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Motley Fool for Dummies: Chapter 1 Definitions

April 05, 2009 – Comments (6) | RELATED TICKERS: WHR , SKX , HOTT

Motley Fool for Dummies:  Chapter 1 Definitions

1) Outperform   | Out*per*form    |   Motley Fool lingo to mean picking a stock for your portfolio that will outperform the S&P 500.  Not to be confused with expecting to have stocks that ALWAYS outperform the S&P 500.  Although if you know of one please share! 

Oftentimes the best stocks will dip below the S&P 500 in the short term to trade well above the S&P 500 in the long term.  Someone could sneeze on the trading floor causing mass selling panic on your paticular stock before people realize it was just someone sneezing on the trading floor.

2)  Sector Shift |  Sec*tor* Shift  |   Identifying the best time for buying stocks is identfying when stocks are out of favor with investors and when they are back in favor.

For example:    Oil Stocks start to fall off in the Winter Time, while typically Natural Gas does better in the Winter Time.  Buying OIL in Q1 and selling it off in July is the trend to follow for short term traders.  Buying Natural Gas Q2 and then selling it off Q4 is how to play Natural Gas.

Motley Fool doesn't follow Sector Shifts.  Motely fool simple says, "Buy a stock when it's price is below the company's intrinsic value.  Sell if and only if the price goes way beyond the company's intrinsic value." 

3)  Catalyst  | Cat*a*lyst*          Normally a Catalyst is some short term gain based off a certain product the company is about to release.  Motley Fool doesn't believe in, for example, buying PALM because of the release of the "PRE" when pretty much that's the only catalyst.

Motley Fool seeks out companys with long term catalysts:

A:  Healthy Balance Sheet (don't buy Cable Corp. Inc.)

B:  Strong Cash flow

C:  Consistently Profitable 

D:  Dividends, Share Buybacks, Acquisitions, Trustworthy Management Boards.

So, an Apple investor who bought Apple stock at $84 a share, would not have done so because of the release of the next great "TOY" the company puts out on the market.  Rather, they buy Apple because of the gigantic Cash Flow, the healthy Balance Sheet, the consistent high profitability, and the overall company strategy.

CNBC's Jeff Macke pops in and out of Apple like a Mad Man seemingly always paranoid over the share price.  Following a trader means getting slammed by Commission Fees and Maintenance Fees and whatever other fees your Broker charges you over and over and over again.

It's about buying because you see the long term growth.  Let short term panickers (myself included after having recently panicked over Manitowoc) lose out on the profit gains you expect over the long haul.

4) Alpha  |  Al*pha   |  The pointless pursuit of trying to do far better than everyone else.  David Gardner created Motley Fool in pursuit of some fantasy "Alpha" that isn't really a true investment strategy.  Worrying about what other people think makes you worry and abandon your own personal research.  Which leads to panic...and poor decision making...and suffering massive losses where you could have gotten solid gains.

The gist of it is that to achieve some fantasy, profit, "Alpha" you do not concern yourself with whatever the other investors are doing...Just let David Gardner do all the worrying for you. 

Whatever "other people" are thinking... or saying...or how many *stars* a particular stock has...
is absolutely not a healthy way to invest.

If you pursued this fantasy ALPHA  that David Garnder pursues then you'd miss out on eye popping share price gains in companys like:

(HOTT)
(SKX)
(WHR)

Those 3 stocks consistently get poor Motley Fool Stars ratings...

Yet.... Had you bought into Whirlpool in the 20s, you are now sitting on a +10$ gain.  That is on top of the insanely high 43 cents a share dividend quarterly you get for holding your shares.

Concerning yourself over ALPHA would have made you shy away from SKX's 2 star Motley Fool rating at your peril.  One trip to your local Skechers shoe store should be a convincer for you if you see that it is jam packed full of shoppers buying shoes, which obviously means the strategy to bring down the company's inventory is working.

It would mean ignoring completely the expansion into Chile or the diversification into Eyewear / Sunglasses to begin in 2010.  All of which are long term catalysts justifying a higher share price for Skechers.  Any semblance of research would have revealed to you that $5.00 for SKX didn't make a lick of sense for how cheap that was in comparison to the intrinsic value of the company.

The problem with Motley Fool is you get a fly by night Shoe Company Fad like "CROCKS" going bust and then everyone begins to think every shoe company not named "NIKE" is a sell.

Instead of concerning yourself over how many stars your well researched investment has, concern yourself with these definitions of Motley Fool Investing.

Disclosure:  I own WHR stock.