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You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
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I'm moving my clients out of stocks and into corporate bonds. What kind of bonds?Dear Marcus, About 35 years ago, a wise old man taught me a formula to help me make intelligent long-term decisions. He recognized that in any given day, people make dozens of small decisions such as what to wear, where to eat, and so on. If 50 percent of these decisions are correct, that is normal and the outcome does not really matter. With long-term decisions, however, one needs to be 100 percent correct. These important decisions could be a career change, marriage, buying a home, or relocating. The key to making good long-term choices is ones ability to get emotions out of the decision, something that is very difficult to do. I have used a formula called the Magic T successfully over the years and now I am going to pass it on to you. One day, you can teach it to your daughters. The best way for me to explain the Magic T is to give you two real-life examples of how I used it in the past. When I was 33, I was manager of a large brokerage firm in Boston. I was in line for a major advancement, but I wasnt happy and the stress caused me to become concerned about my health. A good friend of mine had just died of a heart attack, and my family history of heart disease was hovering in the back of my mind. On the other hand, I was being considered for future top management, and if I turned my back on the firms long-term plans for me, I could never succeed with them. If I left the company, I would be giving up millions of dollars, prestige, and power. It was a stressful time, but I made the right decision. Using the formula in the Magic T, I made a list of five positive points about each decision (no negatives) and put them into columns. After I had five on each side, I decided which is the most important and assigned that point a 10. The next most important point got a 9, and so forth. After adding up each column, the side with the highest total number was the choice I made. (I made the move to Florida, got everything I wanted, improved my lifestyle, and Im glad I made this decision.) The second Magic T was an equally important decision. It concerned two women I was in love with and both loved me. One was an old flame who had come back into my life after I was already involved with another woman. I had asked Joyce to marry me a year earlier and her timing was a cosmic tragedy to me because I had fallen in love with Maria. I knew I had to make a decision or risk being single the rest of my life, most likely. (As you know, I married Maria. It was the right decision, and I am happily married. We built a business together and have many happy memories, many of which you have shared with us.) I hope this helps and please call me if you want my help with the Magic T. Best always, and much love, Dad Try the Magic T if you are not sure whether to invest in the stock market. At the top of the left column of the T, write Buy and on the right side, write Stay Out. On a separate sheet of paper list the following factors: Insiders, Advisory sentiment, Mood of the media, Mood of friends and acquaintances, and State of the stock market. Then place your analysis on the Magic T paper. For example, Insiders are buying would be placed under Buy. Advisory sentiment shows more pessimism than optimism, so place it under Buy. NBC is parading out lots of bearish analysts; put it under Buy. You have observed that many of your friends are frightened, especially those who seem to always make bad decisions; it goes under Buy. Finally, the stock market is depressed and in a downtrend; place this under Buy as well. This would be a low-risk buying opportunity, supported by The Vital Few versus The Trivial Many concept. Other times, Stay Out will be prominent and much of the time there will be a mixed picture. A mixed picture means you have a 50/50 chance of picking winners. You would have to be very careful in what you buy during those times. Chapter 13 goes into more detail on the Magic T, while Chapter 14 provides you with examples of the Magic T in action. Kreit, a broker in my office when I worked in Boston, was a big producer and a genial man in his early fifties. One day I said, What do you think of the market, Irving? I wanted to see if he and I were in synch. It was the spring of 1970 and I felt the stock market would soon be heading for a sharp decline. Im moving my clients out of stocks and into corporate bonds, he said. What kind of bonds? A and AA bonds with 30-year maturities. Okay, I said. Commissions are better in long bonds, but why not put them into bonds with shorter maturities and higher and more liquid grades, such as AAA bonds and government issues? I told him the story of my Navy days when the plane crashed into the helicopter because the commanders had failed to examine what could go wrong with existing procedures. Irving assured me he was on top of things, but I was not convinced that he had really given serious thought to what a stock market decline would do to the bond market. Unfortunately, my fears were realized. The stock market did go into a broad decline, and bids disappeared in the market for lower grade bonds with longer maturities. Irving could not sell his bonds at any price. Bonds with 30-year maturities and $1,000 face values had bids as low as $500 to $600. High-grade bonds fared better because there was more demand for them. The falling prices for the bonds his clients held were worse than the declines in the stock market, and he was locked in. When the stock market decline was over and he wanted to get back in at the bottom, he would face huge bond losses. In effect, he had no recourse but to wait for bond prices to recover or to hold them until maturity. Either way, his days as a big producer were over, and he retired later that year. Chalk up another victim of Murphys Law. the years, I often wondered who Murphy was. Checking the Internet, I was surprised to learn that the original Murphys Law states, If there are two or more ways to do something, and one of those ways can result in a catastrophe, then someone will do it. Murphys full name was Edward A. Murphy Jr. He was born in 1917 and was one of the engineers on the rocket-sled experiments conducted by the Air Force in 1949 to test human acceleration tolerances. One experiment involved a set of 16 accelerometers mounted to different parts of the subjects body. There were two ways each sensor could be glued to its mount. Of course, somebody managed to install all 16 the wrong way. At a news conference a few days later, Murphy made the original pronouncement, and within months, Murphys Law had spread to various technical cultures, finally reaching Websters dictionary in 1958. The relentless truth inherent in Murphys Law has become a persistent thorn in the side of humanity. In October 1970, I was scheduled to move to a large, new, and very expensive brokerage office and as the manager, I was worried that my office might not survive the added expense in the current environment. I got an early dose of contrary divergent behavior on the very first day in our office. Before I left for work that morning, I had watched a few minutes of a major morning news show featuring Elliot Janeway, a famous economist, being interviewed. When the newscaster asked him for his view of the stock market and the economy, he replied it was very bearish and that the economy and the stock market would soon be entering a free-fall. I yelled at my television set, as I frequently do, to avoid being brainwashed, What in the world is this guy saying? My God! The market has been going down since early in the year and is heavily sold out in the background of a very negative news environment! I had not learned about Pareto yet, but my contrarian instincts told me that Janeway was wrong. Later that day, I called a sales meeting to kick off our first day in our new office. I told the salesmen that according to the majority of experts, the outlook was gloomy. If you believe in contrary thinking, I said, you have to buy stocks now for your clients. I continued, Most of our clients are negative and frightened. Janeway was bearish this morning on national television. I think it is smart to be critical of experts, especially when their views are the same as those of the majority of people. The stock market had opened lower but never looked back again. It rose sharply over the following days and weeks. A broad new bull market had begun and my new office was profitable from day one. Janeway had turned bearish at the exact bottom of the 1970 bear market! In Chapter 13, I discuss again the five factors to the Magic T and show you the easiest and least expensive ways to determine their current investment inputs. |
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