How I learned to farm out the grunt work
The Early Years
After I graduated college, I got a job and started earning money. With a few dollars to spare, I figured I should invest somewhere and become a millionaire. The stock market looked like an easy way to get there, so I opened an account with a stockbroker.
Pretty soon, my broker called with a tip. I jumped on it. It never panned out into anything special. I soon came to my senses and realized that if my broker ever really got a hot tip, I wouldn’t be the first one he called. After all, he had clients that had a lot more money to invest than I did. And if my broker got a hot tip, how many other brokers got the same tip. I quickly stopped believing that my broker cared more about me than his other customers and that he had a pipeline to information that no one else had.
Then came the fling with the commodity markets. How will today’s weather in Outer Mongolia affect the corn crop in Iowa in ten weeks? Will the Saudi women’s demand for gold trinkets decrease as the world eases its dependence on oil? How will this affect the price of gold? These and many other monumental questions sucked up big gobs of my time for months. The net result of all my studying and hard work was . . . wait for it. I lost about $5,000.
On to penny stocks. How can you lose? Buy stocks for a penny a share; one of them is bound to be worth a fortune when, like Amazon, it shoots up and sells for hundreds of dollars a share. I can tell you how to lose money with penny stocks, but I sure can’t tell you how to make money with them. I bought five or six penny stocks. Examples of my return on investment: one had its registration revoked by the Securities and Exchange Commission, another sells for ½¢ per share. You get the picture.
An adage is defined as a general truth. Old adages should be of help in beating the stock market. If they are widely promoted, they must have stood the test of time. I discovered “buy low and sell high” and its corollary “sell high and buy low.” I tried them both and ran into trouble determining exactly where low was and exactly where high was.
Onto “sell in May and go away.” I realized that a year has twelve months and I wasn’t comfortable sitting for eleven months doing nothing. Also this adage said nothing about when to buy.
Here’s a good one — diversify. “Don’t put all your eggs in one basket.” I thought that was good advice until I came across one pundit who proclaimed, “Put all your eggs in one basket; and watch the basket very carefully.”
One old adage which I believe works wonderfully outlines how to make a small fortune on the stock market — start with a big fortune. This one makes sense.
Do-it-yourself investment analysis
Maybe, I thought, the answer to successful investing is hiding in the library. I started with Benjamin Graham’s The Intelligent Investor (written along with David Dodd in 1949). I was a little nervous about taking advice from a guy who lost everything in the 1929 stock market crash, but that was before he developed his investment strategy. It was called value investing. Basically, try to buy $1.00 worth of value for 50¢. What could be wrong with that? A lot. Trying to sift through thousands of companies and analyze them for current and potential value is a job for a staff of hundreds.
Some truths and things that worked out
Don’t shed any tears for me. Financially, I’m well off and comfortable. It took some planning and some common sense.
Step one. I got excellent advice from a good friend. I put 5% of my paycheck into a retirement fund. This was the most important step. My employer not only took the money out of my paycheck before I could spend it but also he generously matched it dollar for dollar. The miracle of compounding took place, and I retired with a six-figure lump sum and a monthly pension check.
I made the decision when I was working not to die a millionaire. I wouldn’t be comfortable denying myself all the good things in life just to have a fortune when I retired. I wanted to enjoy life while I was young and healthy and able to take trips and see the world, as opposed to having a fortune in the bank as I deteriorated in a nursing home staring at my walker. Furthermore, old age is a privilege that not everyone gets.
Another truth dawned on me at this time. There were a lot of people who spent (at least) 40 hours a week studying and analyzing the stock market. They also had years of experience doing it, it was their full-time job. How could I hope to compete with them? The answer was, I couldn’t.
Step two. I decided to leave investment analysis to the professionals. I hired the 40-hour-a-week wonks to work for me.
I took a look at newsletters that promised a hot stock every week. Being very jaded, I thought: how can they come up with a good stock EVERY week? Maybe there would be two or three or even zero one weeks, wouldn’t there? I also wasn’t comfortable hitting the occasional home run while striking out four times.
Mutual funds caught my eye. I revisited diversification and found that it made sense. With mutual funds, I would get instant diversification and professional analysis. But which fund(s)? I stumbled onto newsletters that analyze and report on the performance of investment newsletters. Careful review allowed me to choose a newsletter that had a great past performance and recommended which mutual funds to buy. I bought the service (for less than $200 a year), and it’s come through for me big time.
Now I have time to do things I enjoy. I don’t watch the stock market. My employees are doing that for me. And doing quite well, thank you.