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The Motley Fool What to Do with Your Money Now: Ten Steps to Staying Up in a Down Market

The Motley Fool What to Do with Your Money Now: Ten Steps to Staying Up in a Down Market

by David Gardner, Tom Gardner
In these turbulent economic times, everyone is asking the same question: "What should I do with my money now?"
With their trademark irreverence and plainspokenness, David and Tom Gardner, bestselling authors and cofounders of The Motley Fool, answer this critical question and recommend ten important yet quick steps readers can take to survive economic


In these turbulent economic times, everyone is asking the same question: "What should I do with my money now?"
With their trademark irreverence and plainspokenness, David and Tom Gardner, bestselling authors and cofounders of The Motley Fool, answer this critical question and recommend ten important yet quick steps readers can take to survive economic uncertainty, secure their personal finances, and fortify their portfolios. Along the way, they address such important issues as:
• Is this the time to snatch up stock market bargains?
• Are any mutual funds sure bets?
• Is short-term debt dangerous?
• Bonds, T-bills, CDs, savings accounts -- does it make sense to be conservative?
• Why you should believe in America now more than ever.

The Gardners offer a snapshot view of business and the financial markets at the dawn of the world's "new economic reality" -- all while looking ahead to the future with some timely and timeless guidance for investors.
No matter your age or level of investing experience, The Motley Fool's What to Do with Your Money Now is an indispensable survival manual for our unpredictable economic times.

Editorial Reviews

From the Publisher
U.S. News & World Report Their panache is a cover for a belief in the old-fashioned virtues of patience, simplicity, and prudence.

Product Details

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Read an Excerpt


Should auld acquaintance be forgot,

And never brought to mind?

— ROBERT BURNS, "Auld Lang Syne"

Widely published business theorist Peter Drucker criticized the career of Apple cofounder Steve Jobs by stating that Jobs met with too much success in the first five years of his career. Consequently, he never really had to make "the tough decisions." And when later he and his company did get in a bind, during the encroachment of new manager John Sculley, it became too easy, acceptable, and perhaps convenient for Jobs to part, quit, walk away. Start NeXT Software. Start Pixar. Come back to Apple on a white horse.

Drucker's rap on Jobs is that he hasn't truly experienced what it's like to stick it out through the difficult times and rebuild.

We have three observations about Drucker's comment. Consider that in our own much smaller way we have now mirrored portions of Jobs's early career, having as young men started a succès fou (pun intended), featuring best-selling books, magazine covers, a national radio show now on NPR, a syndicated newspaper column in virtually every noteworthy paper in this country, having raised $2 million through revolutionary online giving campaigns we call Foolanthropy, and (also to be noted, with appropriate catcalls as well) having raised tens of millions of dollars of venture capital to help The Motley Fool grow into an international name. Market research done in the year 2000 suggested that fully one third of all people ever to have used the World Wide Web had visited our Motley Fool online service, which is open to more business than ever today at Fool.com (please join in the fun, if you haven't already).

All that, self-made, in our twenties and now early thirties.

Whoa! Hold on! Is that our first observation? You paid your 23 bucks just to read some random brag?

Hardly — the above was just context. Our first observation is that Drucker can't level his Jobsian criticism at us because we have stuck around, straight through what has been a business and investing nightmare full of nosediving advertising rates, a nosediving stock market, numerous employee goodbyes, and almost unrelenting stress for the past two years.

And it's not fun. We think — nay, we know — that Jobs is smarter than we are.

Which is the second observation.

The third and most important observation concerns you. It is that the business and investing climate have probably treated you very similarly — perhaps (we hope) a little bit better, perhaps a little bit worse. The point is, we have all been through something like a nightmare together. As we Fools tipped our glasses at a family retreat in Vermont during the darkening eve of December 31, 2001, it was the first time in memory that we looked into the eyes of family and friends all around us and found that they shared back the same unusual, unanimous twinkle: GOOD RIDDANCE, 2001!!! (And 2000, for that matter.)

Our epigraph above from "Auld Lang Syne" was thus chosen for its irony. Indeed, we said goodbye via layoffs to so many old acquaintances in the year 2001. Our answer to the poet is that if we're not allowed to forget auld acquaintance, we would like to forget virtually everything else about the past two years.

Except that we can't. Because none of us can afford to.

This is a book for you, the person in our society hoping to learn from the mistakes of the past, hoping most of all to make a better decision about your money. We've entitled it What to Do with Your Money Now because that's exactly what we're here to shed light on, to provide you the necessary steps you can and should take now, toward the latter stages of a nasty bear market. We lead off appropriately with "What Happened?" before moving into "What to Do Now" and closing with "What Next?" We've kept this short and sweet, alternately step-oriented and digressive. It's a motley book.

But it's also a book coming to you from two fellow investors turned entrepreneurs, who feel along with Warren Buffett that we're better investors because we're businessmen, and better businessmen because we're investors. And so in what we hope is a completely accessible and anecdotal manner, this book is also a bit of a business book, containing as it does some stories of our own business and what we've personally learned, and become better at, as a result of an unthinkably horrible beginning to the new millennium.

Now you may be wondering, why would I take advice from guys in Fool caps? We've heard that from day one when we titled our original newsletter in July of 1993 The Motley Fool. And we shall probably hear it, regardless, till kingdom come. We'll continue to say simply that we choose to wear our caps because our Foolish goal remains the same as those of the cap-wearing court jesters of yore: to tell our audience the truth about a difficult subject, doing so in terms that are refreshingly blunt, often contrary, and always (we hope) pleasing, mixing in a spoonful of amusement to help the medicine go down. You may further be wondering why you should take advice from guys in Fool caps who watched their own portfolios get cut in half over the past two years. Our reply is that virtually anyone who invests patiently in growth companies had the same thing happen through this period in which the Nasdaq lost an unprecedented 60 percent plus of its value. (The good news for long-term investors is that the decade leading up to 2000-2001 was so wonderful that even 50 percent down leaves a trace of a smile on our faces.) You may finally wonder what business savvy could possibly come from two guys in Fool caps who watched their stock portfolio get cut in half over the past two years and had to significantly shrink their employee base in the past year.

Well, two reasons, we suppose.

The first comes via a cheery longtime businessman and neighbor of ours, who remarked one spring 2001 morning as we drove in to work that "anyone who survives the next six months will make it through the next twenty years." In other words, guiding one's company through the past few seasons and having anything left at all is a blessing (and you were right, Jim; and if you, dear reader, are in business you know what we mean — Enron employees in particular). And second, you may also be comforted to know that your authors consciously and continually rejected any temptation and numerous outside urges to take our company, The Motley Fool, public.

That should say a lot, because it meant a lot. We didn't go public. Thank God. We didn't rush to cash in on — or out of — our business through a period during which that became all the rage, exposing the quick-buck motivations of many who left the messy mop-up and accompanying losses to the next investor, the greater "fool" (small "f"!) — as the parlance would have it. Instead, we kept control of the thing we loved: our company and its mission.

Let's get on with the book.

Copyright © 2002 by The Motley Fool, Inc.

Chapter 1: We Were Impatient

A New York Times cartoon from the late 1990s perfectly captured the spirit of the age. Entitled "How to Start Your Very Own Silicon Valley Startup," its captions went thus:

STEP ONE: Go to Menlo Park. Find a tree.

STEP TWO: Shake the tree. A venture capitalist will drop out. Before he regains his wits, recite the following incantation: "Internet, Electronic Commerce, Distributed Enterprise-Enabled Applications, Java!"

STEP THREE: The venture capitalist will give you $4 million.

STEP FOUR: In 18 months, go public.

STEP FIVE: After you receive your check, go back to Menlo Park. Find a tree.

STEP SIX: Climb it. Wait.

That is the environment that all of us were living through, and in which many of us were investing and working.

We were impatient.

The macro business environment was impatient.

And this point, like each of the points in this section, provides us both a business and investing lesson.


As co-chairmen of the Motley Fool, we can say that we felt a tremendous amount of pressure — both externally and internally — to grow grow grow. We suspect we're not the only ones. For our business, that meant selling a portion of it to venture capitalists to fund new growth. As a small private company founded in 1993, we had a brief history of profitability generated solely by our own resources. And yet we came to realize that we had an international opportunity, and so decided to raise more than $20 million in financing. Our plan was to spend that money to grow toward a second round of financing, in which we would raise even more money. And we did. And we tip our belled caps to our investors, Maveron, AOL Time Warner, Mayfield, and Softbank, for providing us the opportunity to grow and reach many more Fools. And then spend that again to grow further, at which point would come a hypothetical third round that would be even more than that. Having raised that final round, we would turn profitable, retaining about half of that money, and then take our company to the public markets.

It was the way we thought of things. It was the Zeitgeist, the modus operandi, the short but well-worn path.

But step away and ask yourself, "How does good business happen? And how is something created that will be both profitable and sustainable over a long period of time?" What was just described above — with its forced-march progress, its emphasis on raising money rather than building a business model, its expectation of inevitable refinancing (what was passing for the modus operandi) was in fact a very unusual standard.

How did this happen? How did the world come to think this way? We need look no further than the development and growth of the Internet. The rapid and unprecedented revolution in technology that would lead to a global network, and all the new possibilities it promised, easily explains why lots of money was invested in companies like ours. Many companies across all of American business enjoyed major boosts in valuation. And yet there was an overweening impatience to it all...stocks and valuations rose to breathtaking levels, creating a collectively felt need to justify the multiples by turbocharging your growth — or your growth expectations, if you were an investor.

For our own business, this rapid growth and influx of financing meant we needed a CEO, our first-ever, who wound up being Pat Garner. Pat had spent his previous thirty-five years as a manager and marketer at Coca-Cola. He brought along an intense numerical focus into our company. "Guys — if you can't measure it, you can't manage it."

Up until then, until the past twelve months, we just didn't think we had time to be numerical. We had to raise more money, take the Motley Fool mission of financial responsibility to more countries, and continue to grow grow grow.

And then we got a visit to Fool HQ from author and consultant Steven Cristol (author of the useful business book Simplicity Marketing, Free Press, 2000). Steven told us, "I was impatient for success in another career. I was, at the time, a Silicon Valley marketing consultant. And yet my dream was to be a songwriter.

"So here's what I did. I went to Los Angeles, which is where anyone who dreams of being a songwriter goes. And everyone thought I was crazy. My family thought I was crazy, but they followed me. For two to three years I just mixed around and tried to meet the right people and wrote songs. Nothing worked. I became increasingly impatient for success. And then, as luck would have it, I finally got a lunch date with a Big Honcho. So beforehand, I checked in with a friend of mine who knew the industry and I said, 'Here's my opportunity. I'm allowed to put together a demo tape of three songs, give it to the Big Honcho, and maybe finally create my big break. So I'm thinking of throwing him three different looks. A fast song, a slow song, something in between. And — '"

And his friend cut him off. "Steven, that's what everyone does. When we're impatient for success we tend to do what everyone else does. Here's my suggestion to you: one song. Pick your best song. Whatever is your best song put just that on the tape and send it to the guy. Because anything else you do will dilute that. And by the very act of just sending one song you will stand out to that particular gentleman more than all the other dozens of songwriters he's talking to this month."

And for Steven Cristol, as he went on to tell us, that approach led to his first gold album. And he went on and had success as a songwriter with a few gold records...and eventually returned to Silicon Valley as a marketing consultant. (What does that say about the songwriting industry?) Impatient for success, Steven Cristol nevertheless avoided his initial tendency to do what everyone else was doing and instead met with great success.

Impatient groupthink has hurt a lot of businesses in the past few years. So, as we look back and ask, "What happened?" we hope we're learning patience — patience, say, in the form of spending money that you already have as opposed to spending money you expect to have.

One universally renowned venture capitalist firm we met with was so deeply infected by this groupthink that when we sat down with them to share our story in early 1999, their sole question, asked up front, was, "How did you guys blow it?" We wondered how they thought we'd blown it. "Why didn't you go public first? Why did you let a bunch of competitors get out there [i.e., to the public markets] before you did?"

In their minds, that was the mark of success. An early initial public offering (IPO). A "preemptive IPO," perhaps. Never mind that the firms they were referring to are now, just three years later, either wilting or out of business altogether. It wouldn't matter to the venture capitalists much, anyway. They're usually the sellers on IPO day; those were their shares the public was buying.

Which, we suppose, is the point. The business side of that point.


We were also very impatient as investors. Many invested in businesses whose products and services they weren't immediately familiar with, perhaps out of fear of missing the rocket ride. As we now know, companies like Pets.com, Cyberian Outpost, and theglobe.com rode only briefly, before vanishing. More than 300 companies that could be classified primarily as Internet businesses went public in the 1990s. Over 80 percent of them had less than five years of operating history. That's public market money they took (perhaps yours), under the implied oath to grow their businesses indefinitely, limitlessly — the promise that any public company makes to its shareholders.

If you've really only been around for fifteen months, that's a very difficult promise to make.

But is it all their fault? Did these companies force investors to buy their shares? Was this in fact a criminal act perpetrated on a naive and blameless public? Perhaps you can see where we're going with this.

When people are in a hurry to invest, rarely will they distinguish between first- and third-tier technology companies. We know this because of the sheer number of investors that floated the valuations of companies like Drkoop.com to hundreds of millions — in some cases, billions — of dollars. Much of this buying was indiscriminate. Here's an example.

Take the spin-off of Palm on March 2, 2000. Longtime networking gear company 3Com had a hot property, full ownership of Palm Inc., the company behind the fast-growing line of Palm personal digital assistants. That day, 3Com sold 5 percent of its stake in Palm Inc. to the public markets, an IPO that was offered at $38 per share and closed the day at $95 (reaching as high as $145!). The day's close valued Palm at an implied market capitalization of $53.5 billion. We at Fool HQ were not the only ones to wonder aloud on our online site how Palm could be worth $53.5 billion, when the day before, 3Com in its entirety had only been worth about half that.

Let it not be said that so-called full-service brokerage firms don't still have great influence over the buying appetites and habits of their customers. Many a phone was pounded many a time that day.

You wanna buy 5 percent of this book? Or 5 percent of our wardrobe? 5 percent of our company? 5 percent of anything of ours that we can sell you? This paragraph brought to you by what we've learned from 3Com. Anyway, if you ever did want to buy 5 percent of something, we assume you'd want to know what that thing was worth. If so, you'd have done more homework than, in all likelihood, the purchasers of Palm stock did that first day. It was enough, it seems, to "get in on the Palm IPO." (Whatever the price.) Just to have some "hot shares" of a "hot IPO." (Whatever the price.) We love strong brand names and the companies behind them as much as the next guy...but not at whatever the price.

With so many indiscriminate buyers simply wanting in, perhaps it's not surprising that just a month later the Nasdaq Composite began what would represent a greater than 60 percent decline over the succeeding eighteen months — unprecedented, the Nasdaq never having dropped so far. As the market closed the Friday of this writing, Palm traded 16 million shares and closed at $3.47 — pricing the entity at about $2 billion — about one one-twenty-fourth of its IPO day closing value, less than two years ago. 3Com, itself in tatters, is priced roughly the same. By the way, 3Com dished out its remaining ownership of Palm in July of 2000. Investors still paid a sizable premium then compared to what the company is worth now. Of course, one can say that about many companies these days, after a bear market.

Now, who do you think was doing this indiscriminate buying? The answer is that most of us were. While we two brothers didn't ever own any Palm, David paid a pretty penny once for @Home (later "Excite@Home," David recalls with a shudder) and Tom held his Yahoo! up to $237 and back down again (much further down than up). Perhaps you have a few of your own. We suspect that if you're a baby boomer, you might have several.

There can be no question that a lot of the market's juice and then its later sputter comes to us courtesy of the baby boom generation. With so many coming to grips with their own mortality and also with their own lack of retirement preparation,

for baby boomers the stock market became the logical "go-to" solution to the conundrum, "How can I retire comfortably and soon if I'm forty-six, am still in debt, and haven't thought about investing until, um, now?" The stock market, with its superior historical returns and close tie to technology and its resultant prosperity, was a great answer. America's promise, her emerging dominance in global technology, and spirit of free market capitalism made it only more attractive. (We've written a book or two about that, and feel just as strongly now as we did back then about the net benefits of the system.) But the impatience of a large generation of people who are in their peak earning years and control most of the country's assets probably cannot be overemphasized when we consider what happened. The 20 percent plus annual performance of the stock market through 1995-97 can only have further steeled the will and confidence of this generation to invest invest invest right alongside all of us who were trying to grow grow grow.

Again, much of this represents good intentions and sometimes good results — taken in moderation. The problem was that the stock market's bright supernova continued to light up the skies in 1998-99, giving us all too much, too soon. And

the deeper truth is, had America traditionally and effectively educated its citizens about finance and money, our country wouldn't have so many debtors, so many people who lack any notion of the stock market's historic performance until it begins to look so good they figure they'll now finally take a shot on that pony too.

Attempting to prey upon this very mentality in order to teach a lesson about it, we decided to do something different at Fool.com on April Fool's Day. The day was April 1, 1999 (for reasons evident, our national holiday). We closed down all the options available to people coming to our Web site and instead announced on our main page that The Motley Fool was going in a compelling new direction. With many so-called Internet companies worth a couple billion dollars after just a year of being in business, we had decided to give our community a chance to invest in one. No, not ours. But one that we believed in, believed in so much that The Motley Fool was entering the underwriting business for the benefit of its customers, so that they could get in early on a hot IPO for once, instead of all those darned institutions.

And so on April 1, 1999, eMeringue.com was born.

At the risk of already beginning to sound in some way plausible, we'll run the lesser risk of repeating ourselves: This was all an April Fool's joke — this is not an actual company. We were attempting to teach a lesson throughout the day about the overenthusiasm surrounding unknown businesses that had dot-com as their suffix.

So at 9:45 A.M. we announced eMeringue was live on the Halifax Canadian Exchange, ticker symbol HAFD. We urged our readers to consider going out and buying shares right away, before the rest of the world discovered the eMeringue magic. "If you've been a veteran user of our site," we wrote, "you know that we think you should do your own research and make your own decisions. But on this one day, in this one hour, we at The Motley Fool have done your research for you. We believe in eMeringue so much that we've underwritten it, and at market open we have issued a Strong Buy recommendation on shares of eMeringue."

eMeringue's business was of course not the pie, not the filling, just the meringue on top, delivered from a click on its Web site to anywhere in the continental U.S., in seven days or less. (Can you imagine, by the way, the tasty experience of seven-day-old crystallized meringue whip?) And yes, we created a whole Web site for it, brought to life by an in-house creative team led by our incredibly talented associate Todd Etter. In fact, it's still up there, recipes and all — please visit eMeringue.com, experience the Eggulator, try out an order form, and take a tour of the e-process led by friendly cartoon character Marty Meringue.

Of course, we're thinking as we develop this in the days before that no one is going to fall for our April Fool's joke. But with merry aplomb we proceed with the script, anyway, including tricking up our site so that you can get live "real" quotations of eMeringue all day long.

The live graph of the stock price at Fool.com told quite a tale that day. That morning the stock, offered at $22 a share, opened at $84. An outstanding IPO! (One of so many, that year.) Congratulations to the shareholders of eMeringue and particularly to our friends, the executive team (including CEO Larry McCloskey), with whom we worked so hard to realize this dream. At 11:00 A.M., the stock crests $149 and executives gather and announce, effective the following Monday, a three-for-one stock split.

(Sarcasm Alert — it being the wit of Fools: This event naturally gave us an opportunity to tell people our most important piece of investment advice, which is always buy on a stock split. Stock splits create a lot of value in a business, you know. You definitely wanted to get in right then and buy more shares of eMeringue.com before Monday.)

(If you didn't detect sarcasm in the previous paragraph because you do believe stock splits create value, we encourage you to report directly to our Fool's School at Fool.com, or read pages 238-40 of our Motley Fool Money Guide to get the straight stuff on the relative meaninglessness of stock splits.)

By noon, shares were up to $218, and eMeringue was launching a hostile takeover of another Web upstart, Cyber Crust. Said CEO McCloskey: "This will be the first step toward our five-year goal of producing an entire pie." But, unfortunately for him, that goal would never near realization.

With the shares at $319, at 1:30 P.M. the SEC announced that it had stumbled across "accounting irregularities" in the prospectus, and the shares began to nosedive. Even worse, 3:15 P.M. saw a report of a food poisoning scare in Wisconsin related to some meringues that eMeringue had shoveled out of its Boise, Idaho, home office. At 3:18 P.M., executives gathered again and announced effective immediately a one-for-ten reverse stock split to try and get the price back up. And at 4:00 P.M., eMeringue closed at...84 cents a share.

What a day. A wild ride. And in retrospect, our creative team was presaging what would in fact happen in the financial world over the next two years. It's just that ours was a fiction, presented in accelerated form. It was all over by nightfall.

Again, we did not think that anyone would fall for our April Fool's joke. But throughout the day we got phone calls from big-name brokerage firms trying to find out what this company was. "Our clients are calling us. They want into this stock. Guys, can you help us out?" They couldn't find the ticker symbol; in fact, they couldn't even find the Halifax Canadian Exchange that the company was being traded on. One of their clients posted a note to our Fool.com discussion boards. Written perhaps frantically, in all upper-case lettering, it read:


And one of our veteran community contributors responded, to our surprise, "Your broker can't find the ticker, the company, or the exchange? What should you do? Fire your broker!" So we did have others helping us, playing along. (One wonders how the conversation fared between client and broker on April 2.)

We got more than 600 notes the next day. The best involved a wonderful running exchange between a husband and wife at different places of work throughout the day. They were arguing about whether they should buy shares. He was convinced that they should; they had missed, in his opinion, the technology run-up, partly because she had resisted taking risks in their portfolio. This was their chance. You can imagine his anger and frustration when HAFD shares (the ticker symbol stands for "Happy April Fool's Day" if you hadn't yet puzzled that one out) crossed $200 by noon. Anyway, as the shares began to fall she started taunting him. At 4:53 P.M., when CEO McCloskey was arrested trying to hijack a Carnival cruise line to Finland — he'd held three crew members hostage with a frosting gun — they both then realized it was a joke. They learned a lesson about taking their time as investors.

Which is the point of this chapter. Impatience leads to so many wrong things.

Perhaps some nameless Seattle Times staffer was guilty of impatience as well when, a few weeks later, the Times ran an article on the front page of their Living Section listing the top ten Web sites for food and cooking. With no trace of irony, they listed number three: eMeringue. The text read, "This has to be the best opening text ever written for a Web site: 'I'm Larry McCloskey, president and CEO of eMeringue. When I converted my Boise, Idaho, auto-parts dealership into a meringue-delivery service, I really had no idea we would grow to the size we are today. Forty-five employees. $11 million in revenue.' The guarantee here: delivery of a pie meringue to anywhere in the United States in seven days."

To close, whether we're talking about the fictional eMeringue, the very real Drkoop.com, the mistakes we made in our own business, or the ones you may have made in yours, the aim is to identify the root problems. One of those is certainly impatience. It's easy to get caught up in the emotions of the day and the seemingly great opportunity dangling right before our eyes. Probably only a small fraction of those who

believed in eMeringue that fateful day really felt the company had any long-term prospects. Most just wanted to double their money in a single day. Eighty-four cents per share was the right lesson for them then, and is sadly similar to real experiences others of us have had since.

To recognize this now is to defeat it later.

Copyright © 2002 by The Motley Fool, Inc.

Meet the Author

David Gardner graduated as a Morehead Scholar from the University of North Carolina at Chapel Hill. He was a writer for Louis Rukeyser’s Wall Street newsletter before he and his brother, Tom, stared the Motley Fool in 1993. They both live in Alexandria, Virginia.

Thomas Gardner graduated from Brown University with honors in English and Creative Writing.

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