A Common Sense Guide to Investing

I left the field of education for a few years to become a stock broker. My employer at the time graciously told people that I was making my avocation my vocation. I entered the world of finance thinking I knew something about investing one's money and left the field a few years later humbled. On a daily basis I had to confront what I didn't know and in the process I learned a lot.

I also frequently encountered an abundance of simplicity and complexity in this "financial brave new world." A lot of truth and a lot of fluff. There are simple ways to invest and there are complex ways to invest. The irony is that the simple ways do almost as well as the complex ways. You also have to ask yourself, "Do you have time to study the complex ways? Can you trust the person who is selling you on the complex ways?" 

I hope you see this hub as an attempt to pass on what I learned. Here are a few maxims:

1. Always remember that the world of finance is a world of sales. And people will tell you anything, distort the truth, outright lie, to close the sale. This one simple fact will help you immensely. And then you have to ask yourself, "How much am I paying this person?"

2. If someone thinks he or she knows where the market is headed, run away.. fast. Do not get sucked in. Stay away from the light.... If he knew really where the market was going, why would he or she tell you? Unless he is trying to sell you something. If "your friend" knew where the market is going, he would be on a beach somewhere taking a vacation, not standing there trying to sell you something. So don't believe the b.s about technical analysis which you won't understand. You could tell him that reading tea leaves has worked well for you.

3. In many cases, average wins. A statistic I ran across in the Roaring Nineties: An index fund that tracks the S+P 500 will beat managed money 70% of the time. During the Roaring Nineties, index funds were the rage; now you can find an ETF that will do the same. So if you take the simple route and buy an assortment of ETF's to spread your risk, and then leave it alone, you won't be written up in Fortune Magazine, but you won't do too bad either.

4. Ask yourself, "Has anyone gotten rich off of the market?" Or "Has anyone beaten the market consistently for long periods of time?" The only person I can think of is Warren Buffett. So maybe the strategy is to invest in some form of Berkshire Hathaway or to copy his bets.

5. When I was a broker, I used to talk about the risk of inflation and how one had to take a risk to beat inflation. I still believe in this axiom. But don't think that the market will beat treasuries in every ten period. I ran across a statistic in the late nineties that shaped my opinion on investing: From 1969 to 1981, treasury bills beat the stock market. Your broker will not tell you this fact for obvious reasons.

I am kind of curious how treasuries have faired against the stock market from 2001-2010. I had a feeling we were due for some kind of stagnation in 1998 when I was calling on small business owners, and they were asking me if I could give them an investment that was earning twenty percent a year because that is what their current financial advisor was getting them. How the tables have turned. Maybe I should get back in the business.

6. Academics say that the most important decision you make is not what stock you invest in, but what is the ratio of your different classes of assets? In other words, what is the percentage of your stocks, bonds, cash and real estate? Many experts say that the market is like the tide; in times of prosperity, stocks go up; and in times of trouble, they go down. One might now ask: is there a stock out there that has done incredibly well in the last three years?

7. Your broker can lose money as well as you can. I heard that line on an ad on CNBC in the late nineties. A friend working next to me used to cringe when he heard that commercial come on the small television set lodged in his cubicle. No doubt, he expressed this reaction because he knew it to be true.

8. Believe it or not, there are tax consequences for each financial move you make. So you can be the best trader in the world, but what happens to your returns when you factor in your capital gains tax?

In a way, if you invest in index funds, you are betting on the health of the American economy. Right now, you may have your doubts, but a contrarian approach to investing makes sense. We all know the adage, "Buy Low; sell high." Everyone says it; few people really do it.

In the late nineties, the returns of the stock market were skewed and abnormal. About this time I read a book called Against The Odds: The Remarakable Story of Risk by Peter Bernstein who reminded me of a mathematical concept called regression to the means. If you believed in this concept in the late nineties, the stock market would return back to its historical norm, roughly a 10% return. 

This decade has not been a great time for investors, but one needs to remember that the American economy has been a powerful engine for the last hundred and fifty years. Think about it: the seventies weren't such a hot decade either.

Before I went into the business, I stumbled across William Spitz's Grow Rich Slowly and became a devotee. The last time I looked for the text it said it may even be out of print. Spitz was the treasurer for Vanderbilt University and taught classes at Vanderbilt's business school. I mentioned to a friend that I read Grow Rich Slowly and this friend said that that book composed most of what he taught at Vandy.

I like this text because it is based in common sense. It contains some wonderful advice on how each individual can assess his tolerance for risk. It addresses how an individual can assess the risk for each mutual fund or ETF, and it doesn't promise you something that is impossible.

The reason the book is out of print is because it doesn't promise the moon. It doesn't have a title that will says, "How You Can Profit When The Dow Reaches 30,000." It doesn't try to seduce the reader into making a quick purchase. It has a lousy marketing strategy, but it has wonderful advice.

What William Spitz will help you decide:

1. How to spread the risk and how to make sure your funds are not buying the same stocks.

2. Should you create a position investing in international stocks?

3. How to create a portfolio using index funds, mutual funds or ETF's.

4. How to get rich slowly. 

Just what one needs during these uncertain times.