Investing 101: Don't Pick Stocks, Pick Companies
NEW YORK (TheStreet) -- Warren Buffett once said, "If a business does well, the stock eventually follows."
If you have been reading my articles over the years, you would know by now that I quote Buffett quite a bit. The reason is simple: It's hard to argue with his brand of logic. Being in opposition to "The Oracle" has made fools of many people while costing them quite a bit of money.
When I was asked to contribute to this "Investing 101" package, explaining some of the "do's and don'ts" to newbie investors, I jumped at the chance. After studying so many companies and digging through hoards of buried information, there's no question that (in my opinion) successful "stock picking" is a myth.
Investors, especially those who are new to the game, believe they can come into Wall Street's house, pick a few stocks and leave with the house's money. It doesn't work.The way to beat the market is to pick great companies. It seems simple enough, right? But how is it that so many smart people lose their retirements every year doing exactly the opposite? You have to know how to spot a great company. It first requires two things: never taking anything for granted and constantly doing your homework. Take, for instance, the dot-com era. While I'm not old enough to remember the Woodstock music festival of the 1960s, from stories I've heard I think of the dot-com era as the high-tech version of Woodstock -- plenty of great memories that you wished never happened. Likewise, investor due diligence and personal responsibility were non-existent during the dot-com era. Contrary to Buffett's quote above, greedy investors bid up shares of any company with a ".com" attached to its name. This went on even though these companies literally had "no business being in business." Still, their stocks performed exceptionally well. Why? Investors -- if you can call them that -- were more than willing to mortgage their future on the likes of Pets.com, Webvan.com and eToys.com, betting they would grow into their valuation and make tons of money. Well, we know how that turned out.
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