Baseball, Vegas, and Blindfolded Monkeys
Jon is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Baseball. My dad always said that it's athletes are overpaid. "They get paid millions of dollars, and they can't even hit the ball 40% of the time." Sigh...well that's my dad.
Ted Williams was the most recent player to bat .400. He did this way back in 1941. Clearly the fact that no one has done it in 70 years means it is a rare accomplishment. A good baseball player gets a hit 3 times out of 10. The rest of the time they either strike out, someone catches the ball, or they are thrown out at first. Well, I have a secret for you: I have never struck out, had my hit caught, or been thrown out at first. But then again I don't play baseball. You only strike out if you're brave enough to have gone up to bat in the first place.
I used to work with a guy who's real name I don't know, and who's nickname we won't publish for the world to read. When we would go to the gas station after work, he'd load up on Powerball tickets. Despite his constant pressure, I didn't want to spend my hard earned money on lottery tickets. "I don't like my odds" I'd tell him. His reply always was, "you can't win unless you play."
These are two philosophies. One says you can't get a hit unless you step up to the plate. The other says you can't win the lottery unless you play. These might at first glance seem to be the same logic applied to two different situations, but they are fundamentally different to the core.
Brave Enough To Bat
Investing can be intimidating when you first want to get into it. You're not sure where to start, not sure what to look for, and fear those who would like to prey on your naivety. As you sit down to make your first investment decision, you may be struck with just how many options there are. Scrolling through an index is like thumbing through a dictionary. Crack open ol' Webster, and ask yourself "who knows all these words?" No one knows all those words; the dictionary merely contains them. There is no way you can research and know every public company out there before making your first decision (or if you could, you would invest your entire life researching and never investing). So where do you start?
If you've mustered enough strength to step up to the proverbial plate, think on our baseball analogy. A batter doesn't swing wildly at every pitch going by him. He focuses on the pitch he wants and takes a swing. He wants a good pitch. In a similar way, many would recommend you start investing in companies that will anchor your portfolio over the long haul. Your anchor stocks are typically your big names. They aren't on a growth spurt; they are mature companies that are reaping the fruit of being good companies. Many pay dividends.
This chart is showing trailing twelve month revenue for both companies. As you can see, the lines aren't completely straight. The are a couple of bumps and dips over the past 10 years. But the general revenue trend has been up.
Dividends for both of these companies have also steadily risen over the past 10 years. Granted, McDonalds had a dividend spike and drop in 2008, but the dividend today is more than it was 10 years ago. Neither of these dividends are particularly huge when looked at as a percentage. But remember when investing over the long-term, even small dividends that are re-invested will begin to accumulate.
As you continue on in investing, you will begin to grow in experience and skill. Veterans often outperform rookies in sports. They have matured in their abilities over the years. Investing is similar in that there are many skills that need to be learned and improved upon as you go.
Wall Street has been compared to Las Vegas by many sincerely confused people. Have you ever heard of a person who has consistently beat Las Vegas for 30 years? I haven't. Even if there were someone out there with that kind of casino record, there aren't very many. Yet how many people can we point to who consistently beat Wall Street for 30 years? That list is huge. Why can people maintain success in the stock market? A simple answer is investing is not gambling.
As investors, we are looking for good companies that are going to earn their shareholders money. There are hundreds of metrics that could be looked at to determine what companies fit this description. What metrics we consider important is what makes us all unique in our investing strategies. If the metric you are stuck on isn't consistently finding you winners, maybe you should look to change your strategy.
Blindfolded dart monkeys is not a strategy, but perhaps you are familiar with the situation. The Wall Street Journal had a dartboard contest to see if randomly picking stocks via darts could beat the experts. I hate to admit it, but the darts won 39% of the time. Some would see this as a reason to give up...or hire monkeys. However, when I lose at the market, I learn, adjust, and move on. I'm a better investor today than when I started because I'm learning what to look for more and more.
A reader once asked me, "why not just buy an index fund to cover the entire market?" This line of reasoning sees the benefit of buying into all the winners in one fund. But the downside to this is you are buying into all the losers as well. As an investor, I only want to buy the winners.
Not all stocks are created equal. Take a couple of dividend players for example.
These royalty trusts are very similar in a lot of ways. But anyone will tell you that BP Prudhoe Bay (NYSE: BPT) is a better royalty trust to invest in than Permian Basin (NYSE: PBT). As the chart clearly shows, if you were looking for a dividend play over the past 10 years, Prudhoe Bay was the one. Was it blindfolded monkey luck that some invested in BP and other in Permian Basin? Maybe it was, but it shouldn't have been. There are things in each company's prospectus that would have clued you in to which was better. But how many read the prospectus?
Don't let fear keep you from investing. Start small and conservative. You won't always get it right; that's OK. Failure is the quickest path to success if you're willing to learn from mistakes. Don't forget that you're investing not gambling. Look for specific things in the companies you are researching before investing. And above all, never hire blindfolded monkeys...they don't potty train well and someone could lose an eye from a stray dart.
thequast has no positions in the stocks mentioned above. The Motley Fool owns shares of McDonald's. Motley Fool newsletter services recommend McDonald's and The Coca-Cola Company. 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.If you have questions about this post or the Fool’s blog network, click here for information.