You're Probably Making This Mistake, and It's Costing You Money
Jason is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Investing isn’t easy, and we all make mistakes that lead to painful losses. Yet even with these painful and sometimes expensive lessons, investing in stocks is still the best tool many of us will ever have to build long-term wealth. Let’s take a look at a common mistake many of us have made, and a long-term approach that’s sure to net better results for most investors.
It’s 2007; two companies are ramping up towards production of their first major product. You have the opportunity to invest in one or the other. One company is co-founded by a long-time industry insider with a tremendous track record of innovation and design. Several other members of the management team have strong backgrounds in the industry as well.
The second company is being led by a group of industry outsiders. There are numerous technical challenges to overcome if this venture is to be a success. Both companies are planning to introduce a similar product to the market. Which company do you invest in?
It's a simple choice, right? Not when reality gets in the way.
The two companies are Fisker Automotive and Tesla Motors, (NASDAQ: TSLA), and this was the reality of both companies back in 2007. Fisker is now struggling to find investors to keep afloat on the back of poor sales of its only car to date, and Tesla has the number one selling luxury sedan in the U.S in 2013.
A few years ago, it would have been impossible to predict anything like the positive reception of the Model S, and the incredible run that the stock has had so far this year. Tesla has made an amazing car that has expanded the market for an automobile that can cost well over $100,000, and plans to build on this success with the launch of the Model X SUV in 2014.
If Tesla continues on its current path, and in a few years' time the "Gen 3" car is a success, this could be the most transformative event in the car business since Henry Ford introduced the assembly line. But knowing what we did just a handful of years ago, chances are that most investors would have thrown their money behind the people that "knew" the car business.
Speculation can be a losing bet
Investing in speculative plays like Tesla and Fisker -- so early in their existence -- ignores many of the things that individual investors should look for in an investment. While the sky's the limit for a company that does well, for every Tesla there are a dozen Fiskers on the border of leaving investors with nothing.
Warren Buffett talks a lot about predictability, specifically predictable income. The core of Berkshire Hathaway's (NYSE: BRK-A) (NYSE: BRK-B) subsidiaries shows this out; like Mid-American Energy and the transmission lines and power generation capacity that it owns making essentially an impenetrable wall. BNSF owns the tracks it operates on, making it impossible for another rail shipper to provide competing services. Berkshire's diversified insurance businesses, like General Re and GEICO produce consistent, predictable revenues through premiums paid.
Buffett and Berkshire have plodded along, focusing the lion’s share of resources on "boring, stable, and predictable" for decades. Since January of 1980, Berkshire has outperformed the S&P 500 in every ten year period. Focus on sound businesses that offer competitive advantages and predictable income streams, and invest in them. Rinse. Repeat.
Yet many investors still overlook such a simple and proven method, and take the speculative path that even Warren Buffett isn't likely to risk. Most would be better off buying shares of Berkshire and letting time do the heavy lifting, or at the least following Buffett's lead when searching out companies to invest in.
Predictability at its boring best
General Mills (NYSE: GIS) has been doing two things for more than a century: feeding Americans and paying a dividend. 114 years of both, in fact. And while one could also fairly predict that the company isn't going to revolutionize its industry in the near future, we do know that the world's population is growing both larger, and much of that growth is in suburban and urban areas. This means a greater reliance on packaged and prepared foods.
General Mills has a veritable pantry full of brands in its portfolio, including Betty Crocker, Bisquick, Green Giant, and its “Big G” cereal brands that fill up half the cereal aisle at your favorite grocer. At $17 billion in annual sales, it is an established giant in the industry; but before you make the mistake of assuming that the company doesn't have any room to grow, consider this: The worldwide packaged foods market is more than $1.6 trillion dollars in size. That’s a lot of dough, or Bisquick.
How important is predictability? With three exceptions, General Mills has outperformed the S&P in every ten-year period since January 1983. An investor adding new money every year would have been rewarded with a market-beating return 85% of the time. The changing face of the world's population indicates that this consistent performance won’t let up now.
Stop guessing; start investing
While the Teslas of the world can be worthwhile to invest in, (as I have, with a very small position opened this spring) it's best to wait for signs of success, and start small. If Tesla is as successful as many of us hope, you won't need to own many shares. Most importantly, if the company's early success doesn't translate to the mass market, you won't want to own many.
Most investors are best suited to stick with simple, predictable, and more easily understood businesses as the majority of our portfolios. Diversifying into many of these businesses and adding money over time to the ones that perform the best, is a more likely avenue to long-term gains. Let’s face it: No matter what kind of cars are on the road in twenty years, it’s a pretty safe bet that people will still be eating Cheerios.
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Jason Hall owns shares of Berkshire Hathaway and Tesla Motors . The Motley Fool recommends Berkshire Hathaway and Tesla Motors . The Motley Fool owns shares of Berkshire Hathaway and Tesla Motors . 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!