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Here you are, having just purchased a fat little investment guide we'll call Dollars and Sense, as so many investment guides are (although the one I have in mind had a different title), and you are skimming through idea after idea, growing increasingly excited by all the exclamation marks, looking for an investment you would feel comfortable with. You page through antique cars, raw land, mutual funds, goldùand you come upon the section on savings banks. Mexican savings banks.
The book explains how by converting your dollars to pesos you can earn 12% on your savings in Mexico instead of 5 1/2% here. At 12% after twenty years, $1,000 will grow not to a paltry $2,917, as it would at 5 1/2%, but to nearly $10,000! What's more, the book explains, U.S. savings banks report interest payments to the Internal Revenue Service. Mexican banks guarantee not to. Wink.
The book does warn that if the peso were devalued relative to the dollar, your nest egg would shrink proportionately. But, the author reassures, the peso is one of the stablest currencies in the world, having been pegged at a fixed rate to the dollar for 21 years; and the Mexican government has repeatedly stated its intention not to devalue. Now, how the heck are you, who needed to buy a book to tell you about this in the first place, supposed to evaluate the stability of the Mexican peso? You can only assume that the author would not have devoted two pages to the opportunity if he thought it were a poor risk to takeùand heÆs an expert. (Anyone who writes a book, I'm pleased to report, is an expert.) And, as a matter of fact, you do remember reading somewhere that Mexico has oil-pretty good collateralto back any nation's currency. Anyway, what would be so dreadful if, as your savings were doubling and tripling south of the border, the peso were devalued 5% or 10%?
So, scared of the stock market and impressed by the authorÆs credentials, you take el plunge.
And for 18 months you are getting all the girls. Because while others are pointing lamely to the free clock radios they got with their new 5 1/2% savings accounts, you are talking Mexican pesos at 12%.
Comes September, and Mexico announces that its peso is no longer fixed at the rate of 12.5 to the dollar, but will, instead, be allowed to ôfloat.ö Overnight, it floats 25% lower, and in a matter of days it is down 40%. Whammo. Reports the New York Times: ôDevaluation is expected to produce serious immediate difficulties, most conspicuously in heavy losses for Americans who have for years been investing dollars in high-interest peso notes.ö How much is involved? Oh, just $6 or $8 billion.
You are devastated. But you were not born yesterday. At least you will not be so foolish as to join the panic to withdraw your funds. You may have bought at the top but you'll be damned if you'll sell at the bottom. The peso could recover somewhat. Even if it doesn't, what's lost is lost. There's no point taking your diminished capital out of an account that pays 12% so you can get 5 1/2% in the United States.
And sure enough, in less than two weeks the float is ended, and the Mexican government informally repegs the peso to the dollar. (Only now one peso is worth a nickel, where two weeks ago it was worth eight cents.) You may not know much about international finance (who does?), but you know enough to sense that, like a major housecleaning, this 40% devaluation in Mexico's currency ought to hold it for a long, long time. In fact, you tell friends, for your own peace of mind you're just as glad they did it all at once rather than nibbling you to death.
And then six weeks later the peso is floated again, and slips from a nickel to less than four cents. Since Labor Day, you're down 52%.
Aren't you glad you bought that book?
(Everything changes and nothing changes. That was 1976. In 1982 the peso was devalued againùby 80%. In 1995, it dropped 55%. From mid-2002 to mid-2004, it edged down 20%.)
This immodestly titled book-the title was the publisher's idea, in a weak moment I went along -is for people who have gotten burned getting rich quick before. It is the only investment guide you will ever need not because it will make you rich beyond any further need for money, which it won't, but because most investment guides you don't need.
The ones that hold out the promise of riches are frauds. The ones that deal with strategies in commodities or gold are too narrow. They tell you how you might play a particular game, but not whether to be playing the game at all. The ones that are encyclopedic, with a chapter on everything, leave you pretty much where you were to begin withùtrying to choose from a myriad of competing alternatives.
I hasten to add that, while this may be the only investment guide you will ever need, it is by no means the only investment guide that's any good. But, sadly, reading three good investment guides instead of one will surely not triple, and probably not even improve, your investment results.
The odd thing about investingùthe frustrating thingùis that it is not like cooking or playing chess or much of anything else. The more cookbooks you read and pot roasts you prepare, the better the cook-within limitsùyou are likely to become. The more chess books you read and gambits you learn, the more opponentsùwithin limitsùyou are likely to outwit. But when it comes to investing, all these ordinarily admirable attributes-trying hard, learning a lot, becoming intriguedùmay be of little help, or actually work against you. It has been amply demonstrated, as I will document further on, that a monkey with a handful of darts will do about as well at choosing stocks as most highly paid professional money managers. Show me a monkey that can make a decent veal parmesan.
If a monkey can invest as well as a professional, or nearly so, it stands to reason that you can, too. It further stands to reason that, unless you get a kick out of it, you needn't spend a great deal of time reading investment guides, especially long ones. Indeed, the chief virtue of this one (although I hope not) may be its brevity. This one is about the forest, not the trees. Because if you can find the right forest-the right overall investment outlook-you shouldn't have to worry much about the trees. Accordingly, this book will summarily dismiss investment fields that some people spend lifetimes wandering around in. For example: It is a fact that 90% or more of the people who play the commodities game get burned. I submit that you have now read all you need ever read about commodities.
This thing about the forest and the treesùabout one's degree of perspectiveùbears further comment, particularly as for many of us it is second nature to feel guilty if we take the easy way out of a given situation. If, for example, we read the flyleaf and first and last chapters of a book, to get its thrust, instead of every plodding word.
I raise this not only because it could save you many hundreds of hours stewing over investments that will do just as well unstewed, but also because it leads into the story of The Greatest Moment of My Life.
The Greatest Moment of My Life occurred in the Decision Analysis class at Harvard Business School. Harvard Business School uses ôthe case method to impart its wisdom, which, on a practical level, means preparing three or four cases a night for the following day's classroom analysis. Typically, each case sets forth an enormous garbage dump of data, from which each student is supposed to determine how the hero or heroine of the case-inevitably, an embattled division manager or CEO-should ideally act. Typically, too, I could not bring myself to prepare the cases very thoroughly.
The format of the classroom discussion was that 75 of us would be seated in a semicircle with name cards in front of us, like United Nations delegates, and the professor would select without warning whomever he thought he could most thoroughly embarrass to take the first five or ten minutes, solo, to present his or her analysis of the case. Then everyone else could chime in for the rest of the hour.
On one such occasion, we had been asked to prepare a case the nub of which was: What price should XYZ Company set for its sprockets? Not coincidentally, we had also been presented with a textbook chapter containing some elaborate number-crunching way to determine such things. The theory behind it was simple enough-charge the price that will make you the most money-but the actual calculations, had one been of a mind to do them, were extremely time-consuming. (This was just before pocket calculators reached the market.)
The professor, a delightful but devious man, noting the conspicuous absence of paperwork by my station, had the out-and-out malevolence to call on me to lead off the discussion. I should note that this occurred early in the term, before much ice had been broken and while everyone was still taking life very seriously.
Copyright © 2005, 2002, 1998, 1996, 1989, 1987, 1983, 1978
by Andrew Tobias
All rights reserved.