Few investment events this year were as “exciting” as the Facebook IPO.
As my colleague Steve Sjuggerud pointed out, it was a spectacle.
The stories are crazy… Parents are cashing in their kids’ college savings accounts and putting all the money into Facebook shares. And while promoting their stock this week, the Facebook guys – including 28-year-old founder Mark Zuckerberg – “were treated like rock stars,” The Economist magazine wrote.[ad#Google Adsense 336×280-IA]But the urge for this kind of “excitement” is one of the hallmarks of the average stock market loser.
Put bluntly, it’s how bad investors view the market.
They see it as a place for “exciting” action. But investing isn’t about excitement.
That’s what Las Vegas casinos are for.
But as I told you in April, once you favor “boring” over “exciting,” you’re thinking more like a rich, successful investor.
Let me show you what I mean…
We’ll start with “exciting” investments, like initial public offerings… It wasn’t just Facebook in the last year. We also had Pandora, Groupon, and Zynga, as well.
Few events generate as much speculative excitement as IPOs… especially when a slew of them in a brand-new industry take place within a few months of one another. But a new business is usually risky and in danger of failure. The overwhelming majority of new businesses – particularly Internet startups – end in failure.
And these companies aren’t off to a great start as a whole. Of the companies in the table below, only Facebook actually makes money. Losing money is a bad sign for investors. It makes it difficult (if not impossible) to assign any value to the businesses. And if you can’t value a business, you can’t invest in it.
Consider the following table… Had you allocated $60,000 evenly among those four “exciting” IPOs last year, you would be facing huge losses.
Altogether, this “exciting” portfolio of stocks is down 50% in under a year. Your $60,000 would be worth less than $30,000 today.
Now, take a look at the next table… Let’s say, instead of buying shares of those IPOs, you had simply allocated that $60,000 portfolio evenly into four World Dominating Dividend Growers (WDDGs) when Pandora went public.
WDDGs are usually the No. 1 companies in their industries. For example, Wal-Mart is the No. 1 retail network and Intel is the No. 1 maker of semiconductors.
These companies have thick profit margins, fortress balance sheets, and pay out large and growing dividends. Because they are so good at what they do, and because of their dominant position in their industries, they are extremely resistant to outside competition. This allows their shareholders to safely compound their wealth over many years.
As you can see below, three of the four companies are showing healthy gains in less than one year. Johnson & Johnson (JNJ) is down slightly. But positions in Wal-Mart (WMT), Microsoft (MSFT), and Intel (INTC) have grown between 19% and 28%.
All told, “boring” WDDGs are up 13% in that time, outpacing the “exciting” IPOs by more than 60 percentage points. (The S&P is up 1.7% over the same period… much better than the IPO portfolio and much worse than the WDDGs.)
A $60,000 investment in these four WDDGs would be worth just under $68,000 today.
As far as I’m concerned, when you buy WDDGs like this available at great prices, there’s no reason to fool around with super-risky, overvalued, unprofitable, brand-new businesses.
You need to take good care of your money. You need the safest, most “boring” businesses you can find. You need World Dominating Dividend Growers.
These companies sport relentless cash flows and ever-increasing dividends. They don’t fluctuate. They’re always there and always growing.
Yes, that’s boring. But that’s how you get rich in the stock market… not by getting lucky on one big hit.
Dan Ferris[ad#jack p.s.]
Source: Daily Wealth