Editor's Choice

The Wolves of Wall Street are Eating Their Golden Goose

Adem is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

I have a horror story for you that just can’t wait until Halloween -- because it's costing you, the individual investor, money as we speak.

After 2008, you took $3 trillion out of stocks and missed the 80% rally that started in 2009, according to CNN. More tragically, statistics show that most of you sold off during the market panics between 2010 and today, and became a market victim.

The New York Times recently reported that only 14.7% of households have mutual funds, down from 23.9% in 2001. Considering that mutual funds are where most retail investors invest, that trend is very frightening. It seems with the street shenanigans (Enron, 2001, 2008, 2011, etc.) you’ve given up on stocks.

I can’t blame you for thinking it’s all “rigged” against you; but I’m going to show you why you should still keep your money in stocks.

Investing in stocks beats the pants off any other return

From 1928-2012, the stock market has returned nearly 12% annually. Just think about all of the turmoil that this country (and stocks) have seen in that time! You need a retirement plan, and putting your money under your pillow ain't cutting it. And with the Fed keeping interest rates cheap from here to eternity, your 2% yield in bonds won’t even keep up with inflation.

Yes, the market is a rollercoaster, but doesn’t the 10% additional return warrant the courage to ride? Blackrock CEO Larry Fink stated it best, regarding the crash (and panic) of 08’: “If we went on holiday four years ago and came back better human beings with a tan, markets would still be back where they were..."

I can show you how to tame the Wolves of Wall Street
With all the accounting shams on the Street, it’s hard to be an investor these days. Thanks to phony accounting, investors in firms like Enron were convinced that their firms were performing wonderfully ... until they weren’t. What if you’ve done all your homework, and the CEO is just a liar?

I have three simple rules that can help you find companies with legitimate earnings. The first is a fact; the others are subjective.

1. Rely on Dividend History

Earnings per share may be hypothetical, but it’s hard to fund a dividend with fictional accounting. Look at Pfizer (NYSE: PFE), which has paid a dividend since 1982, and General Electric (NYSE: GE), which has (amazingly) paid a dividend consistently since 1962!  It is unlikely that these firms could maintain these programs had their earnings been “suspicious.”

A note about dividends: While I love high yields, you must observe caution, because they can be a red flag of an unsustainable program. Keep an eye on the “payout ratio” -- the percentage of dividends that are being paid out from earnings. You should stick with firms that have payout ratios under 50% of their earnings. Both GE and PFE are below 50%, so I believe their dividends are sustainable.

2. Founders First

This is simple yet subjective. CEOs are often hired from outside a firm; many come on board for short stays, and are rewarded via “golden parachute” for a job poorly done. (Home Depot's infamous Bob Nardelli comes to mind). They simply have no attachment to the company, other than a paycheck. I prefer to invest in companies with tenured management that has significant ownership of itsown stock. If the founder is still active, even better.

Look at Oracle’s (NYSE: ORCL) Larry Ellison. Oracle is his identity, his baby. Without giving a complete biography, Ellison for a large portion of his life was a failure before he founded Oracle. His image has always been tied to company performance, not to his pay. Cheers to that!

3. Avoid Bluster

Nothing should turn you away from a CEO more than “posturing.” I prefer to invest in CEOs who are conservative, rather than those who see future earnings through rose colored glasses. CNBC analyst Jim Cramer last quarter lamented how Deere (NYSE: DE) management always was so understated on earnings calls. While I respect Mr. Cramer greatly, to Deere’s modesty I say, terrific!

Compare that to Groupon’s (NASDAQ: GRPN) executive team, which routinely makes proclamations like “No one can stop us but ourselves” and “Talk of us going bankrupt is absurd.” Deere has been in business for 175 years; if I were an investor in Groupon, I’d prefer that management shut up and take a lesson from the legend.

Stick it to the Wolves

No one said it’d be easy, but investing shouldn’t be this hard; I get that. The Wolves of Wall Street have ostracized the individual investor. But I don’t care about them, I want you to make money, and the stock market is still the best place to do it. By staying invested during the down times and following these simple rules, you can sidestep those hungry wolves. Maybe then, the golden goose will finally have his day -- and this scary story can have a happy ending.

mrrightside owns shares of Deere & Company. The Motley Fool owns shares of General Electric Company and Oracle. 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!

blog comments powered by Disqus