When it comes to investing, most of us know where we'd like to be but not how to get there. We'd like nothing better than to sit down with an experienced professional who can guide us through the bewildering array of choices. Reading this easy-to-understand book is like having the founder and CEO of a $350 billion brokerage firm sit at your kitchen table and distill his 40-plus years of accumulated wisdom in a one-on-one session with you. You will learn how to:
- Define and set investment goals
- Prepare an investment plan, put the plan into action, and update the plan regularly
- Plan for your children's education or your own retirement
- Cope effectively with the ups and downs of the market
- Make sure you'll have enough for a comfortable retirement
|Publisher:||Random House, Incorporated|
|Edition description:||Revised, First Edition|
|Product dimensions:||6.02(w) x 8.97(h) x 0.56(d)|
About the Author
Read an Excerpt
It's All About Growth
What do you think of when you hear the word invest? The books-and-movies scenes showing the chaotic floor of the New York Stock Exchange? Stock certificates? The financial pages of the newspaper? Not me. When I think of investing, I think of growth, because to me that's at the very heart of successful investing. And strange as it may sound, I mean the kind of growth that's all around us, the growth we see every day in trees and plants and our kids.
Think of biology. Maybe you've observed under a microscope the amazing spectacle of an amoeba dividing itself into two. There it is, this tiny one-celled organism, and at some point, right before your eyes, it reproduces by dividing itself. All of a sudden where there was one amoeba, now there are two. You keep watching, and soon the two become four, and the four become eight, and the eight sixteen--and you're seeing this incredible example of growth. Here's an organism that's growing at a geometric rate--1, 2, 4, 8, 16!--doubling itself each time.
What does that have to do with investing? A lot. An amoeba is an organism that divides itself into something more than it was before--and that, to my mind, is exactly what a company is: an organism that grows. When you invest in stock, you're buying shares of ownership of a company, and that's where growth comes in: You now own a part of something that's alive and growing. The first year the company has five employees, maybe one product, 20 customers, and a rented building. Next year maybe it has 12 employees, three products, and 50 customers. The company helps itself to grow by reinvesting a sizable portion of its profits, fueling its futuregrowth. It's growth on top of growth, and it's a phenomenon that holds me in awe. Growth is what successful investing is all about.
I'm 60 years old as I write this book, and I've been studying investing for 40 years. During that time I've had the pleasure and sometimes the sorrow of investing in a lot of different companies, and I've probably studied investing as intensely as just about anybody around. I've studied both by watching--by observing the companies around me--and by doing--by actively founding and building companies, including serving on the boards of major public companies, some of them 100 years old, some 25, some less than 2. Most of those companies have become successful, although a few haven't.
In those 40 years, I've developed an approach to investing that's simple and straightforward, centered on the notion of growth. There are, admittedly, more complex approaches out there, but why complicate things when you don't have to? The world of investing is fascinating, but it can soak up as much time as you're willing to give to it.
If you did what I've done over these years, maybe you'd come up with the same simplified approach. But 40 years is a long time to wait. So I'm hoping to save you some time; I'm hoping my experience can be of benefit to you.
Put simply, my belief is that of all the many investments available, stocks provide the best chance for growth over time. They are a great solution for long-term investing. This conviction lies at the very core of my approach, and while this may sound self-serving, coming from the founder of a brokerage business, my reason for saying so is very simple: I am a firm believer in the wealth-generating power of stocks, a belief that has only grown stronger with time.
The reasons for that belief are tantamount to the fundamentals of the religion. They define a position that I absolutely believe in, and it's a position that you, the reader, have to understand if you are to benefit from this book. More than understand, you have to have confidence in this approach as well, and you have to feel that confidence in your very core, because you will be tested. And if your confidence is low, you'll panic and be tempted to run at the first downturn of the market.
We start with a fact: Over time, stocks have outperformed all other kinds of investments, including bonds, CDs, and U.S. government securities. How do we know this? A little stock market history backs it up. Jeremy Siegel, a professor of finance at the Wharton School, looked at stock market returns from 1802 to 1997 and found that in total returns stocks outperformed all other types of assets. "One dollar invested and reinvested in stocks since 1802 would have accumulated to $7,470,000 by the end of 1997," he writes. The chart "Total Nominal Return Indices," taken from Siegel's book Stocks for the Long Run, gives a vivid picture. (See page 22.)
As you can see, the long-term trend of the stock market in the United States has always been upward. Yes, there've been ups and significant down periods, but over the long haul the trend is up, and it's a pretty good track record.
Now that simple fact alone--over time, stocks have outperformed all other kinds of investments--in and of itself makes a pretty good case for investing in stocks. It's historical evidence, and it's great, but how do we know the upward trend will continue? How can we be sure? Yes, we can see it on paper; we can look at that chart and see the evidence, but the question is why? Why have stocks outperformed other kinds of investments? Is it luck? Coincidence? Magic? Government regulations?
None of the above. There's no voodoo, no hocus-pocus, no tricks, and no mirrors. It's not even much of a mystery. There's a reason for that continuous upward trend. It's what distinguishes stocks from all other investments, and it's the same reason they've proven to be such solid investments over time. And it is, to me, the best argument for investing in stocks.
Making Sure We're on the Same Page
At the end of this book, you'll find a Glossary that gives concise, accurate definitions of the terms most commonly used in investing. You may find it helpful to turn to it as you read the book. But first things first; sometimes even investing's household words can cause confusion because they're often used in more than one context. So at the outset I want to make sure you understand how I'm using some of the basic words:
A fractional ownership in a company, measured by one or more shares.
Lots of companies in which you can invest. When I say someone owns stocks, I mean that they own shares in many companies.
A corporation that is formed with some business venture as its goal. In everyday parlance, a stock and a company are basically the same. "IBM" refers to both the company and the stock.
The broadly diversified inventory of publicly owned companies. For example, the S&P 500 and the Schwab 1000 are broad representations of the greater stock market.
Earnings per share
A company's net income divided by the number of its common shares outstanding. For example, $1 million net income divided by 1 million shares outstanding equals $1 earnings per share.
The part of a company's net income distributed to shareholders.
An IOU issued by the federal and/or a local government or a corporation. The bond states that you have loaned money to the borrower and that you will be paid back on a certain date and at a certain rate of interest.