Things You Should Do Instead of Buy Stocks

We were sitting in a bar, drinking beer.

Of course, we were also talking stocks ...
But we weren't debating whether Coca-Cola (NYSE: KO) had gone cheap after delivering strong profits, or whether big increases in mortgage rates would torpedo the stocks of MFA Financial (NYSE: MFA) and Annaly Capital Management (NYSE: NLY). Nor were we dissecting the meetings we had just had with some of Silicon Valley's finest during our Motley Fool Rule Breakers Innovation Tour.

Instead, we were talking about what had been perhaps our most interesting meeting. A local business legend had told us he firmly believed that most people -- himself included -- couldn't beat the market buying individual stocks, and that many of the companies behind were run by (ahem) "drunken chimpanzees."

Stumbling toward losses
His level of cynicism surprised us, and yet we were meeting with Dilbert creator Scott Adams at a time when once-proud institutions such as Wachovia and Freddie Mac (NYSE: FRE) had been irreparably harmed by years of reckless risk-taking and managerial missteps.

So, really, we shouldn't have been surprised when Adams wondered aloud if Dogbert, CEO of Confusopoly Corp. (Ticker: HUH), could convince the world's bankers that an active market for commercial paper would melt Greenland. Or that ritual cat sacrifices were the key to saving America's auto industry.

Ridiculous? Sure. But it was the bankers at Merrill Lynch, Morgan Stanley, and elsewhere who bought into the crazy notion that credit derivatives weren't all that risky. Who's to say they wouldn't believe a cartoon character? Or that they wouldn't find synergies between CDOs and cat sacrifices? They're eerily similar, after all -- both begin with the letter "c."

Adams distrusts the system that allows these Harvard-stupid weasels -- er, managers -- to have access to so much capital. It's the main reason why he's sworn off individual stocks.

Makes sense to us. Investors were right, for example, to distrust the disinterested management at companies such as Harmony Gold Mining (NYSE: HMY) and Energy Conversion Devices (Nasdaq: ENER). Neither company's insiders own even 1% of their respective businesses, and both stocks are down by double-digits over the past year.

Executives at these companies weren't really owners. They didn't share in the risk the way that Hasbro (NYSE: HAS) Chairman Dr. Alan Hassenfeld has for years. They suffered only the inconvenience of cashing big salary checks.

Is every company with low insider ownership burdened with uncaring management? No, of course not, but we prefer to stack the odds in our favor.

So what should you do?
Adams gave us nine steps that he says, when performed in order, can help you to generate (and protect) wealth. We think his suggestions are pretty Foolish, and thus, with his permission (thanks, Scott), we publish them here:

1. Make a will.
2. Pay off your credit cards.
3. Get term life insurance if you have a family to support.
4. Fund your 401(k) to the maximum.
5. Fund your IRA to the maximum.
6. Buy a house if you want to live in a house and can afford it.
7. Put six-months' worth of expenses in a money market account.
8. Take whatever money is left over and invest 70% in a stock index fund and 30% in a bond fund through any discount broker, and never touch it until retirement.
9. If any of these things confuse you, or you have something special going on (retirement, college planning, tax issues), hire a fee-based financial planner.

You're not in Elbonia any more, Dilbert
Adams' nine steps look pretty familiar to us Fools; we've always advocated paying off debt, saving for retirement, and having a substantial emergency fund. But avoid stocks altogether? We respectfully disagree.

That said, we do agree that if you're going to try to beat the market with stocks, you need to know what you're buying. You need to be able to trust the management teams of the companies you own.

© 2010 UCLICK L.L.C.