Being Smart May Be Stupid. Go Passive Instead.

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"Buy what you know," said the great Fidelity Magellan Fund Manager Peter Lynch, reinforcing the confidence of millions of investors to follow their own instincts and invest in companies whose products they personally knew were good.  Obviously, if you were one of those investors who, like my former wife, bought Apple (NASDAQ:  APPL)  because you liked your iPod, you did very well.  And if you bought Apple because you liked your iPhone, you almost certainly did well, too.  But if you bought Apple more recently, say, because you liked your iPad, you may not have done so well, as Apple stock has fallen from a high of $705.07 September 21, 2012, back down to about $450.00, following earnings.

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Forget for a moment about Apple's stock price and Apple's various products.  Just consider the coolness factor -- has there ever been a large capitalization company as cool as Apple?  Can one even imagine, say, an oil company being thought of as "cool"?  Of course not.  Gasoline isn't hip.  What else isn't hip?  Coal, tires, pork, capacitors -- all sorts of stuff.  When we think of something "having buzz," or being hip, or trendy, we are almost always thinking of consumer products or services that we ourselves know from personal use, mass market stuff -- electronic gizmos, clothes, restaurants.  For example, check out this chart of Chipotle Mexican Grill (NASDAQ:  CMG)

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This isn't meant as criticism of either Apple or Chipotle -- obviously, Apple can still build tablets as good or better than everyone else's, and the same is true of Chipotle's burritos. This is merely to point out that someday you reach the zenith of coolness, and then, there is nowhere to go but down, at least in the short term, because coolness or trendiness is definitionally short term.

So that is the problem with being cool.  At some point, you aren't anymore, or at least, not as cool as you once were.  So as investors, when we try to time these investments in today's hot companies, we are essentially trying to catch a wave before it crests, and passes us.  But this timing factor is getting increasingly difficult -- did you know that the average life span of a typical company in the S & P 500 is falling dramatically?  Yep -- it was 67 years in the 1920s and is just 15 years today.  One researcher estimates that in the year 2020 more than three quarters of the members of the S & P 500 will be companies that don't even exist today, making picking the next hot company, like Apple or Chipotle, increasingly difficult, as a matter of timing. 

One way to deal with this problem is to step back a level and think about investing in trends rather than companies, with their individual products and product cycles.  For example, instead of investing in the continued growth of a particular product family, such as iPads, investors might want to make a broader bet on the continued worldwide adoption of handheld communication devices -- phones, tablets, whatever comes next. 

How about the carriers?  No matter which tablet or phone you buy, no matter which is this year's or decade's trendy model and maker, you're always going to need a carrier, right?  Some pretty good choices here are Vodaphone (NASDAQ:  VOD) which is the largest phone company in the world, outside of China, and good ol' AT&T (NYSEMKT:  T) which is the second largest carrier in the United States, behind Verizon (NYSEMKT:  VZ)  AT&T currently has a whopping 5.4% dividend yield, which, while not as exciting as the rapidly climbing share price of a hot company selling a hot product, is, nonetheless, money.  For their part, Vodaphone has a dividend yield of 3.9%, and, as an added bonus, owns 45% of Verizon Wireless, which has 111 million subscribers, edging out AT&T, with 105 million. 

Being smart and correctly picking a hot stock is certainly fun, but it also pays to remember that one can also get rich s-l-o-w-l-y, 4% or 5% at a time.  And that way, you can relieve yourself of the burden of timing an increasingly fast-moving consumer market.

boriskabinov has no position in any stocks mentioned. The Motley Fool recommends Vodafone and Vodafone Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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