The Best Stocks for New Money
By Rex Moore July 6, 2008 Comments (0)
2 Recommendations
If I told you I would hand you some money to buy a few shares of a stock, but only if you could tell me which company was at the top of your buy list, could you do it? Most investors probably could do no more than toss out a random name, because few keep an up-to-date short list of their best investing ideas.
Yet such a list is crucial -- even beyond the obvious reason of knowing which stocks to buy when opportunities arise. The very act of diligently keeping such a list will sharpen your investing skills. It forces you to develop a thesis for every company and constantly reassess that business to make sure your thesis still holds. You'll also be in better tune with valuation, especially relative to other companies in the industry.
For example ... My own portfolio includes full positions in some stable, blue-chip stalwarts such as Procter & Gamble (NYSE: PG) and Anheuser-Busch (NYSE: BUD). I also have lighter positions in some small caps, Ctrip.com (Nasdaq: CTRP) and Buffalo Wild Wings (Nasdaq: BWLD) among them.
So when it came time to add new money a few years ago, I had good balance in my portfolio and was free to consider almost any stock. For many reasons, including solid management, reliable cash flows, and compelling valuation, Johnson & Johnson (NYSE: JNJ) had been on my short list. After a 10% drop in less than a month, it had moved up to No. 1. I pulled the trigger in early February 2006 and got in at $56.95.
Of course, only time will tell whether that was a good buy (so far, so good). But because I keep an up-to-date list of my best stock ideas, I was able to buy with confidence when the opportunity presented itself.
Look inward, grasshopper When making your list, don't forget stocks you already own. All of us will have a limited number of great ideas in our investing lifetime. Often, your best stocks are already sitting in your portfolio, just waiting for new money.
Most of history's greatest investors followed this route. You may already be familiar with Charlie Munger's disdain for over-diversification; he'd rather have his money in a small handful of stocks, allocating not a single penny to any second-tier idea. David and Tom Gardner are thinking along the same lines for their Motley Fool Stock Advisor members. Each month, they publish their top five stocks to buy now for those ready to allocate new money.
But don't think that you need to limit yourself to just four or five stocks. In fact, the less experienced you are as an investor, the more diversity you need in your portfolio, to keep one or two bad mistakes from torpedoing your net worth. Masters such as Munger and Buffett are tops in their field; they're not perfect, but it's highly unlikely that any one investment of theirs will completely tank and significantly harm Berkshire Hathaway shareholders. The rest of us, however, need a bit more diversification.
But no matter your investing experience, you'll want to focus on your best ideas as you add new money. And as the years roll by, if you were right about most of your ideas, the extra concentration in them will supercharge your returns.
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