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For Making Sense of Investing Today...the Fully Revised and Expanded Edition of the Bestselling The Motley Fool Investment Guide
Today, with the Internet, anyone can be an informed investor. Once you learn to tune out the hype and focus on meaningful factors, you can beat the Street.
The Motley Fool Investment Guide, completely revised and updated with clear and witty explanations, deciphers all the new information -- from evaluating individual stocks to creating a diverse investment portfolio.
David and Tom Gardner have investing ideas for you -- no matter how much time or money you have. This new edition of The Motley Fool Investment Guide is built for today's investor, sophisticate and novice alike, with updated information on:
- Finding high-growth stocks that will beat the market over the long term
- Identifying volatile young companies that traditional valuation measures may miss
- Using Fool.com and the Internet to locate great sources of useful information
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About the Author
Tom Gardner learned from his father how to invest, and with his brother, David, started The Motley Fool in 1993 with a mission to educate, amuse, and enrich. Today, the Fool works to empower individual investors, reaching millions every month through its website, premium services, podcasts, radio show, newspaper column, and more. With David they have coauthored several books, including You Have More Than You Think, Rule Breakers, Rule Makers, and The Motley Fool Investment Guide for Teens.
Read an Excerpt
The Motley Fool Investment Guide
By David Gardner
Simon & SchusterCopyright ©1997 David Gardner
All right reserved.
Chapter One: "Fool"?
You know how by the advice and counsel and prediction
of fools, many kings, princes, states, and commonwealths
have been preserved, several battles gained, and divers
doubts of a most perplexed intricacy resolved.
Not a very wise choice for a name when you're trying to ply your trade in the investment world. For decades financial professionals have done their best to sell customers on their Wisdom. Whether it's the pinstripe suit, the avuncular smile, the firm handshake, or the advertising jingle ("Rock Solid, Market Wise" comes to mind), your typical broker, money manager, or financial planner has striven for an image that smacks of success, intelligence, experience, respectability -- in a word, Wisdom.
And for years they've all been making a fair amount of money off fools. You know about fools. You may even have been one yourself at some point. Ever listened to a salesman on the other end of a phone long enough that the voice-activated vacuum cleaner he was trying to sell you began to make sense? You were being foolish.Ever bought a stock on your dentist's recommendation without even looking to see if it was listed? How very foolish of you. Or what about when you snapped up shares of International Dashed Hopes Load Fund just because your broker said it was the top performer in its category last year? Terribly, terribly foolish.
Basking in the excesses brought about by this folly, the financial establishment hadn't banked on one thing -- that one day the tables might turn when some Fools (and that's a capital F, maestro) actually showed up.
The Wise would have you believe that "a Fool and his money are soon parted." But in a world where more than 80 percent of all professional mutual fund managers lose to the market averages, year in and year out, how Wise should one aspire to be? In what other realms could such a compelling paradox exist, that the paid professional can do no better than -- in fact, cannot even do as well as -- dumb luck? And this general ineptitude has been made more ironic by the appurtenances that typically attend the Wise: expensive suits and gold cuff links (to impress their clients), Swiss watches (to convey the importance of their time), mahogany desks (to rest at between rounds of golf), and other similar displays designed to impress and intimidate their customers. Ah, the many-splendored totems of those who were paid too much to make too little.
In fact, we got to thinking after a while that we should just go ahead and call ourselves Fools, since our attitudes and approach to life were so radically different from what was being passed off as Wisdom all around us. So we launched our original Motley Fool, taking the name from a nondescript quotation from Shakespeare's As You Like It: "A fool, a fool! I met a fool i' the forest, a motley fool." We'd always loved Shakespeare's Fools...they amused as they instructed, and were the only members of society who could tell the truth to the king or queen without having their heads lopped off. The Motley Fool began as a monthly newsletter, then transformed into a daily feature on a national online service, then became one of the premier financial destinations on the World Wide Web. And among other things, of course, it is also a series of books (of which this is the second, following The Motley Fool You Have More Than You Think), all containing as much Foolishness as we can pack into them.
Our goal was and is very simple: Beat the market and show others how to do it -- the more novice, the better. In our brief Foolish history, we've enabled thousands of average people who didn't previously know a dividend from a divining rod to invest their own money without the help of Armani suits, and crush Wall Street at its own game.
Our approach is best characterized by its hostility to conventional wisdom. For example, the Wise will tell you just to invest your money in loaded mutual funds. (This "double dip" enables them to charge you for that advice and then charge you on an annual basis for the funds' management fees.) We, on the other hand, are telling you to buy stocks. They'll tell you, "All right, take on the risk of buying stocks. But if you're going to do that, just buy the safest ones and hold on." Or alternatively, some brokers will try to sell you a variety of rinky-dink shares of penny stocks, dubious entities with an even more dubious likelihood of ever paying off. We say poppycock, in both cases. We're telling you to sprinkle some more volatile growth stocks in with your blue-chips to improve your returns. And avoid penny stocks altogether! We're also educating you -- horror of horrors -- about shorting stocks, a devilishly fun attempt to profit off the decline of a stock, rather than its rise. To the Wise, there is no more risky, bad-faith investment decision than shorting stocks. To us, if you're an advanced investor for whom the stock market is more than a passing fancy, we believe you should at least consider the potential advantages of shorting. And the outrageous list goes on. It is topped off by the very idea that you would even manage your own money yourself. To many segments of the financial services industry today, and portions of the press, this idea remains well-nigh taboo.
In what follows, we therefore hope to teach you, to amuse you, and ultimately to make you good money at the same time.
But first we should introduce ourselves.
What This Book Ain't Going to Do
We're David and Tom Gardner, brothers, and the original editors of The Motley Fool. We hope that you have already gotten to know us through our first book in The Motley Fool trilogy, The Motley Fool You Have More Than You Think, but in case you haven't, let's mention again how we started. Yep, we originally began investing simply because, upon turning eighteen, we took over stock portfolios that our parents had started for us at our birth.
It takes some casual investors a lifetime to wean themselves off the numbing teat of mutual funds; we never knew the temptation. Our very first purchase was shares in a trucker called Leaseway Transportation (since acquired by a larger company). One hot summer we watched it go from $26 to $42, where we took our profit. The stock had been culled, using a few elementary measures, from the pages of Value Line, that redoubtable seven-inch-thick investment research monstrosity that we rarely use anymore because online resources are so much more powerful and timely. We cannot remember the exact rationale for the purchase of Leaseway, so it can't be listed among our most inspired investments. There is an enduring lesson here, however. If you're willing to take a risk and you're open to continuous learning about the world around you, you can succeed wonderfully in the stock market without paying the Wise for the privilege.
In this book we're going to break down into their primary components the reams of writing that we offer on a daily basis in cyberspace. The idea, as the Man says, is not just to hand you a Twinkie...rather, we're going to teach you how to locate your own Twinkies, so that you'll learn to feed yourself for years and years...prior to dying of a massive heart attack.
We want to help you help yourself make money. This was our intention back in 1993, when we launched The Motley Fool as an investment newsletter. Ye Olde Printed Foole -- as we fondly refer to it -- contained our stock picks, one monthly investment article, and a patchwork quilt of content in keeping with our motley interests. We mailed out unsolicited copies to a few thousand unsuspecting people and wound up our first month with exactly thirty-eight subscribers. Did the world care this little about getting educated about the stock market? We were depressed.
What we needed was visibility. So we decided to start a conversation about stocks on what at that point was a small but fast-growing national online service -- America Online.
Through the power and beauty of el cheapo modems, we connected to America Online over local phone lines and started typing. We offered our investment opinions and advice in response to requests from complete strangers, doing our best to provide them with as much information about their own holdings as they could handle. In so doing, we discovered some wonderful things (like how many people were willing to volunteer their own investment research for the benefit of many) and some bad things too (see Appendix D, "Zeigletics"). But what we mainly did was acquire new subscribers. Within a few months, our little gabfest had grown into the most popular financial discussion on America Online. The company approached us about opening up an actual business on its service, where we could get paid for doing interactively, on a daily basis, many of the same things we were doing just once a month, noninteractively, with Ye Olde Printed Foole. Even better.
Throwing away printing and mailing costs forever, we went into the electronic-publishing business.
By December, the word had started to get around, helped by a brief feature in the New Yorker. Soon we were AOL's most frequented service in Personal Finance. Why? Well, it didn't hurt that our Fool Portfolio, a real-money portfolio invested exclusively in stocks (now known as the Rule Breaker Portfolio), rose 11 percent in our first few months online, while the Standard & Poor's 500 (the index used most frequently to track money managers, also known as the S&P 500) stood flat. We closed out our first year up 59 percent, almost 40 percentage points ahead of the market. Lots of people were signing into our area to find out what was up.
What was up was that our stock-picking technique, founded in community involvement, was working. The better it worked, the more Fools came to the forum. And generally, that itself led to better performance. Today, a few million customers visit Fool.com to talk, share information, plan retirement, get out of debt, and discover new opportunities. Fools are helping Fools (and themselves) make money.
Copyright © 2000 by Simon & Schuster
Excerpted from The Motley Fool Investment Guide by David Gardner Copyright ©1997 by David Gardner. Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.
Table of ContentsContents
PART I. Who, What, Why, and How
- Get Online!
PART II. Mutual Funds: Love 'Em, or Leave 'Em?
- Hey, Maybe You Should Just Buy Mutual Funds
- Maybe You Should Avoid Mutual Funds
- The S&P Index Portfolio
PART III. Building a Foolish Investment Portfolio
- Stepping Away from Index Funds
- Out of Funds into Stocks
- How to Find Companies to Invest In
- Getting Information on Companies
PART IV. Companies and Quality
- Why Buy Blue-Chips?
- Why Small-Cap Growth Stocks?
PART V. Things to Look For
- Selecting the Best Growth Stocks
- Making Sense of Income Statements
- Balance Sheets and Cash Flow Statements
PART VI. Rule Makers, Rule Breakers, and More
- Quality Versus Valuation
- Rule Makers
- Rule Breakers
- When to Sell
- Mechanical Investing and the Foolish Four
PART VII: Some Advanced Topics
- Using Margin
- Shorting Stocks
PART VIII. Putting It All Together
- Why Invest?
PART IX. Conclusion
- A Foolish Farewell
Appendix A. Stocks : A Primer for Those Who'll Admit They Need It
Appendix B. How Investment Publishers Should Report Their Numbers
Appendix C. A Tale of Two Stocks: Iomega and AOL
Appendix D. Zeigletics: The Penny Stock That Never Was
Appendix E. The Carnival of Freakish Delights: Investment Approaches to Avoid
Appendix F. The Leibniz Preharmonic Oscillator
A terrible beauty is born.
In the spring of 1995, Iomega Corporation (NYSE: IOM) came out with a revolutionary disk drive whose disks held seventy times the capacity of existing floppies.
Between the initial announcement and the debut of its Zip drive, Iomega shares took off, running from $2 to $10 in a matter of months. The rise drew strength from the expectations created by the five-star reviews that computer industry rags lavished upon the new product, praise that was universal and without reservation.
But demand for the drive far outstripped manufacturing capacity, causing skeptics to conclude that little Iomega could never make enough Zips to turn a profit before the big boys showed up sporting copycat whiskers and claiming the market. Supporting the bearish view, Iomega was coming off two consecutive years of losses; it was fair to say then that the company's recent performance had been reminiscent of a young Elvis Presley...but without the voice or looks. Could Iomega's single great product justify a market valuation five times what it had been six months before? Some said the stock was going back to $2.
Simultaneously, with far less of a splash, a revolution started.
Unlike many grassroots revolutions, it didn't begin slowly in some rural backwater, or on a stump in a city park. Quite the contrary: Though quiet, it was instant and it was national. In metropolitan centers east to west across the union, private investors started polling their local computer stores, inquiring about their current stock of Zip drives and their backlogged orders for the product. ("So, how far would I be down the waiting list at this point?")
They then signed online to publish this information in a public discussion of Iomega available to anyone Foolish (yes, that's a capital F) enough to listen. Concurrently, an anonymous engineer took a simple tour of the plant in Roy, Utah, and observed the Zip manufacturing process. From fifteen minutes of observation, he contributed his own numerical estimates of Iomega's production, apparently doing it so well that company management itself joined the discussion at that point, making a public accusation that he -- a complete outsider -- had provided inside information! (The charge was later retracted.) Further, another fellow on the East Coast had his parents, who lived an hour away from the factory in Utah, drive to the company's headquarters on a Sunday afternoon in order to report how many cars appeared in the company parking lot. (It was full.)
What resulted from the collection and online publication of these seemingly inconsequential details was a national public conversation of a kind that had never taken place before, that had never been possible before. And it created an almost overnight survey of Zip drive sales, one that clearly demonstrated Iomega's success in meeting the demand to an extent far exceeding general expectations.
How well the company was doing -- a subject of so much speculation among benighted offline investors -- had a pretty good answer among enlightened onliners.
The information was provided so quickly and so exhaustively that no Wall Street analyst or firm could ever have pulled it off. (In fact, at the time only one analyst, from a small regional brokerage, was following Iomega.) But within a week, Wall Street institutional traders were gravitating to the discussion; a single spot in cyberspace had become the place to go for understanding and valuing Iomega. This was confirmed by a reporter who, in the midst of doing a story on the "Iomega online phenomenon," discovered with surprise that all four of her regular Wall Street sources were getting their information from something called The Motley Fool.
In less than two months, Iomega zoomed from $10 to $30 as brokers, banks, pension funds, and investment newsletters piled in.
We know the story pretty well because we dreamt up, created, and operate The Motley Fool, and we bought Iomega at $15 based almost completely on our readers' research. But cribbing in this case was fair play. You see, through our writings and our online portfolio, we were the ones who had inspired many of those readers to take their financial futures in their own hands in the first place, encouraging them to renounce the mediocrity of their mutual funds in favor of the greater risk and reward of common stocks.
That was and is the revolution, because somewhere in the midst of it we realized that all of a sudden the world had changed, and changed utterly. The lesson of the Iomega story -- the power of people working together over a network for new benefit -- has been repeated countless times at Fool.com. With free online education, community interaction, and supplemental information coming from investor research via new sites like our own Soapbox.com, it is now little-guy investors -- not huge brokerage firms -- who hold the most valuable cards.
The Motley Fool Investment Guide will show you offline how to do the same thing that we've been doing online. This book will enable even the rankest novice to invest expertly on his or her own, enjoy the heck out of it, and beat the market averages over long periods of time...all things that too many people think takes an expert, a Wise man, or a market insider to do -- those Foolish enough, that is, to believe that the market can be beaten at all.
Not that every investment will make you rich, or even pay off at all! We'd be fools (with a small f) if we led you to believe that. In fact, Iomega wound up going way above the level listed above, but a few years later it declined so significantly (and the CEO quit) that today it is well below its mid-1990s high. Fortunately, even before that we had purchased America Online, aiming to capitalize on the explosive growth of the Internet. Our investments in Iomega and AOL both started as huge successes, but then took wildly disparate paths. Their stories are recounted in "Appendix C. A Tale of Two Stocks." The ultimate lesson is that by practicing patient investing, one's successes should more than compensate for the inevitable failures in every investor's portfolio.
If you harbor the faintest intellectual curiosity, relish -- not wilt from -- risk and challenge, instinctively enjoy taking responsibility for your own future, and can get online, today's investment environment is for you.
So fish out your jester's cap and get ready to stake your own claim on America's great businesses.
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