company mentioned here. View his stock holdings and Fool profile here. Quest and UnitedHealth are Motley Fool Inside Value recommendations. UnitedHealth is also a Stock Advisor pick. Fool rules are here.