Thursday, May 1, 1997
[Today we revisit a
classic Fribble from November 1, 1995.]
Foolish
Guide to Simpleton Investing
by Tom Gardner
(TomGardner)
There are some basic tenets to investing in cash-rich companies with the aim being long-term market outperformance. Hear ye, hear ye:
1. You may not stress out.
In all honesty, sometimes I look out across Fooldom and grimace. All the angst -- "you don't know nothing; shorts are going to eat it on this one," etc. It has that feel of institutional Wall Street creeping in, and experience a flurry of it and you know why Buffett prefers Omaha. It's a shame that there's a fair amount of investor frustration floating around out there in the investment community, and without question, it's the single most disheartening thing about the state of The Motley Fool -- which I'll add is far and away the most tranquil financial forum in the digital world (without being a cobweb site). Getting up in people's face is precisely what we didn't want to see when we launched the forum. For the most part, we don't see it. But every time it props up, it stings a bit.
Foolishness is also thwarted here on occasion by the hyperactive trading mentality. "When should I buy and why." "I bought here and sold there." "I scalped a quick quarter-point." "My options are going to expire worthless." "Where's the market going next week?" It all spells "accounting nightmare" and "lack of accountability" and "high commissions" and "opportunity cost."
Lesson #1: Don't stress out.
2. There are no buy points for cash-king investors. The aim is to find a small group of the most financially sturdy, most profitable, best performing, best industry, strongest brand, most professionally-managed public US companies. When you find them, you buy them, and you turn your eyes away from the stock market and to other things. As was noted in my recent Pitch on Cash-King investing... the ten-stock portfolio here has compounded 57% annual growth over the last three years. Not the sort of stocks that you have to time well, eh?
[Editor's note: The ten stocks were Microsoft (MSFT), Intel (INTC), America Online (AOL), The Gap (GPS), Texas Instruments (TXN), Hewlett-Packard (HWP), Silicon Graphics (SGI), Sun Microsystems (SUNW), Cisco Systems (CSCO), and Dell Computers (DELL).]
Tiptoeing through an industry buoyed by overpriced information, simpleton investors believe the most valuable services out there are the ones that are free -- the guides and books that sit in our public libraries. Simpletons believe that with a dash of cogent research, a sprinkle of basic business principles, and a heavy load of patience, happy-go-lucky, easygoing, average-Joe investors glide past the market. Buffett has been quoted thus: "What I have done is actually remarkably unremarkable." A simpleton agrees -- and sees the largest of all compliments in that acknowledgement.
Expensive neural-network software, $500 shouting newsletters, pricey research reports that compile company research but provide poor stock valuations, daily newspapers with whisper columns, glossy financial magazines that quote unnamed money managers -- these are the wonderful and various financial sources fashioned to tell you when precisely to BUY(!) and when exactly to SELL(!) positions in the companies you've invested in. And they're just the resources that you DON'T need to beat the stock market. In most cases, they hurt far more than help your portfolio.
Lesson #2: There are no buy points.
3. No opportunity costs. Not one. You don't waste time looking at 15,000 ticker symbols. You don't watch financial television. You don't pick up brokerage phone calls in the evening and listen. You don't have to watch your stocks. You don't get angry when someone disagrees with your valuation. You don't invest in markets that you don't understand. You don't stew. You don't miss out on family vacations. You don't waste time reading nonsense. You don't put your faith in the financial services companies that have directly or indirectly generated substandard returns for decades while ever marketing the brand.
The only thing you're concerned with is putting away money weekly, monthly, quarterly, and/or annually to plow back into these holdings. All ten are loaded up with denarii and focused on participating in the newest and most lucrative technologies.
The challenge for the simpleton investor then is not to find hoards of new companies to research, not to ram through a dozen newsletters each month, not to scour the financial news... but rather to work hard to generate and save capital to invest for the long-haul. It takes the focus off high-commission (trade and financial resource), furious-research investing... and back on profitability in the workplace and the savings mentality.
The idea of "buying high" and "selling low" is essentially absurd. The better line is perhaps: Buy intelligently and buy again when you have more cash you can put away for at least 3-5 years, and add to it later if you can, and budget out some income to invest more next Spring, and a la Nick Corcadilos, find ways to make your place of employment more profitable and your role in it more valuable, serve your customers, don't stress out, continue to save money habitually, invest it back into these cash-strong, rapidly-growing, strong-branded, well-managed US companies. Add to them again. Then when the decade has passed, go ahead and run the same screen for the next phenomenal group -- for which no doubt many of these ten will still qualify.
When to buy, when to sell, the importance of daily/weekly fluctuations, the emotional pitch, the fury of it all... what are these?
Lesson #3: Pursue Zero Opportunity-Cost Investing
4. Drop back into Peter Lynch's tomes and recognize that if you generate in excess of 20% returns on your investments -- you can expect to be quite secure in the decades ahead. The Foolishly-modified Beating the Dow, a 4-6-trade-per-year model, has compounded 23% annually. The Investing for Growth approach has returned 25% since 1980. Simpleton Investing is an 8-trade-per-decade kinda model, which over the last three years has compounded 57.6% annually, and which is leading the S&P 500 by a score of 20.8% to 4.8% over the last three-and-a-half months.
Anything in this vicinity of annual returns, and you'll be able to focus on many other things in your life besides the financial markets. Ah, to leave behind the market gurus, a quite comical group. To bid adieu to investment advisors, brokers, mutual funds, foreign markets, options, anxiety, flaming people in Foolish folders (which stock folders come to mind?), market obsession, all to say nothing of market underperformance!
Lesson #4: An average, doubling of the stock market annually is sufficient -- simpleton investors casually anticipate better returns than these.
And there you have it, we've added another three posts in the Cash-King Investing folder this week. Let's keep in mind here that the aim is one message folder over the next decade. We've now put up 27 posts in 3.5 months. At this rate, we'll hit 925 posts by July, 2005. So let's slow down a bit, do some re-reading of the folder, ponder things, smile at talk of drawn-out technology corrections, watch some of the flaming float by out there, and occasionally cast our eyes on one, two, a few, or all ten of our stocks.
Tom Gardner, a Fool
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