What Makes An Investment A Good Investment?

In a nutshell, the lower the risk and the higher the expected return, the better the investment!

But we run into a problem whenever we try to define both the risk and the expected return, and then try to compare whatever we've come up with to other investment choices.

Yes it's difficult, but not impossible, to make an apples-to-apples comparison by simply coming up with a ratio of reward versus risk. And to get this ratio, we need to look at the performance of various indexes over a consistent period of time, and then adjust their returns for risk-free interest. (In other words, deduct the current T-Bill rate from the returns of other investments in order to express their returns in terms of risk-free interest.)

A good rule to follow is to always have a reward-to-risk ratio of at least three-to-one. Which means that if you can't make three times whatever you have at risk in a stock, then that stock just isn't worth it.

This is easy to figure out whenever you use trailing stops to protect yourself. For example, if you buy a stock priced at $100 per share using a 20% trailing stop, that means you would sell it at $80 in order to limit your risk. And further, it also means that if you are willing to risk 20% of your money on that stock, then you had better be looking for a return of 60% or more, or that stock is not worth buying!

When you take the time to compare the risk-reward ratios of different investments, you give yourself a much clearer understanding of what to expect for your money.

Thus, if you know your risk, and your potential return is favorable to you in relation to the risk you are willing to take, then you have made a good investment!

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The Chances You Take In Owning Stocks

In the great bull market of the late 1990's, the definition of risk seemed easy. It was the danger of not keeping the bulk of your capital in hot stocks that could triple in a year. Today however, there are a lot of investors who define risk as owning any such stock. Both perceptions unfortunately are symptoms of "herd mentality" and both can lead to disaster.

Among academics and analysts there is yet another formula called beta, and it's as bad as the two mentioned above. Beta is a statistical measure of so-called systemic, or market-related risk. It is not as popularly believed, strictly a measure of volatility.

One needs to question strongly what this statistic is supposed to be telling us. The theory is that high-beta stocks are riskier than low-beta ones, but reward you with better returns over the long run.

Well, the truth is that they don't deliver those returns. Eugene Fama, one of the early apostles of the efficient market theory built around statistics like beta, renounced his faith in this yardstick. In a paper he co-authored with University of Chicago colleague Kenneth French in 1992, Fama found that no correlation existed between risk and return. In Fama's words, "Beta is dead."

What else is there? Well, there is a more direct measure of volatility - namely, standard deviation of daily/weekly/monthly returns. The standard deviation will tell you whether a stock jumps around a lot, but it scarcely gets at more fundamental matters of risk such as: Is there a risk that the industry you are investing in will not exist in ten years? Is there risk that you are caught up in a speculative bubble and are paying ten times what the stock is worth? Neither beta nor volatility comes close to capturing risks like these.

If you want to assess risk, think about the big picture. Think about things like these:

A company's financial strength. Does it have a strong ability to sail through tough times? If you buy a group of pharmaceutical or tech stocks with enormous financial muscle, you will have a very small chance of losing your investment due to financial problems. Therefore, pay a lot of attention to balance sheets.

The price in relation to the fundamentals. There is always the risk of paying too much for even the soundest business. Buy stocks at or below market multiples--of price to earnings, to book value or to cash flow (in the sense of net income plus depreciation). Some value managers like these ratios to be in the lowest 20% of all stocks.

Inflation. In his book Stocks For The Long Run, Jeremy Siegel showed that stocks significantly outperformed Treasury obligations over the past 195 years. And the gains of stocks over T-bills increased enormously in the post-World War II period.

Why is that? Because inflation, which was minimal before the war, rose sharply over the next 50 years.

An investor who held T-bills, the supposedly "riskless investment," between 1946 and the century's end would have had a real pretax return of only 0.4% annually. Stocks, on the other hand, would have returned 8%. Long-tern Treasury bonds, by the way, scarcely did a better job than T-bills in keeping up with inflation.

Compounded over a working lifetime of 40 years, the spread between an 8% return and a 0.4% return is enormous--almost 19-to-1 in the purchasing power you have at the end of the period. Now think about this risk: the risk of earning too little and having to retire in penury. For young savers that's a much more consequential risk than the risk of losing money in a stock over the next year.

Back before the tech wreck occured, millions of investors had persuaded themselves that there was no risk of overpaying for a Cisco or a Yahoo because tech stocks always bounced back. Today, the same people have persuaded themselves that all equities are too risky. Both views are very wrong!

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Your Tax Information Is For Sale!

The IRS has proposed a new rule that would allow tax preparers to sell or share a client's tax-return information with third parties, as long as they get the client's consent.

Many fear that taxpayers could be rushed or duped into signing the consent form when they are signing their tax returns and related documents. They could end up losing control over financial data they wouldn't want their closest friends or family to see, much less outside marketing and database firms.

Thus if you have someone doing your tax preparation paperwork, there is tremendous opportunity for mischief!

The IRS, with a straight face, says the existing prohibitions against sharing confidential data with outside parties "restrict the ability of taxpayers to control and direct the use of their own tax return information as they see fit."

According to one analyst, "everyone thinks the IRS is the Fort Knox of taxpayer information, but anyone who knows its history knows that is not so."

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Technical Analysis: A Serious Investment Tool or A Sham?

Technical analysis is a touchy subject. When attempting to discuss what works in technical analysis (if anything), and how to use it to improve your investing success, one runs the risk of ruffling a few feathers.

Perhaps the best way to begin this topic would be to define what technical analysis really is, and here perhaps is the clearest definition I have found: Stock Market Technical Analysis, at its best, is looking at PRICE MOVEMENT ALONE in order to determine some course of action.

Now it is also important to note that there are essentially two heated sides of the subject, both with convincing arguments.

Those on the Technical analysis is a serious investment tool side argue that: Anyone who only looks at earnings but ignores emotions in the market is a fool because the market is made up of people who always bid things up beyond any reasonable value, and then sell things below any reasonable value. So ignoring market action is ridiculous.

On the Technical analysis is a sham side, the argument goes like this: The value of a company is purely determined by the fundamentals of that company's business and not by some silly wiggles on a chart. Therefore, the only reliable analysis lies in analyzing the company's business!

So both camps are firmly divided on this subject and it generally boils down to where you either believe technical analysis is useful or you don't. Speaking for myself, I believe that BOTH earnings and emotions matter, and while I place the major emphasis of any investment studies on the fundamental side, I also feel that technical analysis does have something to offer by way of price movement, trading volume, the 200-day moving average, and the beta of a stock. But charting stocks is a total waste of time. One may just as well be charting ocean froth for what good charting does!

Well then, how should an investor proceed? I believe the secret to successful investing lies in buying good values. And a stock can be termed a good value when it is cheap (meaning that it is depressed and selling below its intrinsic value). And how do we find such stocks? You find them using fundamental analysis. And you wait until the share price begins to recover in order to give yourself an added measure of safety. And you also want to be buying in an uptrend rather than a downtrend.

Investors Business Daily (IBD) ranks stocks based on fundamental indicators like earnings, and technical indicators like relative strength - which tells you how well a stock is performing relative to the market or its industry. In IBD, this is based heavily on the latest three months action. So if a stock has high relative strength, it's likely to be beginning an uptrend. Relative strength is based on the idea that the leading stocks are leaders for a good reason, and therefore are worth checking out.

One other example of useful technical analysis is the moving average of a stock's price. While a stock may fluctuate wildly over several days or weeks, looking at the movement of its average over a period of time can smooth out the fluctuations and let you grasp the underlying trend. And moving averages can also be a great way to significantly decrease your risk, and even improve your returns.

Jeremy Siegel, author of Stocks For The Long Run, actually tested the 200-day moving average rule, and he found that since 1886, using the 200-day moving average as your indicator, you would have earned 2% more (annually) than someone using a buy-and-hold strategy, and you would have done so with significantly less risk because you were only in the market about two-thirds of the time.

Finally, the more basic the technical indicator, the more valuable it can actually be. Relative strength is basic, but you can see its usefulness in spotting stocks starting to move. A moving average is also basic, and it has a nearly 120 year track record of success. But avoid the other hundreds of bizarre and complicated technical indicators out there because quite frankly, most of them contradict each other and therefore are not only quite useless, but dangerous as well!

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All About Ticker Symbols

Before you can receive a quote for a stock or a mutual fund, you must know its ticker symbol.

New York Stock Exchange

Stocks on the NYSE use 1 to 3 character ticker symbols. For example, General Motors is 'GM', AT&T is 'T', and IBM is 'IBM'. You can enter the symbol in either upper or lower case.

Most stocks traded on the NYSE are also traded on five smaller exchanges from around the country. To ensure a close-price-quote for the composite of all the exchanges, enter the symbol followed by -Y. This price may change in the hours following each exchange's close, due to processing of trades from each exchange.

To get a quote for a stock on a particular exchange, you have to add the one character code for the exchange you are interested in. For example, to get IBM on the Boston Exchange, you would enter IBM-B. Note the hyphen between the normal ticker symbol and the letter 'B'.

The codes for the five regional exchanges are as follows:

Boston: B
Chicago (Midwest): M
Cincinnati: C
Pacific: P
Philadelphia: X

To get a quote on preferred stocks, you need to add the number 1 immediately following the symbol (no space), and sometimes the letter for the preferred issue. For example, 'Bank of America Preferred F' symbol is BAC1F. Preferred stocks are usually only traded in New York, but sometimes you can append the city code and come up with a valid symbol. For example, 'CHI1.B' is the preferred stock symbol for Furrs Bishop on the Boston exchange only. CHI1 is the composite symbol.

To get a quote for the warrant you add the number '2' to the base symbol. For example, 'Berkshire Rlty Inc WT 09-08-2006 is BRI2.


American Stock Exchange

Symbols for the AMEX follow the same rules as the NYSE.


NASDAQ National Market Issues

All symbols on the NASDAQ start with a four character base. For example: Microsoft is MSFT, and Intel is INTC.

After the four character base can come an optional one character modifier. A complete listing of these codes can be found in The Wall Street Journal. Some of the more frequent codes are:

C -- exempt from NASDAQ listing qualifications for a limited period.
E -- delinquent in required filings with SEC.
P -- first preferred.
Q -- in bankruptcy proceedings.
R -- rights.
W -- warrants.
Y -- American Depository receipt (ADR)



Mutual and Money Market Funds

Mutual Funds are always five characters with the fifth character being X. For example, the Fidelity Magellan Fund's symbol is FMAGX.

Money Market Funds are always five characters with the fiurth and fifth characters being X. For example, the Vanguard Prime Money Market Fund's symbol is VMMXX.


Canadian Markets

Canadian markets are all prefaced by a one character exchange code followed by a period, then the normal symbol. The codes are V, for the Vancouver Stock Exchange; M, for he Montreal Stock Exchange; T, for the Totonto Stock Exchange; C, for the Alberta Stock Exchange; and O, for the Toronto COATS market.

All Canadian symbols are 1 to 3 characters long, except for the COATS market which are always four characters long. Many Canadian symbols have the suffix, .A or .B appended to them to designate class A or class B issues. For example: Bombadier Class B on the Toronto exchange is T.BBD.B.

Warrants have the code .WT appended to the end.

Rights have the code .RT appended to the end.

Units have the code .UN appended to the end.

The Wall Street Journal is one of the few papers that still list the symbol along with an abbreviated description. It's also a good place to look if you want to know if a particular stock has preferred or warrant issues.

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Understanding Market Volatility

Understanding the volatility and risks involved with the markets is vitally important to maintain both your investment and emotional health. Chasing performance or trying to guess tops and bottoms in share prices is emotionally unhealthy. There are common measurement indicators that can help you quickly assess the volatility of a stock or mutual fund and whether it is appropriate for your investment strategy.

Beta

Beta is a measure of a stock (or a fund's) volatility in relation to a related index, usually the S&P 500 index. For example, the S&P 500 has a beta of 1.0. Individual stocks (or funds) are ranked according to how much they deviate from the index. A stock (or fund) that swings more than the index over time has a beta above 1.0. A stock (or fund) that moves less than the index has a beta less than 1.0. On average, high-beta stocks (or funds) are more volatile, but provide a potential for higher returns; low-beta stocks (or funds) pose less risk but also provide lower returns. A stock (or fund) with a beta of 1.5 means that it is 50 percent more volatile than the index. So a 10 percent rise in the index would be expected to result in a 15 percent rise in the stock (or fund). On the reverse, a 10 percent drop in the index could mean a 15 percent drop in the stock (or fund).

Note: Be aware of the fact that beta by itself is limited and can be skewed due to factors other than the market risk affecting the stock's (or fund's) volatility.


Alpha

Alpha is the performance of a stock (or fund) that is not explained by the beta. In other words, alpha is a measure of the difference between a stock's (or fund's) actual return and its expected performance as measured by beta. A high "beta" strategy in a rising market may produce returns substantially above the benchmark, but may generate negative alpha. Alpha and beta are independent contributors to returns and should be evaluated separately. Alpha can be created in two ways, through security selection and through market selection and benchmark timing. Benchmark timing is the process of actively managing beta.


Standard Deviation

Standard deviation measures a stock's (or fund's) risk, not with the index, but with its own average performance. A stock (or fund) that has a consistent four-year return of 3 percent, would have a mean, or average, of 3 percent. The standard deviation for this stock (or fund) would then be zero because its return in any given year does not differ from its four-year mean of 3 percent. On the other hand, a stock (or fund) that in each of the last four years returned -5 percent, 17 percent, 2 percent and 30 percent will have a mean return of 11 percent. The stock (or fund) will also exhibit a high standard deviation because each year its return differs from the mean return. This stock (or fund) is therefore more risky because it fluctuates widely between negative and positive returns within a short period.

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Is There A Downside To Owning Gold?

The quick answer to this question is YES. And here are several reasons for not buying and/or owning gold.

1. There is a cost to holding gold. Not only do you have the expense of a safety deposit box for storing your gold, but you also lose the potential interest that you might have gained by having that money in other investments.

2. There is a risk in owning gold because all the crooks - both those in our government as well as the ones in the private sector - would like to get their hands on your gold!

3. The government bureaucrats will regard you as being peculiar because you are not "acting" in accordance with the script which goes like this: Buy a Treasury Bill or a share of Microsoft, and you're a fine citizen. But, buy an ounce of gold, and "there must be something wrong with you."

Some people think that the greatest risk of all in owning gold is confiscation by the government bureaucrats, and they use the events of 1933 as their evidence. But I believe this is unlikely since gold is not circulating monetarily in our economy, plus the fact that those who own gold are thought of as wackos!

But for the record, let's examine just what did happen back in 1933. It was on April 6th, 1933 that then President Franklin Roosevelt demonitized the $20 gold piece, thus making it appear to no longer be money. And the average "Joe sixpack" was told that since the $20 gold piece was no longer considered money, he should therefore bring it in to his local bank and he would receive a $20 bill for it.

In short, this amounted to GRAND THEFT on the part of our government!

Then in January of 1934, they passed the Gold Reserve Act which changed the value of an ounce of gold from $20.67 to $35... Thus, "somebody" nearly doubled their money overnight!... Any guesses as to WHO that might have been?

It is interesting to note that back before this GRAND THEFT took place, a million dollars would have purchased 50,000 $20 gold coins. And one can only wonder as to how many coins were "legally purchased" and then sent abroad to Swiss banks - because today, some 73 years later, these U.S. gold coins are still available from European banks!

It is doubtful that any American citizen was ever prosecuted for not turning in their gold coins, but most poor schnook citizens at the time DID turn in what few gold coins they possessed just because they were told to do so by the government bureaucrats.

What most people do not understand about gold is the fact that gold is synonymous with freedom, and the politicians we have today are not interested in expanding the freedom of their vassals, i.e., you and me.

Oh, one final point... I should also mention the fact that there is a greater danger to be faced if you DON'T own any gold. It is the reality that NOBODY who buys gold has ever ended up in the Poor House!

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On Things Financial

The April, 2006 edition of The Bob Livingston Letter is now out and I find this publication quite interesting as it makes some rather thought-provoking comments concerning both health and wealth. On the wealth front, it alleges that we are now faced with two crises:

First Crisis: A New Iranian Oil Bourse in Euros. This means, if successful, that an oil bourse priced in Euros would allow all oil producers and all oil buyers to buy and sell in Euros without using the dollar. This translates to a very significant reduction in the importance of the dollar as an international reserve currency. This could bring on huge selling of the U.S. dollar and a collapse of the dollar on the currency markets against the Euro. The Iranian oil bourse was scheduled to open at the end of March, 2006.

Second Crisis: End of publication (by the Federal Reserve) of the M3 macro-economic numbers on March 23, 2006. Ceasing publication of the M3 monetary aggregates can only mean far less transparency on money in circulation and a blackout on the amount of new money being created.

Money printing is speeding up, so to keep the world from knowing how much, the Federal Reserve will just remove the indicator. One can only imagine the amount of new monkey money.

Printing press money is fertile ground for expanding world crisis. Crisis is excellent cover for national and international chicanery, and boy, do we have it!

We see bad inflation in the immediate future, but please keep in mind that inflation always leads to depression. The end of it all will be an inflationary collapse of the paper money factory with the high probability of a deflationary collapse in some sectors such as real estate and municipal bonds, in the very midst of hyperinflation.

Sooner or later as inflation skyrockets along with gold, we can expect physical coercion to impose a politicized fiat (paper) money on unwilling citizens. Whoever owns the paper money factory controls the system.

Paper money economies always crash in the end and their currencies end up worthless. At some point there will be a panic. Many will realize that the debt pyramid is collapsing. We see it beginning now. Most who see what's happening will not act. The herd instinct suggests that only a few will bail out in time; but the majority will act in panic, too late.

In hyperinflation there is actually a shortage of paper money. The paper money production cannot keep up with the prices. Now that we have electronic money, prices and inflation can go higher than the mind can imagine. The Fed is manipulating the Consumer Price Index and stopped (on March 23, 2006) publishing the money supply figures. Things are in place for huge inflation now. They think the people won't know if they just kill the indicators. This is really a phantasy world. Since the money creators own the mass media, it seems that they can make the people believe anything, more fiction than fact.

Be assured of one fact here: The official position against gold is smoke as far as the insiders are concerned. Those who are not brainwashed by their own propaganda are accumulating gold as fast as they can. They know to exchange their paper money for gold while gold is cheap and paper is evaporating.

No one knows how long confidence in the system will last. It could be a very short time in months or it could be several years.

It all depends on how long the money creators can manipulate the public mind to believe what they want the public to believe. Everyone should be prepared for financial crisis and the social breakdown that goes with it. It's like a fire extinguisher; you have to have it before the fire.


NOTE: this was quoted by permission of The Bob Livingston Letter, P.O. Box 3623, Hueytown, AL 35023. It is published monthly, 12 issues @$65.00 per year.

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Sell In May And Go Away?

That's an old Wall Street saying, and it's based on the tendency for the stock market to lag from May through September and then move higher from October through April.

The Ned Davis Research Group reports that the S&P 500 averaged an 8.4% gain during October - April dating back to 1942, while the market posted a less than 1% gain from May to September during the same time frame.

While it is always a temptation to play such seasonal tendencies in the market, common sense dictates that it is better to base decisions on market fundamentals rather than on what happened in the past. (Technicians, please take note!)

When the month of May arrives in a few weeks, whatever you do, don't assume by virtue of what was stated above that you should begin dumping stocks. Always remember that the market doesn't own a calendar. Instead, the market reacts to a variety of stimuli - not the least of which is corporate profitability.

So if you believe that corporate profits will continue to improve beyond the first quarter, then now is not the time to be selling stock and hibernating until October!

How To Break Up With Your Broker

Why stick with a brokerage firm that ignores you or isn't otherwise meeting your investment needs? An automated account transfer process makes switching firms easier than you might think.

Once you decide which firm you want to move to, the new broker - the "receiving firm" - will send you a form from the Automated Customer Account Transfer Service, a system run by the National Securities Clearing Corp. that all NYSE and NASD member firms are required to use. The form asks for details about the brokerage account you're planning to move. Once you have completed the form and sent it back to the receiving firm, the new broker will open an account in your name and send a request to your current brokerage - the "carrying firm" - to transfer the account.

The carrying firm has three business days to approve the transfer, according to the ACATS system. The carrying firm should rubber stamp the transfer unless your account is in arrears or it discovers an error in the paperwork. Once the carrying firm approves, the receiving firm has one day to review the transaction, making sure it meets in-house standards.

Some brokerages won't accept non-stock securities, such as commodities or options. And if your account carries outstanding fees or balances, the receiving firm will likely reject the transaction.

Providing your account passes the receiving firm's final review, the assets are automatically transferred after two days. You may be charged a transfer fee of as much as $75 (by the holding firm); the receiving firm may also charge a like fee.

Proprietary funds offered exclusively by a particular brokerage cannot be transferred. If you have Merrill Lynch or Prudential mutual funds, you'll have to keep them at those respective firms. There's no way around that, short of cashing them in. That could have both investment and tax complications, so don't sell just for convenience sake.

Closing your account is even easier than transferring it. Just call your broker and say you want to do so. Your broker will sell the stocks and cut you a check, or else send out stock certificates if you request them. For a fee of around $50 per certificate, of course.

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A Quiz For Capitalists

This appeared in the April 3, 2006 edition of Fortune magazine and I found it of interest.


1. The median stock ownership of U.S. households is (a) $78,700, (b) $24,300, or (c) 0.

Answer: For all the hoopla over the democratization of the stock market, the latest (2004) Federal Reserve data show that just 48.6% of U.S. households own stock, meaning the median ownership is zero. (The median holding for households that do own stock is only $24,300.) What's more, two-thirds of stock market wealth is held by 5% of the population.


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Four Simple Words Are The Key To Wealth

"Buy low, sell high."

Sounds simple, doesn't it? Everyone knows that buying low and selling high is how you make money as an investor. Yet somehow, everyone isn't rich!

HOW IS THAT?

Investments like stocks, bonds and gold are the only items that people will never buy when they're 50% off from their highs. Yet clothes, cars, and appliances, we buy on sale.

We'll comb the newspapers looking for bargains and coupons. We'll even drive to three stores in order to get the best price on a mattress. We'll read Consumer Reports and visit four dealerships to get the best deal on a car.

But whenever it comes to investments, the "retail" investor is more willing to buy when things are expensive than when things are on sale. And the average investor pays full price, retail, and gets killed. The "smart money" loves these little guys who pour in at the top!

So the "Road to Riches" as an investor is to patiently search out a bargain and once you've found it and made an investment (buy low), then you just sit back and wait for the crowds to come in and drive it up (so you can sell high)!

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NEXT MEETING: Thursday - April 20, 2006

This month we welcome as guest speaker, Mr. Jim Baka - Senior Vice-President and Director of Investment Management Services for Calamos Investments. His topic: "The Importance of Risk Management in Investing."

If there is any time remaining following his talk, we'll devote it to discussing our phantom portfolio.


We meet at DePaul University, located at 150 West Warrenville Road in Naperville, Illinois. The meeting begins at 7:00 PM and ends at 9:00 PM. The room number for this meeting will be posted on the easel standing near the reception desk in the main lobby.

Membership is $15.00 per year to cover twelve (12) monthly meetings. And non-members are welcome to attend any meeting for a $5.00 donation.

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Following The Actions of Professional Traders

You can really increase your success in the investment game by following Wall Street's savviest traders. They have an unwritten code which more often than not turns out to be quite accurate. Here are some of their suggestions:

1. If the market has already risen for five or six weeks, it is then almost always too late to make new purchases with safety - the one possible exception to this being the first month of a fresh new bull market.

2. The last trading day of each month, and the first four trading days of the subsequent month are the strongest short-term market periods. And days before holidays often also show good market strength as well.

3. Count the weeks from one significant market bottom to another, and from one significant market top to another. Strong market advances often start at intervals of from 20 to 26 weeks. And severe declines often start at the same intervals.

4. Before buying preferred stocks of blue chip companies, investors should consider that the same company's bonds may yield 1/4% to 1/2% more. This is amazing, especially since the bonds are safer, and the commissions on bonds are lower too!

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Whose Sitting In Cash Right Now?

Warren Buffett...that's who!... Mr. Buffett released his Annual Report several weeks ago, and it shows that he is sitting on $45 billion dollars in cash, which is up by $2 billion from last year.

With about $135 billion available for investing, Mr. Buffett has determined that the best use for one-third of that money is to simply leave it sitting in the bank earning interest.

Why hasn't he invested the money? Because, in short, according to Buffett himself, there are no good buys out there at this time.

In last year's annual report, Buffett said: "We don't enjoy sitting on $43 billion of cash...Instead, we yearn to buy more [investments]...however, only when purchases can be made at prices that offer us the prospect of a reasonable return on our investment."

So Buffett basically is saying, invest money only when you can make a good return on that money. And when there's no money to be made, then don't invest!

Most people have been conditioned by financial planners, publications like Money magazine, CNBC, or their friends that "you've got to be fully invested at all times", which is pure rubbish because it is BAD advice!... Of course the financial planners want you to be fully invested - so they can keep earning fees from you while you keep your money with them.

But staying fully invested is complete nonsense. Warren Buffett is the world's second richest man. He got there through investing. And he has $45 billion in cash. If cash is good enough for the world's most successful investor, then it should be good enough for you and me.

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A Little Investment Horse Sense

All the information in the world might not make an investor any richer. In fact, it may make one poorer. The notion is contrary to the prevailing wisdom that markets won't be fully democratized until all investors have equal access to timely and reliable information. But study after study shows that investors don't always behave rationally about money, or act in their own best interests, especially when they think they know what they're doing.

A study of horse-race handicappers, done in the late 1970s, seems particularly relevant for stock investors today. The University of Oregon did a study in which 17 handicappers were asked to predict the outcome of races already won. Information about the horses was doled out incrementally, each time asking the handicappers to predict the winner and to note their confidence in the predictions. This study found that as the amount of information increased, confidence also increased, but the accuracy of the predictions did not.

The difficulty, according to the University, lies in integrating many pieces of information garnered from more than 11,000 personal finance Web sites - all competing for the investors' attention. The more there are, the more material you have for a meaningful picture - and the more pieces of information that only look as if they belong to the investment puzzle. The message derived from this study shows that when it comes to investing, feelings of confidence are not trustworthy.

And yet another academic study shows clearly that confident investors trust themselves to make important decisions, such as how to allocate assets, or what, and how often, to trade. The Graduate School of Management at the University of California - Davis, has studied tens of thousands of discount-brokerage accounts, gleaning two simple truths: First, overconfident investors trade excessively, and, second, frequent trading is not a profitable strategy.

Proof that traders are overly confident comes from the surprising fact that on average, the stocks that they purchased actually underperformed the stocks that they sold to buy them. Needless to say, the gains that they thought they would realize through trading did not even cover the costs of the trade. Analysis of some 60,000 accounts found that the traders who were most active netted an average return of just 9.6% annually, compared with 15.3 percent for the average discount-brokerage investor and 17.1 percent for the market benchmark.

A study by academics who specialize in the fairly new field of behavioral finance, found that mutual fund investors also were overly optimistic and overconfident. Their portfolios reflected as much. The researchers surveyed 1,053 subscribers to the Mutual Fund Web site Morningstar.Net and found that 39 percent of investors spent much more time thinking about the potential for positive returns than they spent considering possible losses; only 3 percent did the reverse. One third thought stocks would always outperform bonds over the long term. Those investors put 84 percent of their retirement savings into stocks. While history shows that stocks do outperform bonds much of the time, they certainly don't do so all the time.

Overconfidence, not the lack of data, is the biggest danger faced by all investors. And how is it that investors become overconfident in the first place? By enjoying successes early on, and by taking too much credit for them, instead of giving luck and the bull market their due!

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National Savings Month

April has been designated as National Savings Month, and it is so proclaimed in order to focus public awareness on the need to develop good financial habits.

This brings to mind the fact that it was some fifty (50) years ago that the late Earl Nightingale authored an important talk entitled, The Strangest Secret. In this talk, he outlined the fact that if you were to pick 100 persons at random at the age of 25 and follow them to age 65, here is what you would find:

1 will be rich
4 will be financially independent
5 will still be working
54 will be broke
(The others will have passed away)

Now these are amazing figures when you consider the fact that we are living in the richest country that has ever existed on the face of this earth!

But even more astounding is the fact that in the fifty-or-so years since that talk by Mr. Nightingale, we don't seem to have learned very much about the handling of money - as witnessed by this piece that was taken from Paul Harvey's News & Comment program on ABC Radio.

"Since the invention of credit cards, Americans have lived on borrowed money. Advertisers promote spending, and money lenders make it possible to where today, in an age of incredible wealth and prosperity, half of all American families have less than $1,000 in net conventional savings and investments. And for any rainy day, [most of] the rest of us have nothing!"

Hopefully, the members of AAII will prove to be the exceptions to what was stated above!

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