A little rain must fall …

triffids1We left Chicago just before Christmas … it was one of the coldest winters that most could remember, certainly the coldest that I have experienced. The last day of school was canceled due to the cold, so my children didn’t even get a chance to say a final goodbye to their friends.

When we packed the house, we moved into a hotel down the road for a week – for the life of me, I don’t understand why suburban-Chicago hotels don’t have underground parking lots:

In the morning, ice built up on the inside of the windshield …

… I remember, when the temperature ‘warmed up’ for a day or so back to mere freezing (circa 32 degrees) that it felt quite comfortable: no heavy coats, hats or gloves required.

When living inside a refrigerator feels ‘comfortable’ you just know that something’s screwy with the weather!

So, we arrived in Melbourne on Christmas Day to one of the hottest summers on record. Our children’s first day of school was also canceled just a few weeks later, as the hot spell continued, due to the extremely hot weather … that’s the definition of ‘irony’.

And, I got around to contemplating the various ways to water the garden in our rental house, as Melbourne has been plagued by a drought with strict water restrictions:

The house has a rainwater tank – it fills up from rainwater that lands on the roof and is funneled via the gutters – with a fancy automatic pump that starts up as soon as you squeeze the spray-fixture attached to the hose … I used up the whole tank in just one watering of the garden and it hasn’t refilled itself since (well, it is finally full again now). Needless to say, I wasted my time … without another watering, the garden looked as bad as before.

Then, I noticed that I didn’t really need to water the back garden and most of the grass, because there is a very efficient ‘water dripping system’ in the back (but, not in the front of the house … that part of the garden that now looks, well, dead) that just drips the smallest amounts of water under a timer that is only allowed to run 2 hours twice a week … that seems just enough to keep the plants and much of the grass alive.

Finally – and, this is what filled the water tanks – it rained!

In fact, we had a whole series of rainy days (surprising, since it’s summer) that finally put out all of those horrible bush-fires that you may have heard about …

… not only did it douse the fires, but the whole garden has sprung up, and in the space of just a week or so even the weeds look like something from The Day Of The Triffids … seriously!

So, what I learned it that there are two ways to water your garden that work and one that doesn’t:

– You can drip, drip, drip feed your lawn water in the most efficient way, or

– You can water more deeply, less often, but it must be done a number of times, but

– BUT, you cannot simply dump your entire water supply on the garden once and expect miracles.

And, this story actually has something to do with money …

… you see, I think that there’s only two ways to make keep your ‘financial garden’ healthy, and at least one way to guarantee failure:

1. You can follow the Making Money 101 steps of drip, drip, dripping money into your savings account – being very careful not to soak up too much with excess spending – and gradually find your veggie patch bearing small fruit; enough to live on, if you have spartan needs,

or

2. You can regularly ‘deep soak’ your financial future by large – but, not too large (such that you are left with nothing in reserve) – and regular applications of finances into various Making Money 201 ‘income acceleration techniques – such as small businesses and/or ‘buy/hold, income-producing’ investments – some of which may actually take root and bear an abundance of fruit on their own,

but

3. You must not be foolish enough dump all of your financial resources into the One Big Thing [Insert Speculation of Choice: Lottery; Business Deal; Sports Contract; Stock Market Holding; etc.; etc.] and hope that it solves all of your financial problems in one fell swoop …

… it rarely does, and it’s no fun going back to ‘drip, drip, drip’ once you have tried and failed ūüôĀ

Don't let all of those stock investment choices fool you …

People new to the world of finance are often blinded by all the options available for investing in the stock market:

– Direct investments in stocks – but which ones? Growth? Value? Invest far and wide? Or only in a few?

– Trading stocks or options – how to value and trade? Fundamental Analysis? Technical Analysis?

– Investing in packaged products – Mutual Funds? Index funds? ETF’s? REIT’s?

I wrote a post recently that summarized these options; here I simply want to add a little more info …

Investopedia Says:
The building of a factory used to produce goods and the investment one makes by going to college or university are both examples of investments in the economic sense
.

This means that the true definition of an investment is something that makes a little money now, or more likely a lot of money in the future.

Therefore, while I say that there are three sensible ways to invest in stocks, there are only two investment methods recommended by Warren Buffet:

1. Buy and Hold low cost, diverse Index Funds (check out Vanguard‘s web-site, and others) – this is a long-term, low risk (if your holding periods are 20 – 30 years) strategy that can help you fund a normal retirement.

“By periodically investing in an index fund, for example, the know-nothing investor can actually out-perform most investment professionals‚ÄĚ W. E. Buffett – 19932.

2. Invest in a FEW stocks in companies that are (a) undervalued (b) have a large margin of safety (c) that you love and (d) are prepared to HOLD until the rest of the market decides that they love them, too (at which point you can cash out or keep holding for the long/er term). I never attempt to make money on the stock market … Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.‚ÄĚ W. E. Buffett

Anything else is SPECULATING i.e. the process of selecting investments with higher risk in order to profit from an anticipated price movement.
Investopedia Says:
Speculation should not be considered purely a form of gambling, as speculators do make informed decisions before choosing to acquire the additional risks. Additionally, speculation cannot be categorized as a traditional investment because the acquired risk is higher than average
.
Lots of people have made a ton in trading stocks and options (e.g. George Soros, but he was smart enough to know to quit gambling when you are ahead) – the key is to be able to make informed decisions …… my question to you is, how informed are youif you are merely following the herd, reading the popular press, drawing trends on a graph¬† using the same trends that millions of other investors are looking at, doing a rudimentary analysis of the same sets of financials that every analysts worth his salt is poring over?

In short, what is the ‘special sauce’ that you are applying that will let you buck the trend and speculate successfully, like George Soros?
¬†A public-opinion poll is no substitute for thought … let blockheads read what blockheads wrote.” W. E. Buffett
And, buying most high-cost Mutual Funds or other packaged products is not investing either …
“We believe that according the name ‘investors’ to [people or] institutions that trade actively is like calling someone who repeatedly engages in one-night stands a ‘romantic.’ “ W. E. Buffett

So, take Warren’s advice: unless you have a strong reason to do otherwise, stick to one – or both – of the only two ways of investing in stocks and, over the long-term you are very likely to outperform all but the luckiest of those speculators out there …

What is the best way for a newcomer to get started in investing in stocks?

I just got back from Omaha, where I attended the Annual General Meeting for Berkshire Hathaway – Warren Buffett’s company – so, it’s timely that¬†I remind you¬†there are only¬†a¬†TWO¬†sensible ways to INVEST in stocks – BOTH recommended by Warren Buffet¬† – plus one Speculative way:

1. Buy and Hold low cost, diverse Index Funds (check out Vanguard’s web-site, and others) – this is a long-term, low risk (if your holding periods are 30 years) strategy that can help you fund a normal retirement.

2. Invest in a FEW stocks in companies that are:

(a) undervalued,

 (b) have a large margin of safety,

(c) that you love, and

(d) are prepared to HOLD …

… until the rest of the market decides that they love them, too, at which point you¬†cash out and go back to (a).

Anything else is SPECULATING – lots of people have made a ton in trading stocks and options (e.g. George Soros, but he was smart enough to know to quit gambling when you are ahead) – or UNDERACHIEVING such as following the herd and/or buying high-cost Mutual Funds.

You may be one of the few that can succeed in either of these alternative methods … but, please don’t offend the World’s Greatest Investor by calling it INVESTING …

We believe that according the name ‘investors’ to [people or] institutions that trade actively is like calling someone who repeatedly engages in one-night stands a ‘romantic.’ [Warren Buffett]

So, there are only two methods that Warren Buffet would recommend (and one that he clearly would not) Рone for the wise and the other for the even wiser Рwhich one would you choose?

_______________________________________________________________________________________________

Casting Call

 

Well, the ‘news’ of my 7 Millionaires … In Training! ‘experiment’ is finally out … check out my friend, Bill’s post on Money Hacks, then click here to find out more …

The ONLY three ways to invest in stocks … and, some ways NOT to …

So you want to invest in stocks?

And, why not be a bit of a contrarian by getting in now …¬†when the markets are all beat up, and there is doom and gloom around, that’s¬†when most of the money in this world is made …¬†so, if you do want to invest, how?

Well I covered a bit about this subject in a recent post, comparing Index Funds to ETF’s … but, I want to go into it just a little bit deeper:

First of all you need to understand what type of investor you are:

1. Are you a Speculator – living on the edge, trading stocks/options (i.e. gambling) type? Nothing wrong with that –¬†you could be the next George Soros.

If you are, then sign up for some newsletters and courses, such as the Tycoon Report (has the added advantage of being free!)

2. Or, are you a Value Investor – buying cheap, holding for the long term type? Are you the next Warren Buffet?¬†Obviously, nothing wrong with being the world’s richest man, either.

If you are the next WB, then buy yourself a copy of Rule # 1 Investing by Phil Town. It will tell you exactly HOW to value stocks (what measures to use) and WHEN to invest (what indicators to use).

3. If you don’t have the patience for the latter (2.), or the stomach for the former (1.), then buy yourself some units in a low cost Index Fund … keep buying … and, wait!

That’s it in a nutshell …

… but, wait you say … what about:

4. Mutual Funds – too expensive and 85% of fund managers don’t even beat the market

5. Growth Stocks – if you have no special skill or knowledge, what makes you think that you can beat the Fund managers in 4.? You can’t (unless, you are lucky … then you are really just back at 1.).

Did I miss anything?

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When is investing gambling?

I was browsing a new finance forum the other day and came across a great question from a self-confessed ‘beginner investor’.

He asked:

“Where can I learn how to trade with a few thou for the short term (<3mo) with greater than 20% return. I’ve never invested anything. I know that long term investing seems much easier from what i’ve read ie. value investing with stock screens, but what is another good strategy? I am looking for a strategy, teacher, website, anything to start learning, but with a goal of putting money in the market. I’m not interested in funds or managers.”

That, my friends, is called ‘gambling’ not ‘investing’!

You see, when evaluating ANY so-called ‘investment strategy’ you have to consider the return that you can make against ‘market norms’ …

… which is a very simple way of saying “if I can do it … and I don’t have any SPECIAL INSIDER KNOWLEDGE that makes me SPECIAL … then why isn’t EVERYBODY doing it?”

The answer is, of course, is: it’s simply NOT possible … otherwise EVERYBODY would be doing it, already!

… unless you get extremely lucky (which is why what you want to achieve is called ‘speculating = gambling’).

A friend and I had a similar conversation the other day …

He is becoming a professional speaker and consultant; he has already made a great start by writing and self-publishing a book and already has some paid speaking engagements.

BUT, his target is to earn $200k next year … just from speaking/consulting, as a near-beginner!

So I asked him:¬†“How many corporate executives, with expertise in¬†your specific area [customer service] earn anything close to¬†your $200k target right now?”

He said:¬†“Not many … that’s a BIG corporate salary …”

Next, I¬†asked him: “How many of them could write and speak about customer service?”

He answered: “Probably¬†a lot more¬†than you’d expect, especially¬†if¬†they knew that¬†was¬†$200k on the line …”

“Exactly!” I said, almost jumping out of my chair: “So, why would any of them work for somebody else,¬†if they could simply write a book¬†then earn $200k …¬†with the added benefit of lots of travel, flexible hours, and no boss?”

“Hmmmm” he said, his brain obviously (finally) ticking over: “They wouldn’t!”

Which was exactly the point that I was trying to get across:

It¬†simply CAN’T be DONE, by the average person … otherwise, they would all be doing it!

Of course, there are PLENTY of speakers and consultants earning $200k or way more – as there are plenty of people in all areas of ‘investment’ (stocks, options, currencies, futures, real-estate, business, etc, etc) earning outstanding returns even in a crappy market –¬†but …

… they generally have SPECIAL INSIDER KNOWLEDGE that makes¬†them SPECIAL … or, they work MUCH harder than anybody else and/or¬†they get extremely LUCKY …

So, what would you tell our ‘Beginner Investor’?

I would say, when evaluating any opportunity or even your own investing goals and strategy consider:

1. Are you investing – in which case, you should expect ‘normal’ rates of return over the long haul, or

2. Are you really gambling – in which case, the sky¬†is the limit … but, the ground could equally rush up to meet you …

depending upon how lucky you get.

BOTH have a place in your journey towards $7million in 7 years (or whatever target you set for yourself) ¬†… it’s how I did it …

 

But, always be very clear on when and why you are investing and when and why you are gambling.

 

I’d like to hear your views …