Sunday, May 01, 2005


Will Rogers once said, "I'm not so much worried about the return on my money as the return of my money". Ironically, in addition to being a great comedian, Will was a risk taker, an entrepreneur, a venture capitalist, who was killed in an airplane crash during a time when airplanes were dangerous.

Investors usually fall into one of two categories; those who try to beat the market and those who try to preserve their capital. Many of the investors in either of these categories should switch to the "winning approach". Many members of both groups are misinformed, misled or dead wrong. If they were more rational beings they would "go with the flow" of the market rather than fighting the market.

The groups fight the market by avoiding it to a large extent or by trying to trade it short term. Successful short term traders are extremely rare. The odds of beating the market through short term trades over a 20 year period are about 500 million to 1. The odds that the bond market will beat the stock market over a 20 year period are about 500 million to 1. The odds of beating the market by buying a solid list of 20 stocks and holding for 20 years are about 1 to 1, or a 50/50 chance.

The "winning approach" is one that accepts that the long-term returns of the markets are what they are and one should capture as much of those returns as possible by long-term investing while keeping expenses low. The stock market offers powerful tax advantages and risk adjusted returns that beat other investments.

The long term numbers have been published and republished. Stocks return 11 to 14% compounded over long periods; bonds return 5 to 7% over long periods.

Those who invest 10% of their salary income in stocks, year after year, are wealthy by the time they retire. It does not matter what they start with or what they make. Those who invest 10% of their income in bonds, year after year, are not wealthy by the time they retire unless they enjoy a very high salary.

The Parable of the Talents
In Matthew 25, Jesus tells the Parable of the Talents. This parable and others suggest caution toward hoarding ones wealth. The story suggest that a wise man invests his money in order to make more. While one can fairly state that gold bullion would be smart to own during a depression, those who held gold for 100 years made no real return. Money in savings accounts has returned a small return and bonds a little better. Cash investments in real estate do better than bonds and stocks do dramatically better than cash real estate investments.A diversified portfolio of stocks is the way to build wealth. Wealth that can be used for good or noble causes.
There are good ways to "beat the market". The best way to preserve capital is to earn market stock market rates on a significant portion of ones capital. I appreciate those who have allowed me to assist them in building capital. The process is not difficult. One must simply avoid being too aggressive or towo conservative. Investing is one of the places where the middle of the road is the safest place to be.