Rockwell Automation (ROK)

[Investorman]

The Only Two Things You Can Do Wrong
http://www.fool.com/investing/general/2008/05/29/the-only-two-things-you-can-do-wrong.aspx

Todd Wenning
May 29, 2008


In a recent interview with Fortune, Warren Buffett said there are only two things investors can do wrong when buying stocks:

"You can buy the wrong ones, and you can buy or sell them at the wrong time. And the truth is, you never need to sell them, basically." (emphasis added).

Whoa, easy there, Warren
At first glance, it seems that Buffett is recommending that we buy any stock and never sell it, but that can't be true. He did just sell all the shares of Ameriprise (NYSE: AMP) in the Berkshire Hathaway (NYSE: BRK-A) portfolio, after all, which it received as a result of a spin-off of American Express (NYSE: AXP) in 2006.

What Buffett is saying is that investors need to find the right stocks and be patient with them as they grow. In other words: Be an investor, not a trader.

Buffett practices what he preaches. Consider the length and performance of these holdings:

Company
Year of Original
Purchase
Performance*

Washington Post (NYSE: WPO)
1973
12,300%

Coca-Cola (NYSE: KO)
1988
845%

American Express
1993
513%


Source: Berkshire Hathaway annual report. *As of 12/31/2007.

All three are thoroughly beating the S&P 500 over their respective time periods, and you know it had to be hard to stay patient in the rough times. You can be sure that more recent purchases, like General Electric (NYSE: GE) and UPS (NYSE: UPS), were made with a similar long-term perspective.

What this means for us
See, all too frequently individual investors try to outthink the market and capture short-term gains. Unfortunately, that's a flawed strategy for nonprofessionals. For one, we just don't have the time, motivation, or technology to compete with analysts in huge Wall Street firms. Moreover, when you factor in the added costs of taxes and commissions, it's easy to see that when it comes to trading stocks, individual investors have a lot working against us.

On the other hand, as Buffett implies, we do have advantages as investors. For one, we don't have to answer to anyone but ourselves; institutional money managers must constantly justify their holdings to investors. That forces them to think quarterly, and we can easily think in terms of years and decades.

The only thing left, then, is to find the stocks that are worth holding for the long run. For a little guidance on that front, take a page from Fool co-founders Tom and David Gardner, who have successfully spotted a number of good companies for their Motley Fool Stock Advisor service (their stock recommendations are outperforming the market by 42 percentage points since its inception in 2002).

Among other things, they look for stocks that are:

Built to last 100 years or more
Dominating growing industries
Helmed by committed and proven management teams
Governed by the highest corporate values
Increasing shareholder value consistently.
Here's a quick example: One of David's earliest successes was Marvel Entertainment, which he recommended in July 2002 on the heels of the company's success with the first Spider-Man movie. At the time, Marvel was unloved by the market, but was repaying its debt and seemed to be on the way to generating real GAAP profits. The rest, as they say, is history, and Marvel shares have since surged more than 800%.

But Marvel shares didn't follow a steady upward path. There were times when it dropped 20% or more, but that didn't change David's investment thesis. He bought the right stock at the right time and didn't sell.