WHAT WE’RE THINKING
Don’t just try to get rich
When I tell people I’m a stock ana-
lyst, many of them ask me for a tip.
They often seem to be angling for
a pick likely to quadruple over the
next month or two — you know, the
kind of return dangled as a teaser in
marketing e-mails.
Few real-life investors will ever
earn such returns.
Dow Theory Forecasts doesn’t deal
in stock tips. We focus on investments,
which are not the same thing. You
might say that instead of trying to get
rich, we try to build wealth.
Don’t misunderstand me — the
end result of building wealth is be-
coming rich. The difference is in the
approach. Very, very few people get
rich overnight by investing. Such in-
stant success usually results not from
expertise but from mind-bogglingly
good luck and excessive confidence.
That rags-to-riches approach
leaves more people wearing sackcloth
than satin. But the few who get lucky
tend to shout the loudest, advertising
that “You can earn 10,000% just like I
did.”
Don’t believe it.
One-stock portfolios are mighty
risky. One strike and you’re out.
Stock-tip investing also puts you
at a disadvantage when it comes time
to sell. If you buy based on a tip, you
don’t know why you bought — and
you won’t know when to get out.
The Dow Theory is a method of interpreting and clas-
sifying general market trends and does not directly en-
compass the selection or rating of individual stocks or
the duration of market movements. Dow Theory Fore-
casts endeavors to supply its subscribers with sound
opinions and advice based on its analysis of public in-
formation from sources believed to be reliable.
Editor, Director of Research
Richard J. Moroney, CFA
Managing Editor, Analyst
Robert A. Sweet, CFA
2 Dow Theory Forecasts, October 29, 2007
Robert
Sweet, CFA
Managing
Editor
A sound strategy
Until humans learn to bottle luck
and sell it at the supermarket, get-
rich-quick schemes will remain just
that — schemes.
For our money, building wealth
means building a diversified portfolio
of high-potential stocks likely to de-
liver strong returns over time, with a
reasonable amount of risk. The Fore-
casts tries to help investors do just
that. Our Buy List and Long-Term Buy
List represent diversified baskets of
stocks with quality fundamentals and
superior total-return potential. For in-
vestors already diversified, the Focus
List contains our 15 to 20 favorites.
While all three of our lists are up
more than 40% since the end of 1999
(versus a 3% gain for the S&P 500
Index) and are beating the S&P 500
so far this year, none are designed to
give you huge short-term returns. We
don’t look for stocks likely to double
by next month. That’s a sucker’s game,
and we don’t play at that table. We do
look for stocks we think are going to
Contributing Editors, Analysts
Charles B. Carlson, CFA David A. Wright, CFA
Contributors
Jennifer R. Hopfinger M. Lisa Springer, CFA
Dow Theory Forecasts (ISSN 0300-7324 USPS 997-
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be among the market’s best perform-
ers over the next year or two.
Beating the market over time is a
fine way to amass wealth. And even-
tually, those who build wealth can
become rich. It takes longer, but the
rewards are just as great, and the risks,
far less.
Ask the right questions
So if you meet me at the gas sta-
tion or the ballgame, don’t ask me for
a stock tip. I don’t have any.
More valuable than stock tips are
investing tips. Just in case you never
sit next to me on an airplane, here are
two of those investing tips.
➤ When should I sell? Sell when the
reason you purchased the stock no
longer applies. That can mean selling
a big gainer that you bought because
of its valuation and now looks expen-
sive. It can also mean a growth stock
with declining growth potential or a
speculative stock that took a dive on
some bad news.
➤ How many stocks should I own?
Academic research suggests that a
portfolio of 30 to 40 stocks provides
adequate diversification. The stock-
tip method of portfolio allocation is
too risky for us. A 10-stock portfolio
is about twice as volatile as a 40-stock
portfolio — and a one-stock portfo-
lio is about three times as a volatile as
a 10-stock portfolio.
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