Ever consider how hard it is to make money? I think about it all of the time and today’s as good a day as any, our fourteenth anniversary at Mad Money, to talk about the perils of stock investing.
What, you say? Aren’t we the biggest proselytizers of equities on the planet? Do we want a stock in every pot and a high flier in average garage?
Definitively not. In fact, we want index funds, index funds and then more index funds. But we know that you wouldn’t be watching if you didn’t believe in owning some stocks with your Mad Money — hence the name. So, we want you to invest wisely, which doesn’t mean you only can own index funds because, unlike much of this industry we do think you are smart enough to do the work to own some stocks provided you recognize that the mantra here is not buy and hold, but buy and homework, lest something change and you wind up losing money.
That said, we like to be as tough on ourselves as possible, which is why on this anniversary date we are going to give you some reasons why it is so hard to make money, so we keep you on your toes and remind you why index funds remain our primary investment vehicle, not just individual stocks.
I want to give you examples of how discouraging it can be so you are steeled for pain, so you can understand the risks and accept them, so you can decide if you are really suitable for stock ownership. I want you to consider five risks, right in front of you on just this one day, so you get the perils of stock ownership and know how to handle them when they occur. These have all snuck up on people and make them queasy. Are they driving you crazy? Then you need to rethink how you invest.
First, unseen risk. The grounding of the Boeing 737 MAX. Until the recent crash of an Ethiopian Airlines 737 MAX, we knew two things: Boeing’s (BA) stock was broiling with momentum because of tremendous order growth and at the heart of that growth was none other than the 737.
Suddenly what was great was horrible, what was strong was weak, and the stock has plummeted 70 points. It’s times like these that you want another 499 stocks to make the S&P 500 a bigger part and Boeing a smaller part of your portfolio.
Suddenly you have to ask, will Boeing owe big money to customers who, last week, were clamoring to own more planes. Was Boeing at fault for the crashes and has huge liability? Are you able to handle that level of pain? If not, you have to go index funds. I believe in Boeing and that it will get through this. But I don’t have an answer about the near-term. Not at all.
One of the best investments of the era has been the stocks of the dollar stores, especially Dollar General (DG) . Until today. Today we found out that Dollar General is going to have to spend more, perhaps to make less, because of some important strategic initiatives that nobody I know saw coming, hence the stocks 7% decline. I think the stock’s a buy down here, but I accept the fact that Friday one or two blindsided analysts may downgrade the stock. Yesterday, Dollar General was a market darling. Today it is a market goat. Can you handle that quick a transformation from swan to ugly duck? Most people can’t, yet that’s exactly what you have to be able to do if you are going to own stocks.
One of my favorite stocks for years and years is Johnson & Johnson (JNJ) . It’s got terrific management in Alex Gorsky and his team with a fantastic pipeline, maybe the best balance sheet in the world — not kidding — a fine dividend and an excellent buyback.
But yesterday it lost a lawsuit to a woman who is dying of cancer because, she says, she used JNJ’s talc, one of its oldest products. JNJ owes her $29 million. There are thousands of cases against J&J charging the company knew talc was a carcinogen and kept selling it, something that investigations by Reuters and The New York Times seem to confirm. You owned JNJ for its tremendous health care franchise and because it is the ultimate sleep-at-night stock. But now you discover that you own a stock where you can wake up to a verdict that calls into question the entire safety thesis. Can you handle that as you know now there will be many more trial losses ahead? Or did you not sign on for this? Don’t feel badly, we own it for my charitable trust, Action Alerts PLUS, and we debated just today whether we can take any more pain and I am a seasoned pain taker. Again, do you want JNJ to be only one of 500 after this? Then an S&P 500 index fund is for you.
Yesterday I was saying that it looked like Facebook (FB) had been de-risked, meaning that the worst was over. What more could be thrown at these guys now that they have really tried to clean up their act? Today we discover there’s more, plenty more, like a criminal investigation of the company by the Justice Department. The New York Times this morning said prosecutors are examining deals that Facebook made that involved data sharing. There’s a grand jury convened to look into it. Terrific. Grand Jury proceedings are secret. We can’t comment from the U.S. Attorney or Facebook. So, what happens? Who knows? What’s the crime? What’s the punishment, Raskolnikov? Who knows? Oh and if that isn’t enough, how about the fact that there has been multiple days of outages of the Facebook network? You ever hear of CBS (CBS) having multiple days of outages?
Looks like there’s a lot more risk here than we thought. Are you ready for it? Have you steeled yourself to the mast? Just checking.
Finally, let’s just deal with the kind of left field lunacy that you have to consider if you own stocks: Brexit. Someone today who owns stocks asked me if he had to worry about Brexit. I said I would love to say no, but the smartest guy I talk to in Europe is predicting that Britain could experience a famine five days after a “hard Brexit,” as if anyone knows that the heck that is. Yep, it won’t be Leningrad or the Irish Potato Famine of 47 but it’s possible.
You want to own stocks the day that Britain runs out of food? Are you ready for the Great London Food Riots? I am not.
But then again, after we get hammered because of what may be an illusory event, perhaps you can do some buying, if you have any cash that is.
I know, you watch the show expecting me to tell you, “buy, buy, buy.” Instead I give you the equivalent of one of those pharmaceutical ads that says that your bladder will be stronger but here’s 42 things that can go wrong if you use it.
This is about knowing risks and rewards, about knowing what can go wrong, as well as what can go right, about pitfalls and money pits, not just high fives and laughs to the bank. It always will be.
Happy fourteenth anniversary. Here’s to many more.