Happy Earth Day

The original Earth Day was held in 1970 and this year marks the 40th anniversary.  The origins of Earth Day date back to 1969, when the Cuyahoga River in Ohio caught on fire.  This was a source of embarrassment for Ohio and for the entire United States.   So, Earth Day was born and it is now the largest non-religious holiday in the world.  And, environmental legislation was passed to clean up many of the most polluted sites in the country.  We’ve come a long way.

Personally, I’m not convinced of the coming cataclysm from manmade pollutants.  Climate Change, which is often called Global Warming in the summer, is an emotional subject, based on some curious scientific models.  I got a big kick out of watching the Day After Tomorrow movie, which is about as realistic as the 2012 and Y2K movies.

However, I am a huge fan of clean air, clean water and a reduction of pollution of all types.  I see no good reason to poison our world, just to make a few greedy people rich.  There are much better alternatives for energy and transportation.  I was born in one of the smoggiest places in the nation. And, I have seen the incredible changes just from switching to unleaded gas and catalytic converters.  When we finally stop burning things to produce energy, we will be living in a beautiful future.  Now, is the time to start.

Technologies to Watch

Electric Cars - This is the year electric cars become a reality.  Nissan started accepting $99 reservations for the Leaf on Tuesday and they had to extend the deadline by four hours, so everyone could get their orders in.  The Leaf costs around $32,000 ($25,000 or less, after incentives), so it is affordable for the masses.  Next year, Ford is expected to release an electric version of the Focus, which should also be affordable.  There are a number of key reasons I think electric cars will succeed, despite their cost and range limitations.  They are simpler than gasoline powered cars and at some point they will be cheaper to produce.  Plus, they are much cheaper to operate and maintain.  As battery technology improves and oil prices rise, they will be hard to resist.

DME -Dimethyl Ether is a clear gas that can be used as a fuel in modified diesel engines.  There are three important reasons why DME could be the way of the future.  1) It costs about half as much as diesel fuel.  2) It burns clean and is low on NOx, soot and CO2.  3) It can be made from many abundant sources, including natural gas, gasified coal, organic waste and biomass. So, instead of burning our food for energy, we could burn DME.   The down-side of DME is that trucks and fueling infrastructure would have to be modified.  But, the upside is that our economy won’t grind to a halt when peak oil arrives and the cost of diesel fuel skyrockets.  The military is also evaluating DME.

Self-Generation - I like to call this personalized energy.  Others call it the Micro Grid.  There are a lot of people who would like to leave the energy grid and generate their own power.  Unfortunately, this is currently only affordable to millionaires and Hollywood types.  But, in the near future, I believe wind and solar products will become affordable and self-generation will become a reality.  The real key is an effective energy storage device.  Imagine a fuel cell the size of a washing machine that could power your house for days.  They are working on it at MIT right now.  When that arrives, wind and solar will take off and the cost of all these technologies will drop dramatically.

Micro Turbine - These ingenious devices are simple, clean and efficient generators of electricity.  They can run on virtually anything from diesel, kerosene and natural gas, to biomass and methane from landfills.  Currently, they are used on oil rigs and for backup power for data centers.  But, I think they could have a much bigger role to play.  1) They would make an ideal range-extender for series hybrid cars, like the Chevy Volt.  They weigh half as much as a piston engine and only have one moving part.  2) They are ideal for backup power for people who want to unplug from the electrical grid.  After the sun goes down and the wind stops blowing, people still need power.

Disclosure:  I own shares of Ford (F), Capstone Turbine (CPST), Energy Conversion (ENER), Alternative Fuel Technologies (AFTC) and some uranium mining stocks (FRG, TEUFF, PNPFF, MGAFF and LMRXF).  I don’t recommend these types of stocks to anyone with a low risk tolerance.  I’m pretty happy with my investment in Ford.  The uranium stocks, not so much.

The Bottom Line

The bottom line is a tectonic shift is coming in the field of energy.  Petroleum and coal, at some point, are headed the way of whale oil and kerosene lamps.  Nobody knows for sure when we will hit peak oil or if the globe will warm rapidly.  Everyone knows there are better ways to power our world.  There will be the early adopters.  There will be those who are stuck in the past.  And, there will be those who profit from these changes.

“We do not inherit the earth from our ancestors, we borrow it from our children.”

Native American Proverb

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My inspiration for writing this post came from the many complaints I see on personal finance blogs about how real estate and the stock market are such poor investments.  And, as I read the details of these posts and comments, something became very obvious to me.  These people had bought near the top of the market and they paid way too much.  Whether they were victims of GFT or just had bad timing, I’m not sure.  But, I am sure they are misguided in their attempt to blame the asset.  They should be blaming themselves for paying too much.  It was probably a great investment for the previous owner, who sold it to them for top dollar.

The History of Foolishness

Photo by Pawelbak

The Dutch “Tulip Mania” of the 1630s, was one of the first examples of the rise and collapse of a speculative bubble market.  Other historical examples are the stock market crash of 1929 or the silver crash of 1980.  More recent examples are the dot-com bubble of 2000 and the subprime mortgage crisis of 2008.

In all of these examples, the prices of these assets rose to unsustainable levels, based only on the belief they would keep going up.  But, there was no fundamental value to support those prices, only pure speculation.

History seems to repeat itself, because speculators are still on the lookout for the next hot thing.  And, they have already forgotten the hard lessons from the last crash.

Missing an Opportunity

I have a friend who likes to ask me for advice and then argue with me about my recommendations.  He’s pretty worldly.  And, I suspect he likes to debate more than he dislikes my advice.  He came to me in late 2008 and asked me if he should invest in the stock market, while it was down.  He had a large sum of money sitting in a bank account.  I told him that I thought it was a great time to invest.  But, I recommended he put in a couple thousand dollars per month, to average out any remaining volatility.

He never took my advice.  Instead, he left a lot of money sitting in the bank earning 1-2% interest.  I’m pretty sure he lost money on this investment, after taxes and inflation.  Meanwhile, the stock market rose dramatically and he completely missed out.  I don’t pretend to know where the market is headed, because nobody really knows.  The moral of this story is that money can be lost by indecision, just as it can from speculation.

Consider the Value

During the dot-com era, Warren Buffett was widely criticized for avoiding tech stocks.  Everyone thought he had lost his touch.  He was considered a dinosaur by many, who believed the old rules of business no longer applied.  Warren took this all in stride.  His simple explanation was that tech stocks were overvalued.  It didn’t matter to him how popular tech stocks were or that technology would change the world.  The net income from these companies didn’t justify their stock price.  So, he didn’t buy them.  After the tech bubble burst and fortunes were lost, the concept of value returned to prominence.

Unfortunately, the concept of value didn’t find its way into the real estate market.  Within a few short years, the old rules of housing didn’t seem to apply.  No one was concerned about paying a half million dollars for a tract home, as long as they could qualify for a loan.  And, bankers were more than happy to provide loans, as long as they could sell them off to investors.  This was the Greater Fool Theory in its most sophisticated form.  With the greatest fools being the taxpayers, who got stuck with the tab for a bailout.

Profit from Others

Here is the profit lesson from this post.  If you are still with me, I hope you find this information valuable.  Whenever a bubble pops or a crash occurs, the market seems to over-correct.  And, the price of the asset drops below its normal value.  Often, it drops far below its value.  And, this presents a great buying opportunity.  All you have to do is to watch the bubble pop and jump on the under-valued asset.  Finding the bottom can be risky.  But, you can spread out your purchases and wait until the market starts to recover.

In my particular case, I am usually inside of the bubble when it pops.  But, I have had great luck recovering my portfolio, by stepping up my purchases, after the market tanks.  Keeping your sanity is the hardest part of this strategy.  And, avoiding the natural impulse to sell and run for cover.  What helps me the most is to remember that I am an owner and not a speculator.

The Bottom Line

The bottom line is that bubbles happen.  And, they can be very profitable, as long as they don’t pop while you are invested in them.  See through the hype and never lose track of the value.  Because, the old rules may change from time-to-time, but value remains a constant.

“A wise man can learn more from a foolish question than a fool can learn from a wise answer.”

Bruce Lee - Legendary Actor and Martial Artist

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The answer is, no one really knows.  There is always someone who claims to know.  And, there are even a few who were right about the last bull or bear market.  But, no one has been proven to consistently time the market.  So, I don’t recommend this approach.  There are more reliable ways to make money in a shaky stock market, without a crystal ball. 

Dollar Cost Averaging

Image by Nick Douglas

Most investors know about Dollar Cost Averaging.  This is where you invest the same dollar amount every month.  Most financial advisors recommend it, because it benefits both the customer and the advisor.  The big promise of Dollar Cost Averaging is that it forces you to buy when the market is down, so you are “buying low” as you invest in a down market.  The bad news is that it also forces you to “buy high” in an overpriced market.

Here is why I like Dollar Cost Averaging and have been doing it for decades.  Investing consistently is the key to accumulating wealth.  It’s not so much the averaging of the share prices as the habit of investing that is the secret.  Once you get used to investing every month, that habit quickly replaces the habit of spending all of your money.  This is the first step on the simple path to wealth.

Index Investing

Index investing has gotten very popular over the past couple of years.  This is where you buy a mutual fund or an ETF based on an index, such as the S&P 500.  The big promise of index investing is that the stock market indexes beat most of the actively traded ETFs and mutual funds.  And, there are usually low fees, solid stocks and low trading costs in an index fund or ETF. 

Although this logic may seem to make sense, there is a reason why I don’t invest in indexes.  Simple economics (Macro vs. Micro) dictate that what works on an individual basis doesn’t always work for the masses.  Like any other investment scheme that comes into vogue, once enough people start to jump on board, these stocks become overvalued and due for a correction.  That’s why I believe the stocks in the indexes got trashed so soundly in the last crash, just as the tech stocks did in the crash before. 

Dividend Investing

Dividend investing has also seen a resurgence in popularity.  Unlike the days of the tech bubble, investors are starting to appreciate a company that pays a regular dividend.  And this makes a tremendous amount of sense, especially for long-term investors.  Instead of expecting the stock price to appreciate rapidly, investors can count on a dividend payment from their investment.  And, this makes even a modest gain in the share price add up to a solid return. 

I own mostly dividend paying stocks.  Although, I must admit that I hadn’t paid quite as much attention to the dividend at the time I had purchased them.  Going forward, I plan to give a lot more weight to the dividend, as a measure of the quality of the company behind the stock.  Any company that consistently makes a profit and distributes a dividend is also likely to appreciate in value.

Value Investing

Value investing is also a popular strategy, thanks to successful investors, like Warren Buffet.  The big promise of Value Investing is if you can find good companies at an attractive stock price, they are bound to go up.  And, they are less likely to come crashing down, because they are already undervalued.  But, it’s not easy to determine what is a good undervalued company or to find any bargains when the market is overvalued.

Lately, I have scooped up some great bargains, such as Dell, Ford and Bank of America.  But, this wasn’t so much Value Investing as it was Bottom Fishing.  And, I took some big lumps from speculating in GM and Fannie Mae, which both went bankrupt.  So, I have vowed to be more disciplined in my selection of value stocks and to pay more attention to the fundamentals and less to the share price.  I consider Value Investing to be the most promising long-term strategy to make money in the stock market.

Evaluating Risk

The first rule of investing is to not lose money. So, it is prudent to choose investments that are least likely to loose value as you hold them.  However, there is also a risk of being too conservative with your investments.  So, it’s important to seek a long-term return that exceeds inflation, currency loss, taxes and fees combined.  Otherwise, there is a 100% chance that you will lose money and risk your capital needlessly.

I generally look for investments that yield around 10%.  So, I avoid bank accounts, CDs, money markets and treasuries as investments.  This often places me in investments with high-volatility, which is not suitable for all investors.  However, I have been investing for 25 years and am 20 years away from retirement.  So, I have a higher tolerance and capacity for risk.  If I was older or had a short-term need for the money in my investments, I would invest it conservatively.

Fees & Commissions

It’s a known fact that fees and commissions directly affect your investment results and the higher your investment fees, the lower your return will be on average.  The reason this is so critical is because it’s possible for everyone to get paid but you.  The fund company and government take their cut and inflation takes the rest.  Of course, none of this is visible, except for the taxes.  So, it’s very difficult to calculate the effect.  Over the long-term, a 2% difference in return can make a huge difference in the size of your portfolio.

I choose to invest without the help of an advisor.  I use a discount online broker and no-load mutual funds, with management fees of 1% or less.  This approach is not for everyone and I have learned some expensive lessons along the way.  However, I avoid fees and commissions as much as possible.  Most important, I like to avoid the conflict-of-interest that exists in the financial services industry.  If I ever do take on an advisor, I would consult with a fee-based advisor and not one who makes a living from commissions.

The Bottom Line

The bottom line is that there is no a magic formula for investing.  And, there are no reliable statistics or indicators that can predict the future.  If there were, then everyone would start to use them and they would quickly stop working.  The only strategy that has proven to work throughout history, is to buy the stocks of solid companies, with good fundamentals and growth potential.  Anything else is just gambling.

“You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you’re not ready, you won’t do well in the markets.”

Peter Lynch – Manager of the Fidelity Magellan Fund

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How it Works

Photo by MV Hargan

For those of you who aren’t familiar with The January Effect or a Santa Claus Rally, it is caused by investors who sell at the end of the year for tax purposes and then buy again in January.

This causes a surge in the prices of small-cap stocks, which may lift the broader market.  It is also possible this surge is helped by year-end bonuses, some of which is invested in the market.

In the past couple of weeks, we have seen a lively rally in the stock market, courtesy of the January Effect.

• Russell 2000 +7.5%
• NASDAQ Composite +5.5%
• S&P 500 Index +3.1%
• Dow Industrials +2.6%

Year-End Bonus

For the past 25 years, I have always looked forward to year-end with my investments. First, my mutual funds would disperse their dividends and capital gains in December. Then, the stock market would seem to magically jump up a couple hundred points. By the time I tallied up my investments in January, it would add up to a pretty good year.  And, it would make up for the dog months, when the market would drop faster than I could put money in.

This year, the rally is back with a vengeance and I couldn’t be happier.  I have missed that glorious feeling of victory over the market.  And, I have missed the excitement of the ticker and the closing bell.  I know all too well the dog days will soon return.  But, for now, I pretend to dominate the market.  And, this illusion gives me comfort in a shaky financial world.

Seeing is Believing

The Santa Clause Rally has occurred in 12 of the last 15 years.  The years when Santa didn’t show up were followed by disastrous stock market collapses in 2000 and 2008.  Santa knows if you have been naughty or nice and he definitely packs some coal on his sleigh.  Whether you still believe in Santa Claus or not, the man is still relevant.  And, if you choose to write him off as a myth, you may end up taking sum lumps.

According to the NY Times, the First Five Trading Days is a reliable indicator of the coming year.  This year, we had a rally for the first five days on all of the market indices. I don’t think we should rely on history as a guide, because of the stresses in our financial system.  But, I am hoping for big gains in 2010.  And, I am keeping my fingers crossed and a candle lit.

If you Blinked, you Missed It

What most people don’t realize about the Santa Clause Rally and the January Effect, is most of the action takes place in just a couple of days.  And, it’s very easy to miss out on this windfall.  Some claim the window is from Dec 21st to January 7th.  Others claim it’s the last five trading days of December and the first two of January.  Most agree the light trading volume during the holidays helps to magnify the affect.

If you were avoiding the stock market because of the volatility, you missed a tremendous buying opportunity in 2009.  And, if you ran for cover in a CD or a money-market account, you probably received interest that was lower than the rate of inflation.  If you are parked in bonds, you should be aware that rising interest rates can devastate their market value.  So, there is no safe path for investors.  Tread wisely, as you step over the wreckage of our past.

The Bottom Line

The bottom line is, there are few things you can count on when investing.  The January Effect is a pleasant little perk that happens almost every year.  Enjoy the New Year and Santa’s little bonus from the market.

“If stock market experts were so expert, they would be buying stock, not selling advice.”

Norman Ralph Augustine - CEO of Lockheed Martin

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For some, it’s hard to admit they need help with their finances.  For others, they are happy to delegate this responsibility.  No matter how you feel about your finances, it’s critical to retain control.

      If you turn over control, you risk losing everything.

You are Responsible

You can seek advice from friends and family, hire professionals to assist you or even take stock tips from cab drivers, but you need to be the primary decision maker.  Your future depends on the money you save and it’s far too important to trust to anyone but yourself.  Even if you’re not a financial genius, you must step up to this responsibility.

      Keep accounts in your name and review them regularly.

Protect Your Assets

There is a lot of publicity surrounding the recent fraud by Bernard Madoff and Robert Stanford.  But, this happens in America all of the time, on a much smaller scale.  Financial planners and investment advisers are sometimes incompetent or dishonest, with a devastating effect on people’s assets.

Financial professionals are often very well respected within a community.  This gives them a lot of flexibility and places them above suspicion.  Often, by the time fraud has been discovered, it has been going on for years.  There are rarely any assets to recover and investors lose everything.

      Don’t let your investments disappear with your adviser.

Avoid the Conflict

I have posted many times that there is a conflict of interest in the financial services industry.  The way advisers are compensated by commissions often gives them incentive to act in the best interests of investment providers or their employer.  Whenever they act in your best interest, they may leave some commissions on the table.  It’s best to avoid this conflict entirely.

      When advice and commissions mix, you pay dearly for both.

Get Good Advice

You may think from reading this post that I am against financial advisers.  That’s not the case at all.  I believe people should always try to get the best advice available to them.  If you need financial advice, consider hiring a fee-based planner and pay for this valuable service.  If your planner provides good financial advice, the benefits should far outweigh the costs.

      Paying for financial advice may be a very wise investment.

The Bottom Line

The bottom line is that it’s easy to become a victim of the financial services industry.  The more you know about the industry and the more you make your own decisions, the less likely this will happen to you.

“The first and worst of all frauds is to cheat oneself.”

Philip James Bailey – English Poet

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When I started out with my very first investment, I was “recommended” a mutual fund with an 8.5% front-end load.  For those who aren’t familiar with a load, this meant that for every $100 I invested, only $91.50 made it into my account.  The other $8.50 went for sales commissions and to the fund company.  On top of this, the fund that was “selected” for me had a poor long term track record, high volatility and very high annual fees.

I was pretty naive at the time and I didn’t realize that there were some great no-load mutual funds, where my entire $100 contribution could go into my account.  And, they had good long-term track records and low annual fees.  Of course, my friend and “Advisor” would never tell me about these no-load funds, because they didn’t pay any commissions.

Lesson 2 – No-Load may mean Hidden-Load

It didn’t take investors long to catch on to such obvious skimming of their contributions and soon even novice investors began to demand no-load mutual funds.  The financial services industry quickly responded with new “Advisor Class” funds, that had no front end load.  Instead, they have much higher annual fees and a “Redemption Fee”.  So, the longer you stay in these funds the more of a “load” you pay.  And, if you try to leave the fund you have to pay to get out.

So, although the fund is technically ”No-Load”, the Advisor is assured of a commission, the fund company collects higher fees and you get to pay for all of this.  An extra percent per year may not sound like much, but it definitely adds up over time.

Lesson 3 – Commissions can Affect your Investments

Another thing I realized very early on, is that most of the Financial Services industry works based on a huge conflict-of-interest.  Often, Advisors are paid the highest commissions for selling clients the riskiest or worst yielding investments.  From whole life insurance, to limited partnerships and variable annuities, some investments pay much bigger commissions to your Advisor than others.  And, you can bet your assets, that it’s not in your best interests to buy these investments.

Another huge commission-based issue is the subject of churn.  Your Advisor usually gets a paid a commission every time you move your assets into a new investment.  The more your investments get moved, the more your Advisor gets paid and the less your investments are likely to yield.  A good investment advisor would never churn their client’s accounts.  But, it definitely happens.

Lesson 4 – Investment Advice is Rarely Objective

Back in the stone ages, when I started investing, the Internet wasn’t around for investors.  There weren’t any blogs and statistics weren’t available with the click of a mouse.  Back then, it was hard to get good investment advice.  You either had to buy an expensive newsletter or you had to buy one of the financial magazines or newspapers.  And, the recommendations of these financial papers closely mirrored the products of their advertisers.  Biased advice can cost you a lot.

Another thing that happens frequently, is that investors get a “hot tip” about a hot stock from their investment advisor.  But, when they purchase this stock, it turns out to be a real dog with poor fundamentals.  The reason this lousy stock was recommended to you, is because it is underwritten by the brokerage.  Advisors push these stock and analysts give them good reviews, because the brokerage makes a lot of money on the underwriting fees.

Lesson 5 – Taxes and Inflation are Part of the Equation

When calculating your investment returns, don’t forget to subtract taxes and inflation.  Investment decisions are never accurate without taking these into account.  A 12% return is closer to 4% after taxes and inflation.  And, you are probably losing money on anything yielding less than 7%.  I base these calculations on 5% inflation and 25% taxes.  And, this doesn’t include currency fluctuations.

Feel free to disagree with me.  Feel free to  plug in your own numbers.  But, make sure that you take this into account or you may be over-estimating the returns from your investments.  More importantly, you may be under-estimating the risk involved, for the return you receive.

Lesson 6 – The Market Moves in Cycles

One of the most obvious ways to profit from the stock market is from the cycles that occur regularly.  The market goes up and down with the economy.  Also, money moves between large cap and small cap stocks and between growth and value positions, as they change in popularity.  Even some types of stocks are considered cyclical.

The first lesson of market cycles is that it’s very difficult to time the market.  I still own a home-builder stock that I held onto just a little too long.  So, I don’t have any great advice, except don’t fight the trend.  If the market is moving solidly in one direction, going with it is usually more profitable then going against it.  And, if it has been moving in one direction for a long time, the cycle may be nearing an end.  So, take some of the profits before the direction changes.

Lesson 7 - I’m Not Smarter than the Market

Recently, I have thought a lot about the failure of Long-Term Capital Management.  In case you aren’t familiar with the story, LTCM was a huge hedge fund that failed in 1999.  Some of the most brilliant minds in the industry, including two Nobel Prize winning economists, lost billions of dollars and were forced to liquidate the fund.  They created a financial model that supposedly would require a six-sigma event to fail.  Well, they were wrong and it failed spectacularly.

On a number of occasions, I have been reminded by the market that I am not smarter than it.  In fact, the Market delights in making people look stupid.  The reason no one consistently outperforms the market, is because the market quickly adjusts to any profitable strategy.  So, take advantage of market trends and don’t try to beat the market.  You may succeed at market timing for a short time.  But, sooner or later, you may fail in spectacular fashion.

Lesson 8 – Diversification is More than Stocks and Bonds

Having been through Black Monday and the Tech Crash, I strongly recommend having some real assets, such as real estate and precious metals.  Real assets hedge against inflation and protect you from stock market panics.   I also recommend some International exposure, such as global or international mutual funds.  International holdings help to insulate you from the local economy and currency fluctuations.

Obviously, these types of investments pose some risks and may require some expertise.  But, they will diversify your risks more broadly.  If you are a novice investor or don’t have a lot of capital, you may want to consider mutual funds, REITS and ETFs that will allow you to invest in these asset classes.

Lesson 9 – Look for Value in your Investments

There are many strategies for finding investments.  One of the most consistent strategies over the long haul is to look for investments that trade at a discount to their book value.  This is commonly known as Value investing and it makes a lot of sense.  Just as you should look for value in any of the products and services you buy, you should also look for value in the companies you invest in.

The first lesson of Value investing is that some stocks are cheap for a reason.  That’s why it’s called Value investing and not Cheap Stocks.  The stocks of dying companies are almost always cheap, but they are never a bargain.  Other investors can predict the future of these companies and avoid their stocks.  That’s why they are cheap.  The real secret of Value investing is in selecting good companies that are a good value.  This brings us to the final lesson.

Lesson 10 - Buy Companies, not Stocks

Some of the greatest investors Wall Street has ever seen, became successful with this simple premise; “You aren’t buying a stock or a security, you are buying part of a company”.  Too many investors (including myself) make the mistake of following the stock prices, without understanding the fundamental value of the company.  The value of the company is hard to calculate.  If it is a market leader, with good products and management, it may become very valuable.

If a company is poorly run or it’s products can’t be sold, it makes no difference how the underlying security is valued.  You will lose money on this stock sooner or later.  This is a big lesson I learned from the dotcom era, where earnings didn’t seem to matter.  Trust me, earnings do matter.  And, so do the products and the management.  They matter more than the current value of the stock.

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If you don’t yet have a financial plan, try my simple Three-Step Financial Plan.  It only takes a few minutes and could make a tremendous difference in your financial future.

What Happens if Your Plan Goes Wrong?

What if you have a solid financial plan and good investments, but the market tanks and you lose a lot of money any way?  No one wants to acknowledge that they have lost money.  No one wants to feel like a lousy investor and I’m no different.  My first instinct is to avoid reading my brokerage statements and to turn off the financial news.

But, this is a critical time to evaluate your financial plan for the long-term.  It’s important for you to make sure that your plan is viable for the future.  You need to cut loose of the dogs and keep the investments with promise.  Now, more than ever, you need to pay attention to your investments. 

Past Performance is No Guarantee of Future Results

One thing that often goes wrong, is that people base their financial plan on the past performance of certain investments and they don’t perform as well in the future.  Don’t feel bad about this, because it’s a normal investment experience.  Investments often perform in cycles and yesterday’s winners will likely become tomorrow’s losers.

There were a lot of smug NASDAQ investors in the late ’90s, just as there were a lot of smug Index investors a couple of years ago.  Most of these people lost their shirts.  Few investments can sustain outstanding performance for long periods of time. Otherwise, they will become over-valued and overdue for a correction.  Don’t chase past performance.  The odds are stacked against you.

It’s Always Darkest Before the Dawn

In 1987, in 1990 and especially in 2002, I lost a lot of money.  I could have bought a car with cash or put a down payment on an investment property in California with the money I lost in the market during the tech bubble.  But, I made all of that money back and then some in the years that followed.   If I had pulled out of the market, I would have lost that money forever.  Instead, I stuck it out and profited from the downturn.  In fact, I increased my investments, which dramatically increased my returns when the markets rebounded.

This year, I lost a lot of money in the market from the mortgage and financial crisis.  The good news is that I’m still invested in solid companies that I believe will benefit from the recovery.  More important, I am increasing my investments and purchasing good stocks at incredible prices.  While many investors are bailing out because of the downturn, I’m focusing on the opportunity in the rebound.

Learning from the Master

Do you realize that Warren Buffet was only worth $140 Million in 1979 and now he is worth $62 billion?  Most of Warren’s success came from being a value investor, which means that he only buys stocks when they are priced attractively.  Right now, some stocks are becoming affordable and Warren Buffet’s company, Berkshire Hathaway, is starting to buy again.  I’m no financial genius, but I’m definitely smart enough to learn from the richest man in the world.  If Warren thinks the market is going up, then I’m a cautious buyer.

The Bottom Line

The Bottom Line is that the market goes up and down, but the overall direction is up.  How you deal with loss and disappointment may determine your future success.  Most books and quotes from successful investors talk about having “discipline” in your approach to investing.  Here is your opportunity to show discipline and stick with your financial plan.  Here is your opportunity to profit from others who panic.

“Discipline is the bridge between goals and accomplishment.”

Jim Rohn – American Business Philosopher

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