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

by David Gardner, Tom Gardner

Overview

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.

Product Details

ISBN-13:	9780743234658
Publisher:	Touchstone
Publication date:	06/11/2003
Series:	Motley Fool , #10
Pages:	224
Product dimensions:	5.50(w) x 8.50(h) x 0.60(d)

About the Author

David Gardner learned from his father how to invest, and with his brother, Tom, started The Motley Fool in 1993 with a mission to educate, amuse, and enrich. Today, the Fool works to empower individual investors, reaching millions every month through its website, premium services, podcasts, radio show, newspaper column, and more. With Tom they have coauthored several books, including You Have More Than You Think, Rule Breakers, Rule Makers, and The Motley Fool Investment Guide for Teens.

Tom Gardner learned from his father how to invest, and with his brother, David, started The Motley Fool in 1993 with a mission to educate, amuse, and enrich. Today, the Fool works to empower individual investors, reaching millions every month through its website, premium services, podcasts, radio show, newspaper column, and more. With David they have coauthored several books, including You Have More Than You Think, Rule Breakers, Rule Makers, and The Motley Fool Investment Guide for Teens.

Read an Excerpt

The Motley Fool What to Do with Your Money Now

Ten Steps to Staying Up in a Down Market

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By Tom Gardner David Gardner

Fireside

Copyright © 2002 The Motley Fool, Inc.
All right reserved.
ISBN: 0-7432-3465-0

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Chapter One

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.

THE BUSINESS LESSON

As co-chairmen of the Motley Fool, we can say that we felt atremendous 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.

THE INVESTING LESSON

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.)

(Continues...)

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Excerpted from The Motley Fool What to Do with Your Money Now by Tom Gardner David Gardner Copyright © 2002 by The Motley Fool, Inc.. Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

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Table of Contents

Contents

Preface

Introduction

PART ONE: WHAT HAPPENED?

1. We Were Impatient

2. We Didn't Play Our Game

3. We Didn't Respect Profitability...Enough

4. We Pursued Growth at Any Cost

5. We Failed to Recognize Our Errors

PART TWO: WHAT TO DO NOW

1. Timeless Suggestions for the Ideal You

2. Timely Suggestions for the Particular You

3. Rebuilding with Perspective

4. Five, No, Six Investments for the Future

5. Your Questions, Our Answers

6. More Questions, More Answers

INTERLUDE

PART THREE: WHAT NEXT?

1. Make Life Convenient

2. Get Great People Involved

3. Know How You Make Money

4. Have Fun

Index

Additional Resources at Fool.com

Editorial Reviews

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

From the Publisher