The Two-Pronged Approach To Safe, Consistent Gains

We have a chapter on the book on investing, and we make reference to a Forbes magazine cover in 1975 when inflation was raging in this country. A block of ice in the desert, an umbrella over the block of ice saying, “How to protect your money and assets in a time of terrible inflation.”

We come to the truth in the first paragraph, there’s no way to truly protect everything, and those who tell you they can, watch out.

And so, what we recommend, for individual investors, is that you should have gold, but gold coins. Gold mining is like any other stock. Gold mining stocks, you’ve got to do a lot of homework. They’re not all the same, and they did not participate the way the gold itself did, so have the gold coins, but it’s not so much an investment as an insurance policy. So the worse the coins do, the better the rest of your portfolio will probably do. And so – yes, you have TIPS — inflation, adjusted bonds, and the like. Again, insurance policy, but in terms of investing, unless you have the time to do real homework, you should go – we recommend for index funds.

Emotions are your enemy. Which is why individual investors constantly, as a whole, underperform the market, because they get giddy when things are good, and they bail out when things are bad. Everyone says, “I’m a long term investor,” or “I’m a disciplined investor.” You are until the market goes down, then panic sets in. Oh, my god, is it too late to get out? Classic example, 2008, 2009, one of the worst bear markets ever, over half – 50-60 percent portfolios wiped out. Jokes about 401ks becoming 101ks, and a lot of people said, “I can’t stand it anymore, I got to take some money off the table what’s left.”

Then in March of 2009, because of what Congress did on changing a crazy bank regulation-counting rule, stocks turned. Now they have more than doubled since then. How many people who took money off the table in that bare market, put it back in when the market turned? Not many. So understanding human nature, it’s like a diet. Don’t eat so much. Yeah, easy to say, hard to do.

So we recommend individual investors to take a two-pronged approach. For your retirement money, use index funds. Low-fee, low-cost index funds, like Vanguard. Some other firms will have them, like Fidelity, you can get a cheap index fund. And put a certain amount in quarterly, weekly, monthly, whatever you wanna do. Make it constant, ignore the ups and downs, and ride the market. Amazingly, in America, the stock market is your friend if you let it. Because when it goes down, you end up buying more shares if you’re putting in a constant amount, so when the market turns, you get more of a boost. So your retirement side, use index funds.

For your inner Buffet side, use the non-retirement portfolio. And there, again, other than meeting your own particular needs – and family situations and business situations are different, that’s why you need the advice. But for the non-retirement part of your investment activity, then you can try – you may have a knack for startups, realizing most of them don’t work out. You may have a knack for picking stocks, or you enjoy going in and out and taking piece here and apiece there.

So whatever your proclivities are, we cite a book by one of our people here at Forbes, Matt Schiffrin – next door Warren Buffets, people you haven’t heard of who have done fairly well in the market through various disciplined approaches. So that’s where you should do it.

But always remember, emotions are your enemy, and I think it was Charley Ellis who said in the book, you should approach investing like you should play tennis. When it comes to tennis, he said, forget about going to Wimbledon or the U.S. Open, except as a spectator.

So when you play, don’t try to be fancy and do these fancy shots, just try to focus on getting, he said, the ball over the net and within the lines. Focus on that, and you’ll do just fine.

So it’s the same thing with investing. Individual investors are not going to become billionaires. Maybe you do have the Buffet in you, but most of us don’t. You recognize that, be honest with yourself, you’ll end up doing very nicely and you’ll beat most money managers.