Apparently many members of our community disagreed.
Pointing to their significant short-term gains in stocks such as Bank of America (NYSE: BAC) and Ford (NYSE: F), many readers (rather rudely, in my opinion) insisted that Brian and Tim’s analysis was invalid.
This comment from IronBob is a good representation of the feedback that Brian and Tim received:
INCREDIBLE! Thanks for the advice! I'm glad I'm ignoring it as I almost doubled my money on Ford in less than two months!
While I’m happy for IronBob, I’d like to caution readers that his
returns are hardly typical -- and that short-term speculating in
no-moat companies is simply not a sound investing strategy.
Just say no ... to short-term speculation
Jumping
in and out of stocks is certainly exciting, and -- if you're lucky --
it can result in some satisfying short-term profits. But over the long
haul, active trading is a loser's game.
For starters, you have to correctly predict both the direction and
the timing of a stock's move, which most experts agree is impossible to
do with any consistency. Anyone can get lucky once or twice, but
repeatedly? Forget it.
And then there are the frictional costs of taxes and trading
commissions, which can combine to take a big bite out of your returns.
Plus, there's the unfortunate fact that we humans make for lousy
traders. We tend to sense patterns that don't exist, overreact to
innocuous stimuli, sell our winners too soon, and hang on to our losers
for too long.
In an oft-cited study, professors Brad Barber and Terrance Odean
found a strong correlation between active trading tendencies and
abysmal stock returns. In other words, the more frequently their
subjects traded in and out of stocks, the worse their portfolios
performed.
A perfect storm for poor performance
Unfortunately, the current climate has created the ideal scenario for short-term speculation.
Investors of all shapes and sizes have lost a significant amount of
money in a relatively short time span. The heightened market volatility
has made for some sensational short-term price swings. And the economy
appears to be headed down the tubes.
Based on the volume and content of our reader comments and hate
mail, it’s clear that these factors have combined to make investors
increasingly short-term-oriented and willing to invest in companies
with highly uncertain futures. During the market rally over the last
month or so, these traits have been rewarded. But if history is any
guide, that will not be the case over the long haul.
What this means for you
In other words, if
you're interested in preserving your capital and accumulating long-term
wealth, stay away from short-term speculation in subpar companies.
Don't buy First Solar (Nasdaq: FSLR) because you're
counting on a jolt from President Obama's alternative energy program.
This company specializes in an unproven technology that is rapidly
evolving, and it has a host of competent competitors. The potential
rewards in this space could be vast -- or nonexistent.
Don't buy Bank of America or Citigroup because you heard that banks
would benefit from the elimination of mark-to-market accounting. Nobody
can say for sure exactly what insidious assets sit on these companies'
balance sheets.
Don't buy Sirius XM Radio (Nasdaq: SIRI) because of
Liberty Media’s recent capital infusion. This company is anchored to
the auto industry, loaded with debt, and always willing to dilute
shareholders.
Don't buy Stone Energy because a talking head on TV said that oil can't possibly go any lower. In fact, don't buy a stock based on anything that you hear on TV!
So what should I buy, smart guy?
That's easy.
Concentrate on buying great businesses -- companies with
straightforward business models, sound balance sheets, strong financial
statements, and shareholder-friendly management. If you buy such
businesses when they trade at a significant discount to intrinsic
value, it's highly likely that you'll make a lot of money over the long
term.
Instead of the companies I mentioned earlier, why not buy shares of Marvel Entertainment
(NYSE: MVL), your friendly neighborhood comic book company? Its
characters are timeless, and its financials are gorgeous, thanks to the
high-margin licensing business. Based on the strength of its Spider-Man
franchise and a powerful new movie studio segment, Marvel has soared
705% since David Gardner first recommended it to Motley Fool Stock Advisor members back in July 2002.
Or how about Costco Wholesale (Nasdaq: COST)? This
membership warehouse retailer has strong recurring revenues, pristine
financials, great growth potential, and perhaps the most
shareholder-friendly CEO around in Jim Sinegal. This great business has
always traded at a premium price, but today, it trades at its cheapest
level in years. This stock is up only 25% from where Tom Gardner
recommended it way back in May 2002 -- but that sure beats the negative
23% return for the S&P 500 over the same time period!
To read more about Marvel, Costco, and the rest of David and Tom's top selections, click here to take a free 30-day trial of Stock Advisor. As always, there is no obligation to subscribe.
Already subscribed to Stock Advisor? Log in at the top of this page.
Rich Greifner would happily buy shares of Costco if he could ever stop writing about it. Stupid Foolish disclosure policy. Costco and Marvel are Motley Fool Stock Advisor recommendations. Costco is also an Inside Value pick. The Motley Fool owns shares of Costco.
© 2009 UCLICK, L.L.C.
Sorry
Ford has held above 5 for what..almost three months now? Look, I'd be less than honest if I said everything I pick is solid. I had some residual dollars in a 401K and figured, heck what's wrong with a hundred or so dollars on AIG.
The simple fact remains is that Ford has managed its business exceptionally well given almost impossible odds. While GM and Chrysler spent all their time figuring out new ways to rape the American taxpayer, Ford put its head down and restructured debt and shored up old markets and chiseled out a couple of new ones.
I also have no intention of jumping out of Ford. Why should I when it cost me a 1.82? Hey look, you were wrong, it's no big deal and it doesn't take a lot of acumen to stay away from Citi. But I do have to say, your calls on First Solar, XM radio (especially), Marvel Entertainment (EXCELLENT PICK and I was buying Marvel 15 years ago) and finally Costco.
Marvel especially could see 50 in a couple of years if they can maintain their hitting streak. The fact that they are now the studio gives them much more control over the product. So what gives? Well, Captain America and Thor have to come through but their first wholly owned studio movie was Ironman. How can you argue with that?
What I believe will eventually happen is that they will unfurl solo movies for all the Avengers and then BOOM we'll get our first multi-hero flick. If they were smart, they'd turn it into an epic trilogy and make a couple of billion bucks.
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