The Profile Of An Average Wealthy American

Here's your chance to compare yourself against the average wealthy American, who can be defined as a person with assets amounting to $1,000,000 and with $200,000 in debts, for a net worth of $800,000.

Forty percent of that million dollars in assets ($400,000) are actually in financial assets while the remainder is generally in non-financial assets like property. And the $200,000 in debt is also mostly in properties.

The average wealthy American has only 11% of his assets in individual stocks while 36% is either in retirement accounts or being managed by someone else such as in mutual funds.

Of the $400,000 in financial assets, here is a rough breakdown of how that money is invested:

$84,000 is in Retirement Accounts
$60,000 is in Mutual Funds
$48,000 is earning interest in money market funds or CDs
$60,000 is in Bonds
$44,000 is in Stocks
$16,000 is in cash value Life Insurance
$88,000 is in other things like savings bonds or partnerships

So we can see from these numbers that the average investor would be far better off by devoting his or her time to allocating their assets rather than trying to pick the next big stock winner!

As for non-financial assets, here's what the average Wealthy American has:

$192,000 in a Home
$168,000 Equity in a business
$108,000 in a second residential property
$78,000 in non-residential property
$18,000 in Vehicles
$30,000 in other things such as jewelry, artwork, collectibles, etc.

It is interesting to note that the median value of vehicles they own is merely $18,000 - which goes to show that as a rule, wealthy people don't drive rich because they know that a fancy car's depreciation in value will only slow down their wealth creation.

Some other interesting facts about wealthy Americans:

The self-employed are the wealthy people of America. The average net worth of a family where the head of the family works for someone else is $52,400. In the case of the self-employed, the average net worth is $248,100.

All of the wealth in America is concentrated among homeowners, and the difference is amazing. The average homeowner's net worth is $132,000, while the average renter's net worth is a measly $4,200.

Education is also valuable. The net worth where the family head did not graduate from high school is only $21,000. But the net worth where the family head did graduate from college is $146,800.

So what should you do with this information?... Well first of all, you should take a look at your own assets and see how you compare. It may be an eye opening experience - or, you may be pleasantly surprised.

While there is no "magic formula" that will work for everyone, we can see from these numbers that the average wealthy American spends more time on asset allocation than you may think. Also, the average wealthy American does not live beyond his means, which means he has NO credit card debt, and he also passes on expensive cars!

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Is Your Brain Wired For Wealth?

Researchers are using the latest breakthroughs in technology to trace the exact circuitry your brain uses to make the kinds of decisions you rely on as an investor. So we are going to use these findings and take you deep inside your own brain to help you understand why you invest the way you do -- and, more importantly, how to enhance the workings of your brain to get better results.

The neuroscience of investing helps explain one puzzzle after another: why we chronically buy high and sell low; why "predictable" growth stocks sell at such high prices; why it's so hard to understand our own risk tolerance until we lose money; why we keep buying IPOs and "hot funds" despite all the evidence that we shouldn't; and why stocks that miss earnings forecasts by a penny can lose billions of dollars of market value in seconds.

Fortunately, the latest discoveries also point the way toward cures for bad investing behavior. Therefore, being aware of how the human brain works and why we react the way we do to various situations are critical for developing a better understanding of the common mistakes that typical investors make.

For nearly our entire history as a species, humans were hunter-gatherers, living in small nomadic bands, pursuing wild animals, foraging for edible plants, finding mates, avoiding predators, and seeking shelter in bad weather. These are the tasks our brains evolved to perform.

The human brain is a superb "machine" when it comes to solving ancient problems like recognizing short-term trends or generating emotional responses with lightning speed. But it's not so good at discerning long-term patterns or focusing on many factors at once -- challenges that our early ancestors rarely faced but that we investors confront every day.

Now, how can you use these new insights into the human brain to make yourself a better investor?

Whenever possible, you need to develop automated, irreversible investing habits that are tailor-made for neutralizing your brain's worst liabilities while optimizing its greatest assets. And here's how neuroscience leads to a new science of investing.

Because the amygdala -- the part of your brain that initiates feelings of fear -- is an almost irresistable force, you must reduce your exposure to images that can provoke panic. Turn away from stock tickers; turn off the televised images of closing bells and yelling traders. And promise aloud or in writing, before a friend or family member who can hold you to it, that you won't check the value of your accounts more than once a month. If you haven't already, sign yourself up to dollar-cost average through an automatic investment plan that will electronically purchase shares in a Dividend Reinvestment Plan each and every month. That way, your investing commitment can never weaken, even when you are full of fear.

The human brain is wired to try to make predictions from past patterns and take risks in search of a big reward. That makes sense only if you're following the footprints of a tasty water buffalo or looking for flowers that indicate an edible root plant. With stocks, however, that habit can lead you quickly astray as you invest in a few stocks based on past performance.

If a stock or a fund you're invested in goes straight up, don't just enjoy the ride. The better an investment does for you, the more powerfully your brain will believe nothing can ever go wrong with it. Each time it rises, say, 50 percent, study it again more closely; ask what could go wrong; seek out negative opinions. The time to do the most homework is before bad news can catch your brain by surprise. There are no guarantees, but doing extra research just when things are going well is the best way to prepare yourself in case something later goes wrong -- or seems to. You'll then have a better sense of whether it's a false alarm or a real one.

If you can't stop chasing the next "Microsoft," at least chase it with only part of your money. Just as prudent gamblers lock most of their cash in the hotel-room safe and go onto the casino floor with no more then they're willing to lose, you should set up a "mad money" account. You can't control your prediction addiction, but you can at least contain it -- by putting into your mad-money account only what you can afford to lose. That way, you speculate with only a fraction of your money, not with all of it.

Remembering what you did is only one way to learn from your own experience. Emotions can be an excellent guide to what you should and shouldn't do. But to use them as an accurate guide, you need to remind yourself of how you felt after your decisions (and their results). Regularly evaluating whether an outcome made you feel good or bad will help you learn from your behavior. Also, keeping a written record of your feelings is a good idea, particularly if you are a younger investor.

Remember that your brain perceives anything that repeats a couple of times as a trend -- so never buy a stock or a fund because its short-term returns look hot. Check out the long-run, and never assess performance in isolation; always compare a stock or fund to other similar choices.

Because your prefrontal cortex is responsible for evaluating the consequences of your actions, and because advancing age impairs that part of your brain, be on guard. If you are elderly, simple reminders can help -- like a Post-It note located in a prominent place on your PC that reads, "Never open unsolicited investing e-mail."

The stock market has revealed the biggest risk of all: underestimating your own tolerance for risk. Thinking you can tough it out then suddenly finding that you can't is a recipe for financial disaster. Diversification - making certain that you never keep all of your money in one kind of investment -- is the single most powerful way to prevent your brain from working against you. Thus by keeping your money in a broad basket of assets, you lower the odds that a meltdown in one investment will send your amygdala into overdrive... Just don't go off the deep end in the other direction by over-diversifying!

Finally, putting yourself on automatic pilot minimizes the opportunities for your brain to perceive trends that aren't really there, or to overreact when apparent trends turn out to be illusions or to panic when fear is in the air. That frees up your brain to focus on the harder work of long-term financial planning. Above all, you should take enormous comfort from knowing that the latest scientific findings show just how newly valid the oldest truths of investing really are.

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Where To Find Reliable Investment Advice For Free!

Warren Buffett taught us that the two critical factors necessary for investing wisely are determining the intrinsic value of a given business, and then paying a fair or a bargain price in order to acquire its shares.

The two primary methods for making money in the stock market are value investing and momentum trading. And each of these methods is based on emotion: value investing is based on certainty while momentum trading is based on hope.

A value investor would never buy any business until he/she has followed Buffett's advice on intrinsic value. That means a value investor will not buy a stock without knowing for certain what the business is worth and what would be a fair price to pay for buying the shares of that business.

Momentum traders on the other hand will buy a stock regardless of what it's worth, in the hope that sooner or later someone else will pay a higher price for that same stock. This style of "investing" depends upon there being a steady supply of suckers out there who are willing to purchase overpriced stocks.

But back now to value investing, and finding reliable advice about the right price to pay for a given company's shares.

Getting an expert valuation of any company is based on acquiring an exceptional knowledge of its business. And this can only be gotten by studying a business and by working closely with its management team. So for an individual investor, this would involve reading a company's 10-K and 10-Q filings, studying industry overviews and analyst updates on the company, and listening in on conference calls in order to come up with your own reasonable valuation of the business -- which is almost impossible for the average investor to accomplish!

So the next best option for an individual investor is to find someone who does have the time to do all of this and then pay him or her for their opinion of a given company. But getting investment advice can be very expensive. And if that advice is either cheap or for free, then it is already most likely to be common knowledge and not worth paying for. So what are you to do?

Well amazingly, there is one group of specialists who give out free research on stocks, and their information is both first-rate as well as being very private. These people are experts in that they only work on one company at a time.

These specialists don't publish their reports frequently, but when they do, they not only tell you exactly what they think of the company's future prospects, but they also tell you what they think the company is worth.

So who are these experts I talk about? They are the corporate insiders, and their reports are available on the SEC's Form 4. Column 3 of this Form (the Transaction Code) tells you exactly what these insiders think are their company's future prospects. And this is also where they tell you if they feel the company is a buy.

In order to learn the buy price, you go to column 4 (Securities Acquired or Disposed) which tells you exactly what the insiders were willing to pay for the stock. And since insiders only have two days time in which to file their transactions with the SEC, you can probably buy the stock at a similar price.

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Graham's Number

This is something we've talked about previously at one of our meetings and while it is important to understand, there are only few investors who really do know about it and that is unfortunate.

Graham's Number is named after Professor Benjamin Graham, the author of such books as The Intelligent Investor as well as Security Analysis. But Benjamin Graham is probably even more famous as Warren Buffett's mentor at Columbia University.

Graham's Number is defined as "net current asset value" and you can find it in Value Line where it is referred to as net working capital.

How do we arrive at Graham's Number?... Just subtract Total Liabilities from Current Assets.

And what does this tell you?... If the resulting number is positive, this could be an indication that the company in question is a very conservatively financed company. And if the market cap of the particular stock (which you get by multiplying the total number of shares outstanding by the stock's share price) is less than Graham's Number, this could be an indicator that you are about to make some serious money!

Graham's number is usually negative for most companies, however, when Graham's Number is positive, it can be a very good thing because that usually means the company has plenty of liquid assets on hand that are free and clear of any and all liabilities.

This is a very good tool to use whenever you are studying any company's balance sheet!

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What's Wrong With Diversification?

At first glance, that question might make it appear as if I am about to trample on one of the investing world's most cherished "sacred cows" - you know the routine - "do your asset allocation, rebalance your portfolio periodically, and D-I-V-E-R-S-I-F-Y."

I have repeated those very words at our monthly meetings many times, however, a few words of caution need to be stated in the case of diversification.

Owning any portfolio that is overly diversified makes it very difficult to earn really good profits because while some of your stocks rally, others will tank. So what you end up with is a portfolio that merely mimics the broad market. Investing like that may seem to be a safer way to do it but in reality, by attempting to minimize your losses, you're also limiting your gains.

The best way to make big money buying stocks is to focus your capital on cheap stocks that you understand very well. Which do you think you could be more successful doing: could you know everything you needed to know on a short list of 10 to 15 stocks? Or, how about a long list with hundreds of stocks - the way that many mutual fund managers do?

Warren Buffett has a very definite opinion on the subject of diversification. He has been quoted as saying, "Diversification is only done by people who really don't know what they're doing."

Once again, I have to agree with Warren Buffett. Just think about it... why does any person diversify?... A person diversifies because of the fear of losing. And what is the source of that fear?... All fears stem from ignorance of whatever it is that we fear!

Back in 1963, Warren Buffett had $12 million under management. He invested all of that money in just five stocks. Now he could have chosen to diversify that money over dozens and dozens of seemingly quality stocks but instead of doing that, he chose instead to work very, very hard and as a result, he came up with just a few very sound investments like American Express and Berkshire Hathaway.

The wisdom of Buffett's approach to investing were revealed by the end of 1963, when his portfolio had gained 39% while the Dow had gained only 21% that same year. And by the end of 1964 - one year later - Buffett's portfolio had grown to $22 million from the original $12 million.

In order to make large gains like that Buffett's goal is to just pick winners and to invest exclusively in them. He doesn't waste time or money on stocks he doesn't know and understand completely. To do otherwise he feels would be very much like playing the lottery.

Buffett's strategy works because his Berkshire Hathaway shares have gained nearly 195,000% since 1964!

So if you want to develop a winning portfolio, then don't clutter it up by over diversifying with potential losers that will only limit any gains that you make on your best stock picks.

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An Important Tip On Safeguarding Your Money

Cash money, is normally protected up to $100,000 - whether it is held by a bank or a brokerage firm. On the other hand, securities that are held by a broker can be protected in amounts ranging from $500,000 to several millions of dollars, depending on the type of coverage provided by your particular broker. You should be certain as to the amount of insurance protection that your broker provides for your account.

Since securities receive greater insurance protection than does cash, if you are holding more than $100,000 in cash, you may be better off with a highly liquid security than with cash. Just be certain that your brokerage account is coded as a "cash" account and not as a "margin" account because the rules are different for each type of account.

The assets in your margin account are merged with the brokerage firm's assets, even though they are maintained on the brokerage's books and records in your name. Thus, the broker can use your assets as collateral for the brokerage firm's borrowing. And if your broker should ever go belly up, then you would become a general creditor of the brokerage firm. So while you still have insurance, as a creditor, you may have to wait in line to get your money back. On the other hand, securities held by your broker in a "cash" account are, by law, segregated from other assets.

Aren't you likely to be aware of how your account is coded at your broker's firm? Not necessarily. Brokers have complicated documents that you must sign before an account is opened. It is entirely possible that within the many pages of fine print which comprise the typical Terms & Conditions under which the account was opened, there may be a reference as to the type of account that is being opened for you. In any event, it can't hurt for you to confirm that you do have a cash account and not a margin account.

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How To Invest Like Warren Buffett

There is a very interesting book that was published earlier this year by John Wiley & Sons entitled, "Trade Like Warren Buffett" - and the author is James Altucher.

This book talks about one of the ways that Warren Buffett buys stocks which is to know the maximum price for which that stock will sell - right down to the penny. He then holds the stock for six months and collects an annualized yield of 9.5% to 13%.

The process that Buffett uses is called merger arbitrage, and this is how it works...

A company announces that it has entered into a merger agreement to be acquired at a certain price per share, and Buffett would then buy that stock below that price.

It's as simple as that, and Buffett claims that you can make 50% a year doing this. In fact, if you did nothing but merger arbitrage you could make a lot more money in stocks in a much shorter time.

How much more? Well the book contains an interview with a hedge fund operator who claims to have made 65% per year for five years doing this. So if you'd like to make some serious money investing, then it may pay you to learn all you can about merger arbitrage!

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The Seven Principles of Passive Wealth

My earlier comments about Bob Brinker produced a response from a reader who wants me to expand on the idea of Critical Mass. And I can't think of a better way to do this than to talk about the principles that lead a person to passive wealth because after all, passive wealth is merely another term for Critical Mass!

These Seven Principles, if followed faithfully, will take any person to a totally new level of wealth, freedom, and consciousness. In fact, everyone could enjoy them if they only knew what to do, and had the intestinal fortitude to see it through.

So here are the principles behind EVERY system of passive wealth:

Principle 1 - Duplication

The hardest lesson to learn for some people is the importance of duplication when developing passive wealth. Duplication simply means the ability to copy, or duplicate, the system of strategies that are making you money.

So if you are a top plumber, lawyer, or accountant, that's great, but it's not duplicatable. A great surgeon for instance doesn't have freedom because he cannot duplicate himself. Surgeons have money, it's true. But if they stop operating, they stop earning. Period. So being a great "anything" - other than a great duplicator - is not the way to massive passive wealth. Therefore you must become a great duplicator; someone who duplicates systems and strategies.

Some of the greatest duplicators have built empires of freedom. They include business people in music, software, finance, and more. They can take a month long vacation. They can sit back and relax. They can all retire tomorrow but they usually don't because they are doing something that they absolutely love. And they all have duplication in their business.

Here's the rule to make sure that your business is duplicating: Will this eventually pay you money if you don't work? If not, then you don't have a duplicatable system. If yes, then you have the potential for a fortune of freedom.

But Duplication is just the start.

Principle 2 - Systemization

There is no passive income without a system. It just can't happen. You don't have to invent a system, you just have to utilize one.

Owning a stock is a duplicatable system. You can duplicate the stock purchase. The company you invest in is the system. And the better the system, the more passive income you will receive.

A McDonald's franchise is a system. They have a well laid-out set of rules that are proven to make money. Their system is so duplicatable in fact that they have thousands and thousands of stores making them billions of dollars.

Here's what's not a duplicatable system: trying every "opportunity" that comes across your desk, or else investing in a stock and then trying to guess whether it might be time to sell... That's called a waste of time and energy.

Passive wealth is unattainable without a system!

Principle 3 - Leverage

Leverage = working to get others to work for you.

If you have a lot of money, leverage it by investing in systems that will make your money grow. Let the system work for you! It's easy, once you know how. And it's the reason why the rich get richer.

But what if you don't have money? Then you MUST have other people working for you. And you must leverage your time or otherwise every business that you start will be just like having another job.

You don't have to hire people. That's old school thinking. If you do hire people then you'll have a job of making certain the people go to their job. And that's a bummer!

But there is still more you must know.

Principle 4 - Discipline

If you wanted to drive from Chicago to Los Angeles, you'd have to set a course. And what happens if you don't stick to the course? Then you'll probably never get there.

The same goes for Passive Wealth. It doesn't come instantaneously. The "trip" you take to get to passive wealth requires discipline. Too many times, people will get close to true passive wealth, only to get distracted by another "opportunity" and then have to start all over again.

If you are investing for passive wealth, you can't touch your principle. You must stay the course. You must commit to the long haul. This alone is the reason why most people fail.

The next principle explains why it's so important to stick it out.

Principle 5 - Exponential Growth

In the beginning of any passive income effort, you are expending time and not receiving much income. But as time goes by, you begin to receive more income without spending much effort at all.

And if you keep earning and investing over 20 years, you'll see that income grow exponentially. In fact, you might even be retired after those 20 years, but that money is still working for you now.

The whole idea behind Passive Wealth is not to get rich quick, but rather, it is to just get rich!

Principle 6 - Leadership

In order to gain passive wealth and gain the freedom to live your dreams, you have to take risks, make quick decisions, and inspire people. In short, you must become a leader.

A very wise philosopher once said: "before you make a million dollars, you must first become a millionaire." What he meant was that you have to develop the mind of a leader. You must develop the habits of a millionaire in order to ever earn a million dollars.

Remember, the effort will pay off, but first, you must pay the price that every leader pays!

Principle 7 - Maintenance

If you build a true passive income based on a solid, duplicatable system, there won't be much maintenance, but you'll still need to keep your eye on things.

Most investors have diversified their funds and make minor adjustments each quarter to stay on top of things. Those with large holdings of one stock may participate in shareholder meetings to help steer the company and keep the management accountable.

Passive income does not give you freedom from all responsibility. In fact, it sometimes gives you more responsibility. But with passive income, you become a leader. Someone who is in charge of their life. Someone whose time is flexible.

So these principles are fine, but in order to get results, first of all you must have a plan!

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Inflation and the Stock Market

This is taken from the latest commentary by our friend Chuck Carlson.

"When you look at the things that represent the biggest threats to this market - high energy prices, interest rates, inflation - the one that scares me the most is inflation. Higher inflation can be crippling to stocks. One reason is that higher inflation erodes price/earnings multiples, and lower multiples mean lower stock prices."

"A price/earnings ratio is determined by taking the stock's per-share price and dividing by trailing 12-month earnings per share. Thus, a company with a stock price of $20 per share that has earned $2 per share in earnings over the preceding 12 months has a price/earnings multiple of 10 ($20 divided by $2). Investors oftentimes look at price/earnings ratios not just on trailing earnings but also on forecasted earnings. For example, that same company with a $20 stock price and $2 in earnings over the preceding 12 months is expected to earn $2.50 per share in profits for 2005. Based on that earnings estimate, the stock has a forward price/earnings ratio of 8 ($20 divided by $2.50)."

"One factor that goes into determining appropriate price/earnings multiples for companies is expected growth rate. Higher-growth companies usually receive higher price/earnings ratios. That's because investors generally will pay a premium multiple to buy growth."

"Another important factor in determining price/earnings ratios is inflation. Remember that inflation is the erosion of the value of a dollar. Also remember that investing is all about future expectations. Thus, if you believe the future value of money will be eroded by inflation, you are apt to pay less for that future growth in today's terms. And that means lower price/earnings ratios."

"Here's how the math works: Say you like a stock that you expect to earn $3 per share in 2005. Currently, you are willing to pay 20 times those earnings since you expect solid growth to continue for the firm. A price/earnings ratio of 20 for a company earning $3 per share means a $60 stock price. Now, if you expect inflation to rise, you will not be willing to pay 20 times those $3 in earnings since that $3 in earnings will be worth less with higher inflation. Thus, you knock down the price/earnings ratio to 16 to reflect inflation. What does knocking down the price/earnings multiple from 20 to 16 do to the stock price? It falls from $60 to $48."

"Of course, perhaps you don't believe inflation will be a problem for this market. Still, I think it makes perfect sense to have stocks in a portfolio that represent inflation hedges. Stocks that should hold up reasonably well in an inflationary environment are those that have pricing power, i.e., the ability to raise prices."

"One company that has demonstrated the ability to hike prices is Procter & Gamble (NYSE: PG). The firm's profits in the latest quarter were decent, and I would expect record results this year. I own Procter & Gamble and would look for these shares to at least track the overall market."

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Secrets of Picking Winning Stocks

In order to pick winning stocks, all you need is a legal pad, a calculator, and some basic information from either Standard & Poor's or Value Line. Then look up the company you're considering, and the stock is a worhwhile investment, if it passes the following tests:

Evaluate the company's sales figures. They tell how well a company's products or services are selling in the marketplace. What to do...

Look at sales for the most recent year. Then count back five years. If current sales are twice or better than those five years ago, then you know you've got a good, lively company. But if the sales are up less than 50%, look for another company.

Note: A stock that has good potential shows sales growing by at least 10% per year.

Size up the company's earnings per share. Increasing sales really don't mean much unless a company is making money. Increasing profits, which are also known as earnings, ultimately boost share prices. What to do...

Look at earnings per share for the most recent year as well as for five years ago. Have earnings doubled over the last five years? Earnings that double every five years are growing at 14.9% compounded annually.

Give the management a checkup. The two best management tests are pretax profit margins and return on equity. These numbers tell you how wisely a company is targeting consumer markets, how much power it has to set prices and how efficiently it uses its cash. What to do...

Take a look again at either Standard & Poor's or Value Line. Then calculate the pretax profit margin by dividing last year's pretax profits by last year's sales. Then look at the same figures for the company's competitors. You want a company with a profit margin at or near the top of its peers in the same industry group.

The return-on-equity numbers require no calculation. These figures can be found in Standard & Poor's under "Percent Returned on Equity" and under "Percent Earned on Net Worth" in Value Line.

Note: If the return on equity isn't at least 12% to 15%, eliminate the stock from consideration.

Finally, calculate the stock's price history. You may have found a great company, but you need to know whether or not it is worth buying right now. To find this out, compare the current price-to-earnings ratio (P/E) to past ratios from Standard & Poor's or Value Line. What to do...

Make a list of the stock's high and low prices for each of the past five years. Then do the same for the company's P/E.

Next, find the total average P/E for the past five years by adding the average low P/E and the average high P/E and dividing the result by two.

Note: You want today's P/E to be lower than the average. If it is, and the company's earnings are growing by 10% a year, the stock is likely a good one and a good buy!

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Things I've Learned By Listening To Bob Brinker

We have mentioned the name of Bob Brinker from time to time, and for anyone who may not be acquainted with him, Bob Brinker broadcasts his "Money Talk" program each Saturday and Sunday from 3:00 to 6:00 PM locally on radio station WLS (890-AM) as well as on the Internet on ABC Radio Stations like KGO-AM in San Francisco.

Besides the fact that you likely will hear some nuggets of valuable investment information that you won't hear elsewhere, it is fascinating to observe how Bob Brinker's mind works... he is so clear and succinct in the things that he says and most importantly, he always makes abundantly good sense!

I always keep a yellow legal pad handy when listening to Bob Brinker, and here now is a compilation of ideas that he has expressed over the years.

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"It is important to manage your money with the idea that you only have one portfolio. And what you are trying to accomplish is the optimum efficient management of all your financial assets, for a rate if return that is relative to your tolerance for risk!"

"So your mindset has to be the same as that of a corporate Chairman who manages a group of companies that don't all do the same thing. And a corporate Chairman should always manage his various companies toward a common goal. And that same common-goal mentality should drive every investor's efforts toward managing his/her own personal finances."

"If you think one portfolio all of the time, you can't go wrong. It's a winner!"
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"The first thing you have to do in order to manage your money well, is to determine your asset allocation model. And your asset allocation model in turn determines what percentage of your total portfolio will be in the stock markets of the world, and what percentage will be in fixed income or interest-bearing securities."

"Asset allocation is usually a function of age, and asset allocation begins by knowing exactly what you have. It needs to answer questions like: How old am I?; How many years do I have until retirement?; What percentage of my money do I want to have in stocks?; What percentage of my money do I want in fixed income sources? "

"Until you determine your asset allocation percentages, you can't possibly have any idea of how to invest the money because you wouldn't know where to invest it!"
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"You should always be moving steadily in the direction of that Promised Land of personal financial freedom - known as the Land of Critical Mass... There are no alarm clocks or wake-up calls; there is no pressure at all. Because in the Land of Critical Mass, people do whatever they choose to do with their time, and that makes all the difference!"

"How do you get to the Land of Critical Mass?... Well there is really only one way to do it, and it begins by understanding that there are two types of money: one is assets, and the other type is earned-income."

"Assets we have defined previously as being anything that puts money in your pocket. Therefore assets are a very, very precious form of money."

"Earned-Income is a form of money that carries a certain amount of baggage with it - because earned-income requires you to give up your time, or a quantity of it - in return for earned income... But your life is not your own!"

"So it's only assets, and assets alone, that can bring you personal financial freedom - the ability to live your life the way you choose... as opposed to owing your soul to the company store."

"You build your assets by discipline in saving and by discipline in investing!"

There are three important things to do once you have achieved Critical Mass:

1. Be very careful to never lose any of your capital assets.

2. Take good care of your state of health.

3. Enjoy your money!
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"Whenever you have an investment in a specific stock or stocks, what is very important is the amount of stock risk that the individual takes in his portfolio."

"It doesn't matter which company you own because whatever the company, things can change. But if you own shares in a company where right now things are going well, and its future prospects look bright, then the only important thing to do is to stay close... Stay as close as you can to the top management of the company; as close as you can to future earnings expectations from within the company; and as close as you can to future important corporate announcements affecting the company. And if you take care of all three of these bases then you will be doing as well as you can in shepherding your investment!"

"The more money that you have invested in one stock, the more important it is to stay close to senior management, and to try and catch the trends that are going on within the company - which can gag you with respect to the best approach to take in managing that particular investment."
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"When buying bonds, you should only invest in investment-grade bonds, and of this type there are only four kinds: AAA, AA, A, and BAA. And it is important to watch the BAA type very closely, even on a day-to-day basis, because this type of investment grade bond could very easily be downgraded to BA."

"Before ever buying any bond fund, you must know the average maturity of all the bonds in that fund in order to determine the interest risk... Are the bonds in the fund long-term, intermediate-term, or short-term duration?... Long-term bonds are generally higher risk while short-term bonds are usually lower risk."

"It is also very important to know the quality of the bonds in any bond fund's portfolio."
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"The secret to investing in money market funds - since they all have a net asset value of $1.00 - is to be invested in the one that has the lowest expense ratio."

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"If your portfolio is invested almost entirely in stocks, then the only kind of bond you should be invested in is U. S. Treasury securities."

"If you don't have any stock investments in your portfolio and you are invested entirely in fixed income (bonds), then you should have 30% of your portfolio invested in International Bonds."
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"There are four major market indicators that investors should pay attention to:

1. The Economic Cycle.

2. Monetary Policy.

3. The Valuation of the Market.

4. Market Sentiment.
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"In a Runaway Inflation - go to Money Funds."

"In a Recession - go to Treasuries."
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"You should track the Consumer Price Index (CPI) like a hawk!... As long as your investments are earning interest at a rate that exceeds the CPI, you are making money!"
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"Whenever you are evaluating any company and you re considering to purchase its stock, you should consider only the OPERATING EARNINGS figure and NOT reported earnings, in making your evaluation."
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"If we ever come to a period of time when you think that we are headed for major inflation, then it would be best to be out of both stocks and bonds and go heavily into both cash and gold. Also, gold stocks and gold mutual funds would do well in a period of high inflation."
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And so this is a potpourri of comments that I picked up by listening to Bob Brinker over many years. If you have a problem with anything stated then I suggest that you call his "Money Talk" program any weekend and let him explain it in greater detail!

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NEXT MEETING: Thursday - May 19, 2005

Be sure to mark your calendar for our next meeting on Thursday, May 19th when we will have as our featured guest speaker Mr. Jerry Keaton, Vice-President of Barrington Research Associates in Chicago. This firm does intensive market research primarily for institutional investors and we thought that it would make for a very interesting presentation to hear from someone who analyzes stocks for a living as to what a professional looks for when evaluating and/or recommending any stock for purchase. The title of Mr. Keaton's talk is, "Stock Picking For Serious Investors."

The meeting begins promptly at 7:00 PM and ends at 9:00 PM. Our meeting location is DePaul University in Naperville, Illinois - located at 150 West Warrenville Road (at the intersection of Warrenville and Herrick Roads). The room number will be posted on the easel standing near the reception desk in the main lobby.

These meetings are open to anyone who shares our interest in learning more about investments as well as investing in general. And while you need not be a member of AAII in order to attend, we do have an annual membership fee of $15.00 to help defray the expenses of a group such as this. Non-members may attend any meeting for a donation of $5.00 per meeting. We do meet each and every month throughout the year,
with speakers during the Spring and Fall seasons of the year.

If you need further information then please send an e-mail to: rwm123@hotmail.com

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