What makes the stock market so interesting on a daily basis isn't the fact that it's a great bunch of money slopping all around, but the fact that it's all so changeable -- as changeable as light on water -- and amidst all the change lurks constant opportunity and danger. The challenge is to set yourself on the right course, avoiding storms and seeking light. How do you do that?
Ask 50 different people how to invest and you'll receive 50 different answers, although many of the same familiar threads will show through in most replies: Buy what you understand; try to pay a reasonable price; don't trade often. In other words, you get generalizations.
Alongside this, you'll be pointed to some of the world's greatest investors -- usually the likes of Warren Buffett and Peter Lynch -- and told, "Do as they do. Study them."
Yes, it makes sense to attempt to learn from the best, but if anyone could emulate the masters, they would have done so by now, and they'd be broadcasting their great numbers to the world. The problem is, no matter how much you read, you can't learn Buffett's intuition -- or anyone else's, for that matter. And every investment choice you personally make ultimately falls to intuition.
You do your homework. You study company history, comb numbers, run spreadsheets, read about management, and maybe even meet them. But in the end, it's your intuition that finally gives you the final answer: "Yes, I should buy this thing." Or, "No, it looks interesting, but something doesn't seem right."
Of course, the more informed you are about investing, the more informed your decisions become, and thus --we could argue -- the better your intuition on each opportunity considered. But how much of your intuition remains ingrained and unchanged, born with you, and influences your decisions despite increased knowledge? I'd argue quite a lot.
Some people are born to love banking stocks, while others are born to follow biotech. Some investors will always be drawn to risky situations, and others will always seek safe havens. You can't escape yourself. When you try to ignore yourself (as I've done with some decisions in years past), you typically get burned, because you're out of your element.
An investment that makes you inherently nervous will rarely pan out because, unless you're very lucky, you're unlikely to hold it long enough to make money. Plus, being nervous, you won't view it rationally. An investment that you have no qualms about -- that seems natural to you -- you can hold and analyze calmly through thick and thin, because volatility doesn't shake an assured resolve.
So, it's all about you. As an investor, who are you? Which investments make you feel resolved and right? That's ultimately what matters, and that's why seeking yourself through others is usually, at best, only an instructive detour.
8 picks and pans
Guidelines can help you become a better investor. Reading investment practices that work for others can help. Criteria help. Obtaining several stock ideas also helps, because you can pursue those few ideas that most appeal to how you invest.
At the outset of 2003, I publicly began to compile a list of stocks that I believed would either outperform the S&P 500 or underperform it. Of the eight companies we're following so far, six were rated "outperform" -- Intel
The following table shows where share prices started, along with dates companies were written about (the articles are archived) and the S&P 500 level. We track against the S&P because if you can't beat it, you should buy it -- via an index fund.
Starting Ticker Price S&P Opinion01/02/03 MCD $16.50 908 U01/16/03 INTC 16.34 901 O01/29/03 HD 20.72 844 O01/23/03 T 20.03 861 U02/04/03 TREE 11.99 843 O03/06/03 JNJ 53.30 822 O 03/06/03 PEP 37.65 822 O03/06/03 MEL 21.66 822 OO = Outperform S&P 500U = Underperform S&P 500
The last three choices are only two months old, while the rest go back to January and February (so they're all still short-term results). Here's how the stocks rated "outperform" have done so far, individually measured against the S&P 500 (dividends not included).
Ticker Start Now Change S&P %Pts. AheadJNJ 53.30 56.52 6.0% 13.6% -7.6PEP 37.65 43.39 15.2% 13.6% +1.6MEL 21.66 26.88 24.0% 13.6% +10.4INTC 16.34 19.54 19.5% 3.6% +15.9HD 20.72 29.48 42.2% 10.6% +31.6TREE 11.99 20.90 74.3% 10.7% +63.6Average 30.2% 10.9% +19.3
Tracking against these equities, the average gain of the S&P 500 was 10.9%. All six of our chosen companies responded to the "up" market, rising, and all but one outperformed the S&P 500, Johnson & Johnson. As we've written, J&J is not inexpensively priced. Overall, our basket of six stocks is up 30% in the last four months -- about 20 percentage points ahead of the S&P 500.
LendingTree was recently bought out at a 45% premium, so it'll likely come off the list soon. Home Depot has risen a great deal (42%), so I'm not nearly as optimistic about it at today's price. It was undervalued initially; now it probably isn't. We'll revisit it.
Here's how our two pans have fared:
Ticker Start Now Change S&P %Pts. Diff.T $20.03 $16.55 -17.3% 8.4% +25.7MCD $16.50 $17.88 8.3% 2.8% -5.5Average -4.5% 5.6% +10.1
McDonald's recently moved past the S&P 500 when measured since January 2, but AT&T has done poorly enough to keep our two pans better than the market -- meaning, losing to the market. So, we're 6 for 8 so far (comparing very well to the money managers in Barron's), as 75% of our picks are outperforming, and all but one are positive.
We'll aim to add new companies to the list, and likely remove some (while keeping a record of performance), but the main objective along the way will remain to explain each choice, and thereby develop a framework.
Jeff Fischer -- who owns many of the stocks mentioned here, all of which you can see in his profile -- does not accept bribes. He's a senior analyst for the Fool. You can see his other and his colleague's best stock ideas in the monthly The Motley Fool Select newsletter. The Fool is investors writing for investors.