The Motley Fool Investment Guide: How the Fool Beats Wall Street's Wise Men and How You Can Tooby David Gardner
The Motley Fool Investment Guide contains everything the Fools have learned from their time online about what investors really need to know to find the best investment possibilities. They show you just how powerful the information revolution can make you, the individual investor. Plus, they supply all the investment decisions, and a healthy skepticism/i>… See more details below
The Motley Fool Investment Guide contains everything the Fools have learned from their time online about what investors really need to know to find the best investment possibilities. They show you just how powerful the information revolution can make you, the individual investor. Plus, they supply all the investment decisions, and a healthy skepticism about conventional wisdom.
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Read an Excerpt
Take heed.... The wise may be instructed by a fool....
You know how by the advice and counsel and prediction
of fools, many kings, princes, states, and commonwealths
have been preserved, several battles gained, and divers
doubts of a most perplexed intricacy resolved.
Not a very wise choice for a name when you're trying to ply your trade in the investment world. For decades financial professionals have done their best to sell customers on their Wisdom. Whether it's the pinstripe suit, the avuncular smile, the firm handshake, or the advertising jingle ("Rock Solid, Market Wise," comes to mind) your typical broker, money manager, or financial planner has striven for an image that smacks of success, intelligence, experience, respectability--in a word, Wisdom.
And for years they've all been making a fair amount of money off of fools. You know about fools. You may even have been one yourself at some point. Ever listened to a salesman on the other end of a phone long enough that the voice-activated vacuum cleaner he was trying to sell you began to make sense? You were being foolish. Ever bought a stock on your dentist's recommendation without even looking to see if it was listed? How very foolish of you. Or what about when you snapped up shares of International Dashed Hopes Load Fund just because your broker said it was the top performer in its category last year? Terribly, terribly foolish.
Basking in the excesses brought about by this folly, the financial establishment hadn't banked on one thing--that one day the tables might turn when some Fools (and that's a capital "F," maestro) actually showed up.
* * *
The Wise would have you believe that "A Fool and his money are soon parted" But in a world where three quarters of all professional money managers lose to the market averages, year in and year out, how Wise should one aspire to be? In what other realms could such a compelling paradox exist, that the paid professional can do no better than--in fact, cannot even do as well as--dumb luck?! And this general ineptitude has been made more ironic by the appurtenances that typically attend the Wise: expensive suits and gold cufflinks (to impress their clients), Swiss watches (to convey the importance of their time), mahogany desks (to rest at between rounds of golf), and other similar displays designed to impress and intimidate their customers. Ah, the many-splendored totems of those who were paid too much to make too little.
In fact, we got to thinking after a while that we should just go ahead and call ourselves Fools, since our attitudes and approach to life were so radically different from what was being passed off as Wisdom all around us. So we launched our original Motley Fool, taking the name from a nondescript quotation from Shakespeare's As You Like It: "A fool, a fool! I met a fool i' the forest, a motley fool? We'd always loved Shakespeare's Fools ... they amused as they instructed, and were the only members of society who could tell the truth to the king or queen without having their heads lopped off. The Motley Fool began as a monthly newsletter, then transformed into a daily feature on a national online service, and now you have the most potent distillation of our Folly, a single tome containing all the Foolishness we can pack into it.
Our goal was and is very simple: beat the market and show others how to do it--the more novice, the better. In our brief Foolish history, we've enabled thousands of average people who didn't previously know a dividend from a divining rod to invest their own money without the help of Armani suits, and crush Wall Street at its own game.
Our approach is best characterized by its hostility to conventional wisdom. For example, the Wise will tell you just to invest your money in mutual funds. (This "double dip" enables them to charge you for that advice and then charge you on an annual basis for the funds' management fees.) We, on the other hand, are telling you to buy stocks. They'll tell you, "All right, take on the risk of buying stocks. But if you're going to do that, just buy safe ones and hold on." Poppycock. We're telling you to add some more volatile growth stocks to your portfolio, or you'll probably end up as flotsam left in the market's wake. And we're also telling you--horror of horrors--that you should consider shorting stocks, a devilishly fun attempt to profit off the decline of a stock rather than its rise. To the Wise, there is no more risky, bad-faith investment decision than shorting stocks. To us, there are fewer better opportunities available to the individual investor today. And the outrageous list goes on.
In what follows, we hope to teach you, to amuse you, and ultimately to make you good money at the same time.
But first we should introduce ourselves.
Who We Are, by Way of Explaining
What This Book Ain't Going to Do
We're David and Tom Gardner, brothers, and the original editors of The Motley Fool. We originally began investing when we were given a bit of money of our own to invest, upon turning eighteen.
What we did with that money was what our father had always done before us: invest it in stocks. It takes some casual investors a lifetime to wean themselves off the numbing teat of mutual funds; we never knew the temptation. Our very first purchase was shares in a trucker called Leaseway Transportation (since acquired by a larger company). One hot summer we watched it go from $26 to $42, where we took our profit. The stock had been culled, using a few elementary measures, from the pages of Value Line, that redoubtable seven-inch-thick investment research monstrosity that we rarely use anymore because online resources are so much more powerful and timely. We cannot remember the exact rationale for the purchase of Leaseway, but that's not the point anyway. The enduring lesson for us was that if you're willing to take a risk, and if you play your cards right, you can make money in the stock market without paying the Wise for the privilege.
In this book we're going to break down the reams of writing that we offer on a daily basis in cyberspace into their primary components. The idea, as the man says, is not just to hand you a Twinkie ... rather, we're going to teach you how to locate your own Twinkies so that you'll learn to feed yourself for years and years ... prior to dying of a massive heart attack.
We want to help you help yourself make money. This was our intention back in 1993, when we launched The Motley Fool as an investment newsletter. Ye Olde Printed Foole--as we fondly refer to it--contained our stock picks, one monthly investment article, and a patchwork quilt of content in keeping with our motley interests. We mailed out unsolicited copies to a few thousand unsuspecting people and wound up our first month with exactly thirty-eight subscribers. We were depressed.
What we needed was visibility. So we decided to start a conversation about stocks on what at that point was a small but fast-growing national online service called America Online.
Through the power and beauty of el cheapo modems, we connected to America Online over local phone lines and started typing. We offered our investment opinions and advice in response to requests from complete strangers, doing our best to provide them with as much information about their own holdings as they could handle. In so doing, we discovered some wonderful things (like how many people were willing to volunteer their own investment research for the benefit of many) and some bad things too (see appendix on Zeigletics). But what we mainly did was acquire new subscribers. Within a few months, our little gabfest had grown into the most popular financial discussion on America Online. The company approached us about opening up an actual business on its service, where we could get paid for doing interactively on a daily basis many of the same things we were doing just once a month, noninteractively, with Ye Olde Printed Foole. Even better.
Throwing away printing and mailing costs forever, we went into the electronic publishing business.
By December, already having grown more popular than Morningstar (the big mutual fund research firm) the word started to get around. Soon we were AOL's most frequented service in Personal Finance. Why? Well, it didn't hurt that our Fool Portfolio, a real-money portfolio invested exclusively in stocks, rose 11.03 percent in our first few months online, while the S&P 500 (the index used most frequently to track money managers) gained just 0.19 percent. (We closed out our first year up 59 percent, almost 40 percentage points ahead of the market.) Lots of people were signing into our area to find out what was up.
What was up was that our stock-picking technique--the Fool Ratio--was working. The better it worked, the more Fools came to the forum. And as more came, there was more talk, more information shared, and more opportunities discovered and explored. Fools helped Fools (and themselves) make money. We all prospered without the Wise. Now, you can too!
Foolery, sir, does walk about the orb
like the sun; it shines everywhere.
The too-earnest reader will no doubt wish at this point that the moneymaking grub be served. This isn't that sort of book. If you're interested in fast cash, you can find many other books to sate your appetite. Books with titles like How to Make $1,000,000 Automatically in the Stock Market no doubt contain the magical formula that will enable you to become rich beyond your wildest dreams faster than you ever could have imagined. And you can do it, it seems, without using your brain!
This book, dear reader, is written for those who drop--not slam--their token in the bus meter, who remain seated when the FASTEN SEAT BELTS sign turns off, who walk down to the final car of the subway train because it's the one with the fewest people. In short, we write for those who aren't in a hurry, those who actually think before they act, those who are willing to exercise their brains. And, to stay in character, we really should begin the book by talking about Folly. It's what we're actually all about once you get past the juggling balls, the pointy caps and the red-and-green-checkered pantyhose.
The True Wisdom: Go Against Your Instincts
Foolishness is not a luxury. It is a necessity; it attacks conventional wisdom. Folly is particularly crucial today because through the miracle of modern communication more bad thinking now circles the globe quicker than ever before. "For every 10 bytes of value online there seem to be 10,000 bytes of drivel," writes Smart Money's technology commentator Walter Mossberg. Too true. And if we're not careful, true wisdom--those proverbial 10 bytes of truly good ideas and approaches--will get lost in the 10,000.
It may take a Fool to notice this, but despite the continual advances in knowledge earned through scientific experiment, archaeological discovery, and globalized computer networking, one thing that has assuredly not increased over time is the collective true wisdom (or common sense). So while modern technology has determined that we'll continue to pile up more and more information, technology has no good mechanism for ensuring that we even maintain our common sense. In fact, it may be leaking away right now! One cannot help but notice that the ancients--Western and Eastern--were far more interested in studying the nature of wisdom and folly than we are, despite the abundant resources of folly in our time. What happens when you combine a rich history of literature and thought on the subject with a modern populace largely ignorant of its substance? Answer: received "truths" that no longer have much truth or meaning behind them but are accepted by wide swaths of the population as conventional wisdom. It is these sorts of situations that put Fools everywhere on red alert.
Good straight wisdom is a dear commodity. Benjamin Franklin had it, for instance. A glance again through Poor Richard's Almanack: "Three may keep a secret if two of them are dead." "He that speaks ill of the Mare will buy her." "He that's content hath enough. He that complains has too much." What makes these aphorisms tokens of true wisdom is the way they contradict our basic instincts. For instance, when we hear that the content man has enough, we naturally assume that the discontent man does not have enough. We are told, instead, that he has too much. Our foiled expectations force us to consider this new possibility, and after further reflection on our own experience we recognize that one or another of our grumbling acquaintances does in fact suffer from having too much, not too little.
True wisdom leads to that kind of insight by challenging our preconceived notions or expectations. A Fool has no quarrel with this wisdom. It is a universal good, beloved by all.
In the end, every great investment method succeeds not because of its numerical gizmos, magical formulas, or other assorted whizbangs. Rather, it succeeds by using some of the very commonsense wisdom we're talking about. Good investment practices can almost be called studies in good character. Warren Buffett's investment career, for instance, is not so much about balance-sheet analysis as Buffett's own humility, patience, and diligence. Peter Lynch's approach is not so much about price-to-earnings ratios as it is about perceptiveness, optimism, and serf-effacing humor. The greatest investors are often outstanding human beings, insofar as they exemplify the highest achievement in one or more human characteristics like patience, diligence, perceptiveness, and common sense.
Because remember: Dealing in money, the investor constantly must avoid his own instinctive temptation toward fear and greed. Fear and greed will ruin your investment returns. It is perhaps an underappreciated trait of great investors that in putting up consistently superb investment returns, they are demonstrating their relative imperviousness to many of the less optimistic aspects of human nature.
This, then, is the true wisdom, to resist one's baser instincts. "Do every day one or two things for no other reason than that you would rather not do them. Thus, when the hour of darkness comes, it will not find you unprepared." So wrote the psychologist William James, another fellow who was more concerned with character than the minutiae of his respective discipline. James knew that in order to succeed we must vigilantly toil against our own wills.
Resist to subsist.
The Conventional Wisdom:
"Go with Your Instincts"
Having set forth true wisdom, we are now left to examine its bastardizations. Revisiting an earlier point, true wisdom or common sense may be not much more than a husk in our present age, with so few having awareness of or appreciation for its rich history. Another form of wisdom, however, is alive and well: conventional wisdom. It is this counterfeit and useless form of wisdom--the conventional, or worldly, wisdom--masquerading as the real thing that has roused Fools throughout the ages in a call to arms.
For--say it again--the be-all and end-all of Folly is its attack on conventional wisdom.
We can best summarize the present-day conventional wisdom in this way: We live in a world that does its level best to convince us to follow our own instincts. "Follow your instincts; "Just do it," and "Because you deserve the very best" have been among our most popular advertising slogans. A fashionable Yuletide ad jingle these days urges us to treat ourselves to a gift; this, in the season whose whole meaning--even its secular one--is supposed to be about giving to others.
Even more disheartening, the means for the distribution of conventional wisdom are more powerful than ever before, thanks to the mass-media. That's because mass media, by its very definition, has the power to broadcast to the masses. Never in the history of the world has any tool had the power to create so many like minds, as has television. This is obvious, a commonplace. What is not immediately so obvious is how bad so much of the thinking being inculcated on the minds of the American people is. In the investment world alone we have a financial network that features popular regular fare like "Buy! Sell! Hold!" where a few unFoolish random callers get to ask some bloke' they've never met before--and who hasn't the slightest grasp of their own personal situations--what they should do with a given stock in their portfolios. The bloke, usually an analyst of some sort, gives preprogrammed answers of two or three sentences' duration, passing along his almighty, destiny-controlling Wisdom about Motorola or Apple to the unwashed anonymous masses. This is about as close as television ever gets (or can get) to interactive education.
And don't even get us started on Dan Dorfman, the television commentator who for years on a daily basis has blared analyst and "insider" opinions and rumors about a stock, almost unfailingly moving the market a few points up or down. For example, Dorfman suggested ten stocks as winners for 1995 on December 1, 1994. As of this writing, the Dow Jones industrial average is up over 28 percent in that period, and Dorfman's picks are up 22 percent. Those who have actually tracked the performance of the Dorfman stocks know how incredibly good this performance is for his stocks, and therefore how regrettable it is that some people listen to the guy. But as we were saying, this is mass media, baby ... the market moves not just because Dan happens to open his mouth, but because he does so on national television.
What you end up with is a large segment of the population that is extremely receptive to the repetitive, conventional pabulum that television features because they believe that conventional wisdom is wise. That's why for market researchers and brokers and financial planners, these people are the easiest (and the most profitable) game in town.
One can learn a great deal from the Wise, though. In fact, the careful investor can learn so much through a brief analysis of common human error that we can't resist but putting it right here up front in the beginning of our book. We'll close our chapter on Folly by examining the two brightest pots of gold that marketers try to convince us we will find at the end of the rainbow if we'll only "just do it ... follow our instincts ... because we deserve the very best" Both can be poison for your brokerage account, and they are opposite but deadly investment mistakes. We're talking about the two idols, Wealth and Security.
Let's take Wealth first. Everyone wants to be just a little bit richer, right? We've just about never met anyone who thought he had enough, whether we're talking about billionaires or mendicants. In the investment game, this leads people to take stupid gambles.
Most of the time, these people are younger people; the race for Wealth remains one run most fervently by greenhorns. (Security, as we shall see, is quite the opposite.) Unsophisticated first-time investors often almost instinctively swing for the fences. They've heard about that IBM stock their grandfather once bought and unloaded a few decades later for forty-five times his money. They figure the fastest way to make ten times their initial investment is to buy a stock at $5 that might go to $50, rather than one bought at $50 that would have to hit $500. In fact, perhaps one of the few negative side effects of Peter Lynch's One Up on Wall Street is that he induced a generation of readers to shoot for his fabled "ten-bagger" (a stock that makes an investor ten times her original money). Many people shooting for ten-baggers wind up buying pathetic penny stocks sold them by people who don't have their best interest at heart, even though Lynch is the last one who'd ever advocate such a decision.
We started a wonderful discussion in our online area entitled My Dumbest Investment. In it, we encouraged readers to provide a brief story of the worst investment they'd ever made, and what they learned from it. From the day we started it, it was one of our service's best offerings. We learned a lot.
Take the dentist from Illinois, who wrote of the year 1986, when he was a young, happy-go-lucky investor getting ready to invest in a company called Microsoft. But just then, RINNNNNGGGGGG! He got a call at work from an investment banker claiming to have just bought an expensive car with the money made off an investment in (whispered) platinum. The poor and self-admittedly naive dentist was convinced by this fellow to put his money into platinum on "margin," meaning that he effectively borrowed extra money beyond what he had in order to heighten his stack of chips on the table. "A few days later my first margin call came in as the bottom dropped out. I had to put several thousand dollars on my credit card to cover my losses." The lesson learned from his Dumbest Investment was an excellent moral to learn so early in his investing life.
Or take the screenwriter from Los Angeles who noticed in an issue of Smart Money magazine that a recent recommendation in its pages had dropped from $2 to just 25 [cts.] per share in value. Excited, he didn't even bother to check out what the company, Memorex-Telex, did. "Now, imagine this," he goes on, "I thought if I had bought it at $2, I would now be down, what, 87 percent or so? But what a deal it was now! A mere quarter! If they thought it was a good buy at two, it must be outta this world at 25 [cts.]!!!
"When a few months later I received the notice of the company's bankruptcy from my broker, I ruefully rubbed my chin, downed a Manhattan, and considered searching for a tall building." With the characteristic good wit that pervades the Dumbest Investment discussion, the writer concluded, "But I have a family. And, fortunately, I didn't throw away our nest egg. No, I saved that for some other dogs that maybe I'll write about later on."
The stories go on and on, as they will forever. There was the high-school student doing a summer framing job for an oil tycoon. The tycoon was praising a company traded on Canada's penny-laden, corruption-ridden Vancouver Exchange. Only problem was, kid didn't know the exchange's reputation or anything about money, in fact, except that this "tycoon" had made a lot of it. So the kid bought New Dolly Varden Minerals at $2.25, just before it dropped to $1.25. He then doubled his holding. It dropped to $0.25. Having lost 90 percent, he told us he was just hanging on to the thing, since it would "cost more to sell than just to keep."
There was the fellow who kept adding to a stock holding in a since-failed consumer electronics company, even as it kept dropping further and further. His wish: "May Crazy Eddie rot in jail for years to come."
There was the guy who, enticed by expectations of big returns, was convinced by his financial planner to make a large investment in a real-estate limited partnership in the mid-'80s. He lost it all. "To add insult to injury, I actually paid this guy for his advice, plus invested the rest of my savings in his 5 percent load funds that did a whole lot worse than a simple Vanguard Index no-load." (For more information about mutual funds, and what the heck "no-load" means, see part II, "Mutual Funds: Love 'Em or Leave 'Em?")
And finally there was the photographer who, "completely ignorant" about managing money, got to talking with his father's broker at his father's funeral (no joke). Soon after, he'd opened up a margin account so his broker could trade currencies for him: Swiss francs, yen, German marks, Eurodollars. "Five months later, the `new' broker handling my account (never did find out where the original broker went, all my calls were never answered) called to tell me I should close out what remained of the account, or write a new check to continue trading. I closed: 88 percent loss."
The point of these stories is not that brokers and financial planners are evil. Not at all. Some are very good. Some are good, and just plain wrong sometimes. Every investment entails a measure of risk. The only point we're making is that in every case, the correspondent was taking on stupid risk--either because of having done no research, or having been baited by a sales pitch, or both Why? In order to achieve get-rich-quick returns, in the chase for Wealth.
The lessons are probably self-explanatory: Don't invest in anything you don't understand. Manage your own money if you have the time and instinct. Don't fall in love with (and keeping adding to) any given investment. Lots of other people do stupid things too.
The overarching point is that it's those very get-rich-quick returns that will always remain attractive to our human nature. We will be tempted by the conventional wisdom to shoot for the big bucks by "going with our instincts," sometimes on our own initiative, sometimes at the urging of others (who may see us only as so much fodder). Our natural human instinct is toward Greed. It is this very instinct that one must resist in order to become a good investor.
Fortunately, you now have some Fools on your side who are aiming to help you do just that.
Opposite Wealth, however, is another bete noire, another gorgon from which to avert one's gaze: Security. This one seems on the face of it to be far less threatening or objectionable than the impulsive chase for Wealth, better known as Greed. How can we seriously advocate that a desire for safety be placed in the same Circle of Hell as one of medieval Christendom's Seven Deadly Sins?
Easy ... we're now talking about the two biggest threats to your (or your family's) long-term investment survival. Chasing Wealth, you may run headlong into Madame la Guillotine. But chasing Security is no less deadly a pursuit, akin to inhaling carbon monoxide in sufficient quantity to bring about your eternal rest.
In our first-ever issue of our defunct printed publication, we printed this contrarian line to which we still very much subscribe: "The least-mentioned, biggest risk of all is not taking enough risk."
The investment community today is infatuated with "risk avoidance" (or "risk aversion"). The primary aim of investing, the Wise tell us, is Safety--holding onto your precious dollars. Whatever happens, you don't want to lose what you've already earned through the sweat of your labors. Now, a perfect Fool might point out that you are constantly losing what you've earned, since even the low inflation of the present day is continuously eroding the value of cash. In fact, Treasury bills (the Safest investment of all) held from 1926 to 1989 increased the real value of your investment less than 7 percent, according to a study by Ibbotson Associates. In 64 years! Now, of course, with Treasury bills you were ostensibly up every year, and indeed some years you thanked your lucky stars that you avoided going down 20 percent in stocks. But here you are at the end of your investment lifetime tearing out whatever's left of your hair over the Grand Mistake you've made, all to appease the local deity Safety (who for all those years had such an alluring smile--flossed regularly).
The possibility that one might actually make good money sometimes does not seem to enter Wall Street's thinking--among the more respectable element, anyway. And to be sure, most business schools today teach the Efficient Markets Theory, which, when you boil it right down, says that no one can consistently outperform the market over time. (Note: Please keep your eyes closed and pay no attention to those who are outperforming the market. And don't bother telling the profs, either ... they're probably in league with the mediocre fund managers.)
The cynic may step right in and suggest that many investment "pros" never will consistently or impressively beat the market, due to various handicaps that include the requirement to diversify large portfolios, timidity, a lack of imagination, the inability to short the market, and graduate study at business school. Given this, why NOT make the sine qua non Safety? Like the wastebasket by your desk, it's an easy target. And it seems to keep the customers happy ... those who don't know what they're doing, anyway.
Speaking of which, we have heard money managers musingly opine, "You know, if the market goes up 25 percent one year, and I go up 15 percent for my clients, no complaints. If the market goes up 5 percent one year and I go down 5 percent, I get all sorts of calls." This is quite true to the experience of many money managers, and is a perfect example of our illustration. In both situations, of course, the money manager has underperformed the market averages by 10 percentage points ... which, to Fools, is the most relevant year-to-year consideration. But in one situation the manager is humored (possibly even complimented), while in the other he's berated.
So, if you were an investment professional in this environment, wouldn't you (further evidence) make the sine qua non Safety? The pieces of this puzzle interlock quite snugly.
Now, since we advise whole-hog investing in the stock market, we do need to propound two things about playing it safe Foolishly. First is, invest money that you can afford to wait on. The stock market is risky. We like that very much; it helps us make money, because you almost never get something for nothing. But over a given period of time, your stocks could get mashed. Just over 65 years ago, thousands of people lost most of what they had by investing in the market. So if you get melted down on Meltdown Day, we want you still to have something left to slap back down on the table. Invest money that you plan on keeping in the market for at least 5 years. (We recommend a lifetime.)
Second, we invest in good companies. We generally avoid buying stock in companies that are losing money, companies that are cash-flow negative (we'll explain this later), companies with just one product, companies featuring a less-than-respectable-looking management, and a bunch of other yardsticks offered later in the book.
And that's about it. Beyond the two points about Security just covered, we advise staring down your nose at this slovenly creature, or the financial adviser who reflexively strikes the low-risk Safety gong. Yuck. With low risk come low returns ... the numbers shown above regarding Treasury funds are not much better for low-risk mutual funds; their performance as a group is abysmal. The whole point of buying this book is to educate yourself profitably. We expect that even at this early point, you've already graduated beyond most of the rest of the world; most of the rest of the world is going with its instincts, and blaming someone else when it fails.
Now, before we close the curtain on Folly's chapter, we need to stick in a word about people who require income and high degrees of safety. These are typically older people. Just as chasing Wealth attracts the young in huge numbers, chasing Security can be a fervent hobby among the advanced. We've heard before from readers of our service, "Hey, the Fool investment approach may work for younger people who can take some risk. But I'm seventy-six years old. What about somebody in my situation?"
Well, we certainly advocate first of all that you get to know your own situation very well and act accordingly. If you don't feel competent to analyze your own situation, hire a financial planner to help. If your money is tied up in an annuity and you expect to need its every interest payment over the 5 additional years you expect to live, you should let that money stay put. On the other hand, if your situation is one that requires some income but allows you to contemplate risk in search of greater investment rewards, we think you're crazy to be just sitting in high-interest-bearing securities. These securities--whether bonds or mutual funds or preferred stock or real-estate investment trusts or what have you--all underperform the market historically. So if you're looking out beyond 5 years--but with income needs--you're probably going to do much better by staying invested Foolishly (in good stocks) and annually selling off a portion of your nest egg to meet your income requirements ... better than any other single investment approach.
Just to make that clear: If you have a $50,000 annuity paying you a flat annual interest of $3,000 (a 6 percent interest rate), consider that you could instead have that money invested in the stock market (historic average return is about 10 percent) earning on average (therefore) $5,000 a year. Assuming an average year, you can sell $3,000 to provide you your income and still wind up with $2,000 to spare, available for reinvestment to produce an account value of $52,000 to begin the next year. Sure, some years your stocks will lose money and you'll have to take that $3,000 straight out of capital. But except under the worst market periods in history, which occur very rarely (and from which we will all always eventually recover), you'll end up well ahead even despite the occasional horrible 2- or 3-year run. Because some years will be wonderful.
This is the thinking that has us talking down Security and suggesting that people consider keeping their money in the market for their own good, even--perhaps, especially--when keeping their money in the market runs against their native instincts. As has been pointed out by many, the market is the best game going because it pays good stakes and the odds are stacked in your favor. Fear sometimes causes people to lose sight of equity investing's superiority, always (it seems) at the wrong time ... when the market has just hit bottom. Don't let human nature sway you. Consciously taking on smart risk remains the best way to succeed in investing ... and in Life too, we believe.
* * *
In summarizing our Folly chapter, we hope we have demonstrated that conventional wisdom--what we call capital W Wisdom--provides society with stale hall-truths that encourage us to follow our instincts. Folly, an ever-radical force for reformation and enlightenment (and a heck of a lot of fun, too), attacks Wisdom by providing its adherents contrary truths that enable us to resist our own base instincts. We've addressed the complementary bugaboos of Wealth and Safety, one which tempts us to take too much risk, the other to take too little. We've explained who we are and told you what we believe. Now, let us show you why you should join us online if you haven't already.
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