Peter Lynch once made famous the dictum to "buy what you know." That idea was reinforced in an odd, unintended way this past weekend.
My wife and I were visiting with friends who don't closely follow the stock market. In between taking turns watching after their newborn daughter, I asked the couple: "If you were to list five companies you are thankful for, which ones would they be, and why?"
Their answers revealed a lot, but before I get to the lessons that these picks illustrate, here's what my friends from rural Iowa had to say.
Lots to be thankful for...
| Company | Why Thankful? |
|---|---|
| Apple (Nasdaq: AAPL ) | Said the couple: "We especially love their iPhoto's cloud possibilities, as it allows us access to pictures of our daughter without having to carry them around." |
| Coach (NYSE: COH ) | Said the wife: "I'm pretty sure my husband would just get me a new vacuum cleaner every Christmas if it weren't for Coach." |
| Amazon.com (Nasdaq: AMZN ) | On their new baby: "We have a revolving order of 100 diapers that automatically get dropped off at our front door every few weeks. I don't even want to think about life without that." [Me neither.] |
| Kimberly-Clark (NYSE: KMB ) | "They provide the diapers that Amazon delivers to us." |
| Google (Nasdaq: GOOG ) | Because they live in rural Iowa: "We have lots of people who have come to visit us recently. Without Goog! le maps, we aren't sure whether or not they would've found our place, which is on the edge of our small town." |
Oh, and it's worth noting that the couple also singled out two companies that have drawn their ire over the past 12 months:
- Netflix (Nasdaq: NFLX ) : "We canceled our subscription based on principle. I felt like we were being taken for a ride."
- Green Mountain Coffee Roasters (Nasdaq: GMCR ) : "Our Keurig machine has broken three times in the past year. The company has replaced it each time, which we appreciate, but it's starting to be a pain to go through the process."
A victory for "buy what you know"?
We here at the Fool are big proponents of taking a long-term view with investing. For me, that means making investments with a time horizon of at least three years -- and hopefully much, much longer.
Using this as a measuring stick, I went back to see how the five companies my friends identified would have done over the past three years. Keep in mind that over this same time period, the S&P 500 returned 49%.
| Company | 3-Year Return |
|---|---|
| Apple | 297% |
| Coach | 270% |
| Amazon | 345% |
| Kimberly-Clark | 39% |
| 126% | |
| ? | ? |
| Average | 215% |
Source: Fool.com, includes dividend reinvestment.
Wow, those are impressive numbers. Our friends' hypothetical portfolio would have crushed the market by an astoundin! g 166 pe rcentage points in just three years. So does that mean you should go out and buy the stocks of your favorite companies right now?
Not by a long shot. It's one thing for my friends to tell me what they appreciate, and then look three years back. It's quite another to say, "I believe that three years from now, I'll really appreciate these companies and what they provide." Sure, you could be right, but you could just as easily be wrong.
Don't forget the two unlikeables
I want to move for a quick second to our two out-of-favor companies. Though Netflix and Green Mountain have returned 235% and 622% over the past three years, respectively, things have not been going well for the companies as of late.
In fact, if you'd invested equal parts in these two companies midway through 2011, you'd be sitting on a total loss of 57% of your money. Of course, the five months between now and then aren't even close to our three-year timeline, but the overall circumstances do reveal a telling lesson.
Losing customer loyalty is not to be taken lightly!
Netflix started running into trouble with its price hike, and the slide continued with its odd journey into Qwikster-land. Green Mountain, on the other hand, came under fire when investor David Einhorn called the company out with accusations that its earnings are "too good to be true." Why would that be? Well, it could be that its K-Cup patents are running out, or it could be that it is simply losing traction with customers -- like my friends in Iowa.
Either way, the message is crystal clear: When it comes to consumer-facing companies, customer service, brand loyalty, and timely communication are of the utmost importance.
Motley Fool CEO Tom Gardner summed it up when voicing his disappointment with Netflix's PR disasters this year:
Even if this is the right business strategy, the customer communications have been just terrible. The latest one read like a business communication to Net! flix sub scribers. They don't, and shouldn't be expected to, care about Netflix's business. They just want movies, a great variety of them, inexpensively and conveniently.
These are problems that the five stocks we're thankful for have avoided thus far, and they've been prospering in part because they've avoided such pitfalls.
What's next?
Not every stock has an obvious consumer angle. But for those that do, it's vitally important for them to provide valuable, high-quality products and services -- and even more so, to communicate effectively with their customers. The stocks that succeed on that score should reward their shareholders.
Since we're already on the subject of most-loved stocks, I thought I'd offer you some reading for your (hopefully) long weekend. We've already established that Apple and Google have been performing quite well recently. Along that vein, our analysts have put together a special free report on hidden ways you can profit from their success.
The report -- 3 Hidden Winners of the iPhone, iPad, and Android Revolution -- details three lesser-known companies that will continue to profit as the world switches to mobile communication. The report is yours today, absolutely free!
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