The Motley Fool Million Dollar Portfolio: How to Build and Grow a Panic-Proof Investment Portfolio

Read an Excerpt

Chapter One

Getting Started

Americans make three primary investment mistakes.

A startlingly large portion of our populace stands on the market's sidelines forever, missing out on the greatest builder of wealth available to the average (law-abiding) citizen. Many Americans just never save—or invest—anything. This is the greatest mistake of all. No matter your age, the best time to start investing is now.

The second biggest investment mistake is waiting too long to start. It turns out that financial independence can't be achieved as quickly as everything else in our lives: 90 seconds in the microwave oven, one-click buying on a Web site, or speed dial on our mobile phone.

The third biggest investment mistake is the subject of this book. People with this affliction might have money put away and may have purchased some mutual funds and even a few stocks. They've recognized the value of getting started, allowing the returns to compound over time. They make us proud. But they often have one tragic flaw: They are wildly unsuccessful pickers of stocks.

Picking good stocks

Investors often pick the wrong stocks and build the wrong kind of portfolio. They lack any coherent strategy. When the stocks they buy inevitably drop—at least temporarily—these folks cash out their shares and take a loss, running from the market altogether. Or they invest in bad stocks and stay with them for too long, "just hoping to get back to even." These strategies combine the damagingelements of desperation, blind optimism, and greed.

But even the most comically inept investor is in a far better situation than the non-investor or the late-comer. Because while the first two groups need to undergo a near-religious conversion before they see the light, a bad investor just needs a bit of strategy and guidance to accompany an existing practice and passion. This stuff is eminently teachable. It's what this book is for.

Think about how hard it is for many of us to get past those first two mistakes. The odds are stacked against an early start at successful investing. Most Americans begin their professional careers saddled with credit card debt and student loans while trying to pay for all that life entails, often on a relatively small starting wage. There's not a lot of cash floating around.

And even in the unlikely event that their couch cushions were overflowing with $20 bills, most people wouldn't know how to properly put the found money to the best possible use. Our high schools and universities have failed miserably to educate their students about how or why to invest. For the most part, no one has stressed the importance of saving and the value of investing, so they wander relatively blindly (or at least shortsightedly).

These are thorny, sometimes seemingly insurmountable issues and we by no means intend to belittle or gloss over them. In fact, previous Motley Fool books and countless Fool.com articles have provided advice and step-by-step guidance on how to work through them. That's our mission.

Once you're ready, we're here to inspire you to not only invest, but to invest well. There are two components to investing well: First, you have to choose the right stocks and second, you need a strategy for putting those stocks together in a smart, balanced way. This book shows you how to do both.

Before we get to that, though, there's one principle you must embrace.

No one's perfect

In order to succeed, you must first accept that you will fail. Great investors pick stocks that lose to the market at least one time out of five. It's a lot like basketball free throws—Michael Jordan, arguably the game's greatest player of all time, shot just a bit over 80% from the line over his career.

Chances are, you're not the Michael Jordan of the investing world, at least not just yet, so it's essential to set realistic expectations, to know ahead of time that you're regularly going to missСespecially at the outset. Expect that even if you get to be very good, and that's if you're very, very good, you'll still be wrong 20% of the time. If you're just starting out, plan on being wrong half the time as a simple baseline from which to improve.

Yes, that's right, half the time. But don't be discouraged. To mix our sports metaphors, you'll be batting .500. That would get you your very own wing in the Hall of Fame!

12 Stocks

This book is about picking great stocks. We're writing it in order to improve your ability to pick winners and avoid losers. But perhaps even more important, it's about how to put those stocks together in a portfolio that will see you through good times and bad, a portfolio that will grow. And grow and grow. Our goal is simple—we want to help you to develop your own $1 million portfolio.

To that end, we'd like to start our journey together with a challenge: Buy at least 12 stocks. That's right. Not just one stock that your uncle claims can't miss. Not a couple bets on two numbers at Atlantic City. Not three equities for your IRA, four tech stocks, or five Dow Jones Industrials heavyweights. At least 12.

Why 12?

First, you are diversifying meaningfully. You are conditioning yourself from the shock of a few losers. And you will have a few losers. But you'll have a few winners, too, and in many cases, your winners will more than make up for your losers. Why? Because stocks can only lose 100%, yet there's no limit to how high they can climb. As you spread your dollars across a manageable number of your best ideas, you will plink down your money, watch your stocks, learn more about them as you monitor their perormance, and enjoy a first-year gain or loss comparable to the market averages. You will probably not double your money right away. (Sorry.) You will also not lose most or all of what you invested.