The best stock tip you’ll ever receive

Photo courtesy of Chris Ford

 

I’m not usually in the business of talking about stock advice, but every once in a while, I make an exception.

Many people charge hundreds, even thousands, of dollars to get access to certain people’s stock tips, but I’m offering this one to you for free. You don’t need to even sign up for my mailing list (although you’re missing out if you don’t).

So without further ado, here is the best stock tip you’ll ever receive.

The best stock tip is to not buy stocks.

Surprise!

Let’s say you’ve got money to invest. (This means that you’ve paid off all your credit cards and student loans and the like.) Where do you put that money?

Maybe you could buy some shares of that hot new tech company you’ve been hearing about? Maybe an old stalwart like General Electric, which has been on the stock exchange since 1896? Or maybe a company in China, given how well the economy has been doing there?

The problem with buying stock in a single company is that you really don’t know what the company is going to do. Let’s say that you research a company wholeheartedly, and learn their financials inside and out, and then decide that it’s poised for growth. Even still, the timing of that purchase and the timing of the sale disproportionately affect the investment. Waiting a few months in either direction can be the difference between making money and losing money.

And how long do you plan on holding the stock? Even if the company does really well for a while, can you really be sure that the stock is going to be there for the long term?

A real world example

For decades, Company X was a ubiquitous household name. It was so popular that a singer wrote a famous pop song with the name of one of its products. And into the 1980’s, despite the stock market crash, the stock was a solid buy for years, and it seemed like the company was poised for international expansion, especially into Japan.

But the company, so secure in its dominance, was caught off-guard by new and disruptive technology, which undermined its business model. It was late to move into this new space, and the window of opportunity had closed. After a number of strategic misfires, the company ended up filing for bankruptcy in 2012.

The company, in case you didn’t figure it out, is Kodak. (And this is the song.)

Not a good investment.

Not a good investment.

The stock, now worthless, was trading at $30 ten years ago, $45 twenty years ago, and $70 thirty years ago.

Here are two interesting situations out purchasing this stock:

  • If you had bought this stock on April 8, 1988 ($42) and sold on February 14, 1997 ($93), you would have made a 9% return for nine straight years. Not bad.
  • But, if you had bought on September 25, 1987 ($101) and sold on December 19, 1997 ($58) you would have lost your shirt.

Notice that those dates are not all that far off from each other.

And this is just within a company. Despite a failing narrative, you could have made lots of money. Or you could have lost everything. Or pretty much anything in between. You cannot time the purchase and sale of stocks optimally, so don’t bother.

We are busy. We don’t have time to research individual stocks. More than that, if you throw all of your extra money into a single stock, you’re violating the Cardinal Rule of Investing (and to me, a cardinal rule of absolutely everything): Diversify. So now you’d have to research multiple companies, which is even less likely.

There’s a romance with investing in the stock market. But where there is romance where money is concerned, there is usually danger.

Be boring

What if you could outsource the picking of stocks, the researching of companies, and the diversification and mixture of same?

Luckily, you can! It’s called a mutual fund. Mutual funds are simple: a fund manager picks the stocks for you. When a company starts tanking, its relative weight is diminished in favor of other companies.

And here’s the awesome part: the risk is spread out among all the companies, so that if one does poorly, it is offset by other companies doing well.

What this means is that you invest in a broader sector, undeterred by the whims of any one company.

True, if the entire economy goes south, your mutual fund goes south. But the trend of our stocks over the long haul is inexorably up. And while we can’t guarantee that it will always be that way, if that changes in a fundamental way, we’ll have more to worry about than mutual funds.

Now make no mistake, this is not an exciting way to invest. While there is excitement in checking the latest announcements from a particular company (“Did you see the new product they just announced?“) there’s pretty much nothing to do with a mutual fund. There are lots of them out there (and some cruddy ones as well) but basically, you buy them, and over the long haul, they rise in value. Slow and steady. Which is appealing to me.

So the next time someone tells you a hot stock tip, and it actually includes an actual stock, remember the simple mutual fund…and ignore the stock.

But enough about me. Do you invest in individual stocks?

Mike Pumphrey

Mike Pumphrey

I'm the founder and author of Unlikely Radical, a site to help people succeed with money, achieve their goals, and live intentionally.

I offer a free phone consultation to anyone who is interested in changing their financial narrative. Are you ready? Click here for details.
Mike Pumphrey

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Posted on May 19, 2014