Million Dollar Portfolio: The Motley Fool Guide to Stock-Market Investing

“People want to make money fast, but it doesn't happen that way.” — Warren Buffett

Over Christmas, I read Roger Lowenstein's fantastic biography of Warren Buffett, one of my financial heroes. Because I currently prefer to invest through index funds, it was fascinating to read how Buffett has been able to make billions by purchasing individual stocks.

Next, I picked up the new book from David and Tom Gardner: The Motley Fool Million Dollar Portfolio. It was the perfect follow-up to reading about Buffett. “This book is about picking great stocks,” write the authors in the introduction, and it's true. Over the subsequent pages, they describe a variety of techniques for finding individual stocks that are worthy of investment (and not just speculation).

Stocks that don't suck
I don't write much at Get Rich Slowly about investing in individual stocks. For one thing, I have a pathetic track record in choosing good companies. In the past, I've been a speculator and not an investor. Some of my choices include:

  • CRA, at its peak
  • PALM, on the day of its IPO
  • WAMU in the autumn of 2007
  • SHRP, last January

Fortunately, I've never had huge sums to invest in these speculative bids. All the same, I've lost thousands of dollars in bids to get rich quickly in the stock market. Because of my experience, I've come to admire the virtues of indexed mutual funds.

All the same, I recognize that it is possible to build a great investment portfolio from individual stocks. Many GRS readers are interested in doing just that. And I, too, would like to allocate some portion of my money to buying stocks — now that I have the urge to speculate out of my blood. In their book, the Gardners write:

If you have the time, ability, and interest, individual stock investing is the single best way to build you own million-dollar portfolio.

Though the authors advocate picking individual stocks, they're as wary of fees as any index fund investor. They believe active trading is dumb. They're advocates of buy-and-hold. The Gardners also write that there are two components to investing well:

  1. Picking the right stocks.
  2. Building a balanced portfolio (i.e., diversifying).

“In the end,” they write, “you want 100% of your money invested in companies that don't suck, and 0% in companies that do.”

Investment strategies
Each chapter of Million Dollar Portfolio explores a specific investment strategy. The authors note that “each [strategy], practiced well, can and does beat the market.” Some of the methods covered include:

  • Dividend investing, which involves buying stocks that produce consistent income through the use of “dividends”. MDP argues that dividends are the investment world's “allowance”. When you own a dividend stock, you receive a periodic payment just for investing.
  • Value investing focuses on buying companies trading for less than what they're worth. It's about buying good companies at a great price. “The excitement of blue-chip value investing comes from looking at long-term charts of what value stocks do as a group over a period of decades.”
  • Small-cap investing attempts to find “hidden gems” — stocks from smaller companies that tend to be ignored by large institutional investors.
  • Growth investing. Growth stocks are those expected to produce above-average earnings over the near future. Increased earnings lead, in theory, to increased profits, and to higher share prices.
  • International investing, which allows you not only to diversify, but also to find stocks in other countries that might be better than those in our own.

The authors lay out the basic techniques of each style, and then provide case histories. Along the way, they explain investing concepts like P/E ratios, book value, “market cap”, rebalancing, and more. Though they write about individual stocks and not index funds, much of the advice is familiar: buy and hold, diversify, etc.

Million dollar portfolio
Million Dollar Portfolio includes more than just information about choosing stocks. The book also features:

  • A chapter about CAPS, the Motley Fool stock-researching tool (which Get Rich Slowly has covered before).
  • A discussion of asset allocation and diversification.
  • A short section on the financial collapse of 2008. The Gardners look at the causes, the reactions of big investors, and the prospects for small investors like you and me.

The Gardners also stress the importance of investing as soon as possible. They write that the biggest mistakes that American investors make are:

  1. Never starting.
  2. Starting too late.
  3. Picking poor stocks.

As many have argued, the best time to begin investing is now, whenever now may be. Because of the power of compounding, time is the investor's best friend.

I was ready to hate this book, but I didn't. I found it fascinating. I loved the information about how to evaluate stocks. I'm not ready to abandon index funds, but I am eager to learn more about dividend investing, the method that seems best suited to my personality and goals.

I also like that the book doesn't just tout successes. Each chapter describes a particular investment strategy, explains the method, and then illustrates it with two or three successes. But each chapter also includes a real-life mistake the authors have made. These examples of choices gone wrong are often more instructive than the picks that worked!

Note: I recently had a chance to interview author David Gardner. Look for an excerpt from that conversation later today.

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plonkee
plonkee
11 years ago

My direct investing career has also been rubbish. I think the thing to realise is that the whilst there are techniques that potentially can work if done well, it’s actually not straightforward to do them well.

I’m not going to invest directly in shares because I am too lazy, but also I get the impression that you need a fairly significant amount of money ($100s?) to start a diversified portfolio. Is that really the case?

MitchK
MitchK
11 years ago

@ plonkee

If you follow index investing, you can instantly diversify your portfolio with your first share of an ETF or first buy-in into a low-cost index mutual fund.

Books that I thought were excellent and easy reads on the subject:

http://www.amazon.com/Smartest-Investment-Book-Youll-Ever/dp/0399532838/ref=pd_bbs_sr_1?ie=UTF8&s=books&qid=1232025742&sr=8-1

http://www.amazon.com/Little-Book-Common-Sense-Investing/dp/0470102101/ref=sr_1_1?ie=UTF8&s=books&qid=1232025896&sr=1-1

the weakonomist
the weakonomist
11 years ago

Dividend investing is a good way to get your feet wet, but it isn’t exciting.

The best opportunities are going to be in small-cap growth. This is where you potential to make some quick returns will lie. Given the current market though, you could probably have just as much with large cap growth.

Good luck, I’m laying low in the stock picking for now.

skipadoo
skipadoo
11 years ago

wow. i’m a little surprised to see talk of investing in individual stocks here. my work involves analyzing businesses and financial statements. i personally wouldn’t invest in individual stocks unless i had enough money to properly diversify and did enough research into each industry and company (which would include interviewing management, which i don’t think the average joe would have access to)… or have insider information (which would be illegal).

ABCs of Investing
ABCs of Investing
11 years ago

I have to admit that I just don’t believe anyone can pick stocks and beat an equivalent index fund over the long haul. Some people get lucky for a while and then fall to earth (Bill Miller). Others like Buffet play on a different playing field than you and I. @Plonkee – If you want to have a diversified all-individual-stock portfolio then you need a pretty good amount to accomplish that. An alternative if you don’t have much money is to put the majority in index funds and the remainder in stocks. As you increase your portfolio you can slowly… Read more »

Ken
Ken
11 years ago

Thanks for the review JD. This looks like an interesting book for getting started in individual stock investing. I’m glad it also defines terms. I think that’s the biggest deterrent for me right now. I just don’t know what anything means – even looking at index funds confuses me. Do you have any recommendations as to the most basic but thorough resources for a complete noob to any kind of investing? Books or websites?

Jude
Jude
11 years ago

Investing in individual stocks is a fools game for most amateurs. It is very expensive in terms of both dollars and time to acquire a necessary level of expertise.

Even if you could be great at it, how much time would you have to spend every day/week? At even 5 hours a week (which I think is on the very low end) just think of what else you could do with your family, your community, etc.

Noah
Noah
11 years ago

I’m very interested in this and also indexed mutual funds. However, maybe I missed it, but exactly how does one go about purchasing these stocks/funds? I’m in Canada if that makes a difference.

Jeremy
Jeremy
11 years ago

First off, I don’t think most people ‘get’ Buffet. My take on him is that he invests in a business, not in the stock market. Sure, he uses stocks to buy in, but to a large degree he buys a noticeable percentage of the business’ stock and gets involved in the company. I don’t think it’s possible for the average investor to ‘buy like Buffet’. Unless you buy shares of Berkshire Hathaway, that is! I’ve done very well at buying individual stocks, and I agree that a big part of that is buying stocks that don’t suck. I don’t ‘buy… Read more »

tinyhands
tinyhands
11 years ago

The best way to get rich using the stock market remains to be writing about how to get rich in the stock market. There is no scholarly evidence that anything other than dollar-cost averaging into a broad-based index fund will yield CONSISTENT returns over a 15+ year timeframe.

John
John
11 years ago

Double Your Money in America’s Finest Companies by Bill Staton is another book about individual stocks for small investors. His approach is centered around a small portfolio of stocks that emphasize large established companies that pay dividends. He believes you can start out with a fairly small number of stocks too.

An interesting read but at the end of the day I think a simple index approach is best. The most important element is to rebalance with a bond index regularly. That forces you to invest when low and protect profits when stocks are high without making emotional decisions.

Chance
Chance
11 years ago

I’m a member of both the Motley Fool “Million Dollar Portfolio” and “Stock Advisor” service. While they do invest in individual stocks, there is some diversification and they have done a great job overall in their stock selection. Since its inception in 2002, the “Stock Advisor” service has consistently outperformed the market. Right now, for example, the S&P500 is down 27% and “Stock Advisor” has an average return of about 1%. 1% might sound bad for ~6 year, but it sure beats -27%. When the market was up, I want to say “Stock Advisor” exceeded the market by 40-50%. The… Read more »

The Personal Finance Playbook
The Personal Finance Playbook
11 years ago

“Increased earnings lead, in theory, to increased profits, and to higher share prices.”

Earnings and profits are synonymous in finance. They literally are profits. EPS = profit per share.

I loved Lowenstein’s book on Buffet. He is an incredible writer. I have read one other Lowenstein book, When Genius Failed, and it was phenomenal as well.

The book you describe sounds very good, I’ll check it out when/if they get it at my local library.

J.D.
J.D.
11 years ago

Personal Finance Playbook wrote: Earnings and profits are synonymous in finance. They literally are profits. EPS = profit per share.

Thanks! See, this is another reason I still need to do some reading. This seems like a basic piece of information. I need to grok all this terminology…

Dylan
Dylan
11 years ago

Unfortunately, everyone cannot own only the stocks that don’t suck because the sucky stocks have to be owned by someone. And they don’t want sucky stocks anymore than you do. Stock picking is similar to playing a game of Hot Potato, and the longer you play, the more likely you will lose. I’m specifically talking about stock picking, not investing in the stock market. When you pick specific stocks you are betting that your stocks will do better than the market. If your wrong (half of the bets have to be), the market does better than you. Add in the… Read more »

John Forman
John Forman
11 years ago

I’ve actually been reading this book myself (got it free) for the purposes of a review on my own blog, which admittedly is trading oriented, rather than investing. I haven’t as yet come upon anything not found in many other similar investing books that have been on the market for many years. What I did find was a set of incredibly incorrect figures at the start of Chapter 3 when the authors try to explain how long-term buy and hold is better than short-term in and out because of the transactions cost and taxes. My guess is the vast majority… Read more »

Chris Gammell
Chris Gammell
11 years ago

@Ken, one of the best investing books for beginners, and I know the Gardners agree, is “One Up On Wall Street” by Peter Lynch. While not everything in that book is a great idea, it’s just so well written for a financial guru. Very conversational and very much written for the beginners (like me). Lynch is often invoked by the Gardners (I am a Stock Advisor member and have read many of their books…which are also good); however, he isn’t as well known by the general public.

Cheryl
Cheryl
11 years ago

You should read Warren’s new book, “The Snowball” written by one of his close friends and a financial analyst who followed him around. It tells a great story about his life, family, trips he takes, and his introduction to the stock market when he was young.

Ron@TheWisdomJournal
11 years ago

Compounding isn’t a miracle, the miracle is having the patience to allow it to work!

Silvia
Silvia
11 years ago

I am still learning about investing right now but I am still young-ish (26) and I think right now is the perfect time to buy stocks if you can wait about 10 years or longer before you need the money. I don’t buy any small unknown companies so there’s not as much risk (I think). I’ve bought Apple, Coke/Pepsi, 1-800-Flowers.com and a couple index funds. I might be losing some money in the short term but as long as I don’t panic (and keep buying more while the stock is low!), I think I will be doing pretty well 5… Read more »

Sean
Sean
11 years ago

Noah You can buy any of these stocks by opening up a brokerage account (I would suggest a discount brokerage account). In Canada the major banks offer this service, or you can use another company. I use a company called Disnat. The best part about being in Canada at the moment is the new Tax Free Savings Account. You can open a TFSA account at a brokerage house of up to $5000 per year (this is the first year so a $5000 limit at the moment) and any income you make from your investments is tax free. I think one… Read more »

Tony
Tony
11 years ago

Now is the time to protect your money. Not risk it in the stock market. Buy gold and silver. These metals have great intrinsic value. We are going through unpredictable and tumultuous times and now is not the time to make a quick buck or two in the stock market. Look back in history and you will realize that in times of economic distress people will hoard their money. Cash is safe for the time being but look into other assets that can withstand the changes in the economy that we are about to face.

simplesimon
simplesimon
11 years ago

JD, Each of the strategies that you’ve listed out (Dividends, Value, Small Cap, Growth, and International) can all be bought using just index mutual funds and/or ETFs. They also fit one of the “components of investing well”: diversification. The other component, picking the right stock, is 1000x harder to do. I suppose if you want to do that much more work, by all means go for it. But remember that through the index funds, you *DO* hold the good stocks and they are priced for it relative to “bad stocks”. You just can’t know what is “good” and what is… Read more »

Evelyn
Evelyn
11 years ago

Just a small proofreading error…

“Growth stocks are those expected to produce [are those expected to produce] above-average earnings over the near future.”

Not ready for this type of investing myself, working on consumer debt, but I enjoyed the post.

elisabeth
elisabeth
11 years ago

I think that one can buy stocks as a kind of hobby, not perhaps a good way to get rich slowly, but not necessarily a terrible way to spend disposable income. I worked in a brokerage for a few years right after college, so have never felt intimidated by the idea of making a buy (though I do use a brokerage firm rather than an on-line, [yes, much cheaper] route.). So, after we paid off our mortgage, I decided I wanted to own a few stocks outside of our retirement funds (which are managed by TIAA-CREF and don’t need much… Read more »

Cents in the City
Cents in the City
11 years ago

Have you considered buying shares of a high dividend yield ETF? I’m still learning about investing and haven’t felt ready to buy individual stocks. I read a tip from Suze Orman suggesting that now was a good time to buy dividend yielding stocks, since to some degree they will still pay you back. I was curious, so I did some research. I realized I could invest in dividend stocks and still get the safety of an index. I invested in Vanguard High Dividend ETF, VYM, and its top ten shares are all companies I know, trust, and would be likely… Read more »

Jenni
Jenni
11 years ago

J.D. or Sean: What is the difference between a discount brokerage firm and a no-load fund company? Which type are companies like Vanguard/Fidelity/T Rowe Price? Or are they the same thing?

Ted
Ted
11 years ago

The authors write, “In the end you want 100% of your money invested in companies that don’t suck, and 0% in companies that do.” Of course, as this bear market has proven, that is difficult to do. As recent as last year, many financial stocks (Citigroup, Washington Mutual, AIG etc.) did not “suck.” In fact, many well-respected investment managers touted these companies as “great buys.” When investors (and the professional managers) in those stocks realized they “sucked,” it was too late. People would be much better off if they simply bought and owned a diversified portfolio of indexed mutual funds.… Read more »

Cathy
Cathy
11 years ago

My index funds have fallen and can’t get up. I’ve allocated all my new contributions to government money markets. If my index funds are floundering, there’s no way I could pick a good individual share. All the good companies who gave dividends have cut back or eliminated the dividends. Good advice in a stable economy, but this economy needs to stabilize.

Tyler Karaszewski
Tyler Karaszewski
11 years ago

I have two different stock market investments. One is an index fund that tracks the S&P 500. It’s down right now, which encourages me to buy more of it. It’s effectively on sale until the economy recovers. My entire 401k is invested in this fund (I may move it into something more stable when I’m older and closer to retirement). My other stock investment is my own company’s stock. This is, admittedly, not the most prudent investment from a financial standpoint, but I have other reasons for choosing it. Company stock is often given as bonuses and awards, but cannot… Read more »

FranticWoman
FranticWoman
11 years ago

elisabeth said: “I didn’t ever think of it as a way to get rich slowly or quickly, instead I think of it as entertainment, a little more likely to have a good result than the entertainment my mother gets when she occasionally goes to vegas and plays the slot machines!” That’s my style too. I dont do it the smartest way but I also don’t have much money percentwise in individual stocks. I do it for fun, mostly. My father bought me individual stocks when I was a teenager and taught me how to check their worth each day. Once… Read more »

kelle
kelle
11 years ago

Read #25 elisabeth until it sinks in:
1. Seen inside the business
2. After college education self-investment
3. After mortgage payed off
4. Other than retirement $’s
5. Money she didn’t need
Not the exciting get rich tips your looking for, but the smartest place to start.

Jeremy
Jeremy
11 years ago

Jenni (#27): They’re completely different beasts. A Fund is a company that buys groups of stocks and repackages it, selling their own shares as a blend of bits of the stocks they own. For example, Vanguard (a fund family, or company that has many funds) has a High Yield Fund that owns hundreds of dividend stocks and bonds to generate income. You buy one share of the fund, and you own a piece of the fund that owns all those shares. In a way, you have a little bit of each of those stocks and bonds. No-load means they don’t… Read more »

Muttrox
Muttrox
11 years ago

“And I, too, would like to allocate some portion of my money to buying stocks – now that I have the urge to speculate out of my blood.”

Picking individual stock *is* speculating. To whatever degree you are picking individual stocks instead of index funds, you are speculating. You’d be better off joining a neighborhood poker game and getting your gambling bug out there, it is much cheaper.

Go read (or reread) John Bogle’s “The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns”

Jeremy
Jeremy
11 years ago

Actually, from Dictionary.com, speculation is, “engagement in business transactions involving considerable risk but offering the chance of large gains, esp. trading in commodities, stocks, etc., in the hope of profit from changes in the market price.” Trading is speculating. Speculating means you are expecting a certain price or direction of price movement, and (in this case) putting money on it. Betting or trading. Buying a solid blue chip stock that you intend to hold “forever” for dividends is not speculation. This is investing, as is buying a home or loaning money with lots of collateral (like a bank does). There’s… Read more »

mwarden
mwarden
11 years ago

I really am disappointed to see this article. As some have asserted, trading individual stocks is gambling. Stop “picking winners” and acting like you’re doing anything more than hitting the black jack tables (there’s skill involved in black jack too, but it’s still gambling and only the house wins). I think it is irresponsible to promote stock picking before you have fully understood the other side. JD, please please please read Bogle. These Motley Fool guys cannot show a technique that will consistently beat the market after expenses AND TAXES (don’t forget them!). You may think it is harmless for… Read more »

J.D.
J.D.
11 years ago

I’ve been exchanging e-mail with @mwarden, but I wanted to reply here, too. I have not abandoned index funds in any way. But I’ve had a lot of people ask me about individual stocks, too. I’m going to mention books about how to invest in them now and then. My own money is 100% in index funds right now. Well, except for the $50 of Sharper Image I have left. 🙁

~_^
~_^
11 years ago

Hey J.D., have you picked up ‘The Intelligent Investor’ by Ben Graham (Buffetts’ mentor)?

I haven’t read ‘Million Dollar Portfolio’ but based on your overview it seems Graham disagrees with a lot of the logic there, which is to be expected since he argues in favor of the value investing approach, but whilst doing so he makes a strong case against other investment approaches (he is particularly critical of growth investing and I found his comments on dividends very interesting). That doesn’t mean he’s right of course, but it’s probably worth picking up as a counterpoint.

Mike
Mike
11 years ago

If you do experiment with dividend investing, be sure to keep all your transactions in a tax-deferred account since those all those dividends will be taxed at your marginal tax rate if you buy/sell through a taxable brokerage.

thomas
thomas
11 years ago

Adding this book to my reading list. Thanks for the review

Mike dave
Mike dave
11 years ago

Don’t buy index funds!! Doing so exposes you to every poorly run, fraudulent buggy whip maker out there. It doesn’t take a large portfolio to diversify with individual stocks, it does take more work. Some advice you won’t find in the books, After you have identified a stock in what seems to be a good company: -Get a list of the leaders of the leaders and the board of directors, research these people if they have histories of fraud or failed companies RUN don’t walk -find a message board, find the local basher (there are almost always a few) read… Read more »

skipadoo
skipadoo
11 years ago

as ~_^ Says, ben graham’s “intelligent investor” is a great book on value investing. that said, here’s my personal point of view on “investing” in individual equities: before picking individual stocks, i usually ask myself why i think a stock is mispriced. what do i know, that everyone else (including industry insiders, and finance mba’s) don’t know? often times, i can’t think of a valid answer. not many fund managers can beat their resepective index. what makes me think that i can beat a professional? how many of you guys that buy individual stocks can read a balance sheet, analyze… Read more »

Bon
Bon
11 years ago

Great post as always JD — I love GRS for general “financial lifestyle” advice and GREAT articles, but this is a topic I’d love to find a really solid, quality Blog about — any suggestions? I’m looking for a place with discussions around what I would call “intermediate” investing. i.e. I know to put money in my 401K and Roth IRA, and have a few no-load mutual funds, but I have no confidence around anything beyond this. Taxes, college savings plans, other retirement savings vehicles, etc. etc. I feel everywhere I look is either too complex for me, too simple,… Read more »

VC
VC
11 years ago

It is difficult for everyday people to make a lot of money investing in stocks because they only invest in companies they know. These companies tend to be the large market cap stocks like Microsoft, Exxon mobile, Proctor and Gamble. The problem with these stocks is that the companies are so large and have so many analysts following them that they are rarely mis-priced. They are mature companies so the growth has already been done. Microsoft and Exxon Mobile are already so large and do so many things that they do not have that much room left to grow. Investing… Read more »

James
James
11 years ago

I guess some of it has to be luck, no ones knows the future…you can pick the next stock that goes up 1000%

V Chow
V Chow
11 years ago

For ETF of all underlying, I heard someone said counter-party credit risk (like Lehman collapse) is unavoidable. Is that the case ?

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