Making Money
Making money entails a lot more than predicting which way the stock or bond markets are heading or trying to figure which stock or mutual fund will double over the next few years. For the great majority of investors, making money requires a plan, self-discipline, and desire. On the other hand, if you happened to be a genius like a Michael Dell or a Bill Gates then you don't have to know about the Dow or the markets or about yields or price/earnings ratios. When you're a phenomenon in your own field, you are going to make big money as a by-product of your talent and ability. But this kind of genius is very rare.
For the average investor, since we're not geniuses, we therefore have to have a financial plan. In view of this fact, we now offer a few items for your consideration if you are really serious about making money as an investor!
Rule 1: Compounding: One of the most important lessons for living in the modern world is that in order to survive, you've got to have money. But in order to live happily, you must have love, health (both mental and physical), freedom, intellectual stimulation -- and money. And to help you understand the time value of money, you will need to equip yourself with a volume of compounding interest tables.
Compounding is the royal road to riches. Compounding is the safe road, the sure road, and fortunately, anybody can do it. In order to compound successfully however, you need the following: perseverance in order to keep you firmly on the savings path. You need intelligence in order to understand what you are doing and why. And you need a knowledge of the mathematics tables in order to comprehend the amazing rewards that will come to you if you faithfully follow the compounding road. And, of course, you need time, time to allow the power of compounding to work for you. Remember, compounding only works through time.
But there are two catches in the compounding process. The first is obvious -- compounding may involve sacrifice (you can't spend it and still save it). Second, compounding is B-O R-I-N-G. Or perhaps we should say that it's boring until (after seven or eight years) the money starts to pour in. Then, compounding becomes very interesting. In fact, it becomes downright fascinating!
Rule 2: Don't Lose Money. This may sound naive, but believe me it isn't. If you want to be wealthy, you must not lose money -- especially BIG money. Absurd rule? ... Silly rule? Maybe, but MOST PEOPLE LOSE MONEY in disastrous investments, gambling, rotten business deals, greed, poor timing, in the stock market, in options and futures, in real estate, in bad loans, in mindless gambling, and in their own business.
Rule 3: Rich Man, Poor Man: In the investment world the wealthy investor has one major advantage over the little guy, the stock market amateur and the neophyte trader. The advantage that the wealthy investor enjoys is that HE DOESN'T NEED THE MARKETS. You can't imagine what a difference that makes, both in one's mental attitude and in the way one actually handles one's money.
The wealthy investor doesn't need the markets because he already has all the income he needs. He has money coming in via bonds, T-bills, money market funds, stocks and real estate. In other words, the wealthy investor never feels pressured to "make money" in the market.
The wealthy investor tends to be an expert on values. When bonds are cheap and bond yields are irresistibly high, he buys bonds. And when stocks are on the bargain table and stock yields are attractive, he buys stocks. When real estate is a great value, he buys real estate. When great art or fine jewelry or gold is on the "give away" table, he buys art or diamonds or gold. In other words, the wealthy investor puts his money where the great values are.
And if no outstanding values are available, the wealthy investor waits. He can afford to wait. He has money coming in daily, weekly, monthly. The wealthy investor knows what he is looking for, and he doesn't mind waiting months or even years for his next investment (this is also known as patience).
But what about the little guy? This fellow always feels pressured to "make money." And in return, he's always pressuring the market to "do something" for him. But sadly, the market isn't interested. When the little guy isn't buying stocks offering 1% or 2% yields, he's off to Las Vegas or Atlantic City trying to beat the house at roulette. Or he's spending twenty dollars a week on lottery tickets, or he's "investing" in some crackpot scheme that his neighbor told him about (in strictest confidence, of course).
And because the little guy is trying to force the market to do something for him, he's a guaranteed loser. The little guy doesn't understand values so he constantly overpays. He doesn't comprehend the power of compounding, and he doesn't understand money. He's never heard the adage, "He who understands interest -- earns it. He who doesn't understand interest -- pays it." The little guy is the typical American, and he's deeply in debt.
The little guy is in hock up to his ears. As a result, he's always sweating -- sweating to make payments on his house, his refrigerator, his car, or his lawn mower. He's impatient, and he feels perpetually put upon. He tells himself that he has to make money -- fast. And he dreams of those "big, juicy mega-bucks." But in the end, the little guy wastes his money in the market, or he loses his money gambling, or he dribbles it away on senseless schemes. In short, this "money-nerd" spends his life dashing up the financial down-escalator!
But here's the ironic part of it. If, from the beginning, the little guy had adopted a strict policy of never spending more than he made, if he had taken his extra savings and compounded it in intelligent, income-producing securities, then in due time he'd have money coming in daily, weekly, monthly, just like the rich man. The little guy would have become a financial winner, instead of a pathetic loser.
Rule 4: Values: The only time the average investor should stray outside the basic compounding system is when a given market offers outstanding value. And we judge an investment to be a great value when it offers (a) safety; (b) an attractive return; and (c) a good chance of appreciating in price. At all other times, the compounding route is safer and probably a lot more profitable, at least in the short run.
* * * * *
For the average investor, since we're not geniuses, we therefore have to have a financial plan. In view of this fact, we now offer a few items for your consideration if you are really serious about making money as an investor!
Rule 1: Compounding: One of the most important lessons for living in the modern world is that in order to survive, you've got to have money. But in order to live happily, you must have love, health (both mental and physical), freedom, intellectual stimulation -- and money. And to help you understand the time value of money, you will need to equip yourself with a volume of compounding interest tables.
Compounding is the royal road to riches. Compounding is the safe road, the sure road, and fortunately, anybody can do it. In order to compound successfully however, you need the following: perseverance in order to keep you firmly on the savings path. You need intelligence in order to understand what you are doing and why. And you need a knowledge of the mathematics tables in order to comprehend the amazing rewards that will come to you if you faithfully follow the compounding road. And, of course, you need time, time to allow the power of compounding to work for you. Remember, compounding only works through time.
But there are two catches in the compounding process. The first is obvious -- compounding may involve sacrifice (you can't spend it and still save it). Second, compounding is B-O R-I-N-G. Or perhaps we should say that it's boring until (after seven or eight years) the money starts to pour in. Then, compounding becomes very interesting. In fact, it becomes downright fascinating!
Rule 2: Don't Lose Money. This may sound naive, but believe me it isn't. If you want to be wealthy, you must not lose money -- especially BIG money. Absurd rule? ... Silly rule? Maybe, but MOST PEOPLE LOSE MONEY in disastrous investments, gambling, rotten business deals, greed, poor timing, in the stock market, in options and futures, in real estate, in bad loans, in mindless gambling, and in their own business.
Rule 3: Rich Man, Poor Man: In the investment world the wealthy investor has one major advantage over the little guy, the stock market amateur and the neophyte trader. The advantage that the wealthy investor enjoys is that HE DOESN'T NEED THE MARKETS. You can't imagine what a difference that makes, both in one's mental attitude and in the way one actually handles one's money.
The wealthy investor doesn't need the markets because he already has all the income he needs. He has money coming in via bonds, T-bills, money market funds, stocks and real estate. In other words, the wealthy investor never feels pressured to "make money" in the market.
The wealthy investor tends to be an expert on values. When bonds are cheap and bond yields are irresistibly high, he buys bonds. And when stocks are on the bargain table and stock yields are attractive, he buys stocks. When real estate is a great value, he buys real estate. When great art or fine jewelry or gold is on the "give away" table, he buys art or diamonds or gold. In other words, the wealthy investor puts his money where the great values are.
And if no outstanding values are available, the wealthy investor waits. He can afford to wait. He has money coming in daily, weekly, monthly. The wealthy investor knows what he is looking for, and he doesn't mind waiting months or even years for his next investment (this is also known as patience).
But what about the little guy? This fellow always feels pressured to "make money." And in return, he's always pressuring the market to "do something" for him. But sadly, the market isn't interested. When the little guy isn't buying stocks offering 1% or 2% yields, he's off to Las Vegas or Atlantic City trying to beat the house at roulette. Or he's spending twenty dollars a week on lottery tickets, or he's "investing" in some crackpot scheme that his neighbor told him about (in strictest confidence, of course).
And because the little guy is trying to force the market to do something for him, he's a guaranteed loser. The little guy doesn't understand values so he constantly overpays. He doesn't comprehend the power of compounding, and he doesn't understand money. He's never heard the adage, "He who understands interest -- earns it. He who doesn't understand interest -- pays it." The little guy is the typical American, and he's deeply in debt.
The little guy is in hock up to his ears. As a result, he's always sweating -- sweating to make payments on his house, his refrigerator, his car, or his lawn mower. He's impatient, and he feels perpetually put upon. He tells himself that he has to make money -- fast. And he dreams of those "big, juicy mega-bucks." But in the end, the little guy wastes his money in the market, or he loses his money gambling, or he dribbles it away on senseless schemes. In short, this "money-nerd" spends his life dashing up the financial down-escalator!
But here's the ironic part of it. If, from the beginning, the little guy had adopted a strict policy of never spending more than he made, if he had taken his extra savings and compounded it in intelligent, income-producing securities, then in due time he'd have money coming in daily, weekly, monthly, just like the rich man. The little guy would have become a financial winner, instead of a pathetic loser.
Rule 4: Values: The only time the average investor should stray outside the basic compounding system is when a given market offers outstanding value. And we judge an investment to be a great value when it offers (a) safety; (b) an attractive return; and (c) a good chance of appreciating in price. At all other times, the compounding route is safer and probably a lot more profitable, at least in the short run.
* * * * *
posted by Bob Moser at
9:53 PM
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