Tuesday, March 9, 2004
"At current market values, canned goods in a basement would offer better returns than the U.S. stock market."
~Paul Krugman, quoted in the recent book Valuing Wall Street
"Steve, you probably get asked this all the time, but..."
Let me stop you right there. If you want to learn how to invest in stocks, before you go any further, you must understand two key principles... These principles are not openly talked about by the financial community, but you absolutely must know them before you invest a dime.
- It is not easy to make money in stocks... in fact, it is extremely difficult.
- Right now may just be the worst time to buy stocks in a very long time.
I was reminded of these two things as I read two books over the weekend. One of the books was a current book... the other was published 100 years ago in 1904, but the lessons could have been written yesterday. Let's take a look at the important lessons from these two books...
Learn How To Invest? The Lesson: It's Extremely Difficult To Make Money In Stocks
Wall Street Speculation - Its Tricks and Its Tragedies was first published in 1904. But many of the words that author Franklin Keyes spoke are true today. So true that it's better to let him deliver the message than me. Please, read Keyes' words closely. His words were the truth 100 years ago, and they are the truth today...
"The general public seldom have any opportunity to become familiar with the inside workings of Wall Street speculation as it really is, except through an expensive personal experience. But by the time most people have learned enough through personal experience to make money in Wall Street, their experience is all the capital that they have left, and this alone makes rather a light margin with which to operate in stocks."
"[Making money in stocks appears to be as easy as] rolling off a log. The stocks can only go two ways, either up or down - all that you have to do is buy when they are low and sell when they are high. But after the novice has tried it a while... he is forced to conclude that there is no more difficult way to make money, and no easier or surer way to lose it."
"Wall Street is dominated by some of the brainiest and shrewdest men in the country. And before the average man can get the better of them, except through the merest chance, he will have to eat brain food for a long time."
"Perhaps you say, "It seems to me that the public would come to realize what dangers beset them in Wall Street and consequently keep out. And that the withdrawal of the public would cut off Wall Street's source of revenue and thus spoil this fine sport..." But no, this does not seem to be the conclusion drawn by the inexperienced..."
"Wall Street is an institution that has been running a long time now and there are plenty of victims, coming on all the while. They see others go to ruin there... yet they think that they can beat the game... Wall Street insiders do not worry themselves over a scarcity of "lambs." They go on the old theory that a "sucker" is born every minute. And consequently, there will always be an inexhaustible supply..."
What was true in 1904 is true today. The financial community would have you load up on stocks right now, whether you're a seasoned trader or want to learn how to invest. Of course, nobody knows the future - in hindsight, this may actually turn out to be the right advice. But famed analyst Andrew Smithers, author of the recent book Valuing Wall Street, thinks stocks will lose money over the next seven years, when you adjust for inflation...
Right Now May Just Be The Worst Time To Buy Stocks In Generations
Smithers pulls no punches. I'll let him speak for himself, from his book...
"Sell stocks. By far the most important thing you can do with your money is get out of stocks. What you do with it then is a second order problem. We think you can do better than canned goods [see the quote at the top of this e-letter]. But canned goods would indeed be a very much better bet than the U.S. stock market."
"There are really two options open to you if you want to preserve your wealth, and earn a reasonable return. You can hold alternative financial assets, such as bonds or bank deposits. Or you can invest in real assets, which for the most part means real estate."
"In following this policy, you will not get dramatic returns, but you will avoid dramatic losses. This is just a strategy for surviving during [the present moment]. It is clearly not a viable longer-term strategy.
"In the end, if you are a long-term investor, wanting to get reasonable returns, you are going to move back into stocks. Ideally, you will do so in what will still appear to be [very bad times]. Stocks will appear to be a dreadful prospect and will be deeply unfashionable. But if you are a [smart] investor, you will be in a position to know that this is exactly the time to buy stocks again."
There you have it--a practical lesson for those of you who want to learn how to invest. It is extremely difficult to make money in stocks, and the next few years may be the most difficult time in generations.
A sobering lesson for today. But hopefully one that will prevent you from going head over heels for stocks... only to see dramatic losses.
Good investing,
Steve
