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You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
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One of the most talented money managers we know still calls us when he wants a stock quote because he is not connected to the InternetHeres the Help You Need to Prosper in the New Investment Culture Accumulate all the possible circumstances which shall reinforce the right motives; put yourself assiduously in conditions that encourage the new way. William James, The Philosophy of William James Investing in the era of the new dominant investment system will be easier than in the old one. Like everything else targeted at consumers by the late twentieth century, investing had congealed into a wad of mass-marketing boilerplate. Investors getting skittish about the stock market? Change the name of those growth funds to growth and income or blue-chip growth, and they will keep on selling. Drug stocks in the news because they rose a lot? Cobble together a pharmaceutical fund and shove it down the pipeline. Wall Street as Madison Avenue pump out product to get even more of investors dollars jumping on each new bandwagon. By the very late twentieth century, competition for investment dollars was fierce. It was decided that people would invest more if they felt empowered. They would buy more stocks and mutual funds if they had control. So, in the 1990s the Internet became to Wall Street what the credit card had become to Madison Avenue a few decades before: the tool that empowered consumers. Investors could check their account values minute by minute, buy and sell stocks, and trade mutual funds 24-7. Just how this would help them create wealth was unclear. (One of the most talented money managers we know still calls us when he wants a stock quote because he is not connected to the Internet. He does not want his decision making to be clouded by distracting daily, or even weekly, price movements.) Nevertheless, the investing public had its direct link to Wall Street and was supposed to be appreciative. The bear market of 2000-2002 that ended the discovery phase of the new dominant investment system opened investors eyes to the flaw in leaving ones personal wealth to the whims of mass marketers. Billions of dollars of unnecessary losses were created because people did not realize that they were concentrated in only one or two sectors of the market. Most still do not understand the characteristics that distinguish the different parts of the market and remain dangerously underdiversified. Nor did the public know that their hard-earned dollars were helping to shore up failing companies like Enron and K-Mart, which were held until the bitter end, in their so-called index and growth funds. The mass-marketing model that brought in hundreds of billions of dollars to banks, insurance companies, trust companies, brokers, and mutual fund companies failed to generate anything close to those kinds of profits for their customers. THE ZONE It is striking how little difference there is between the ad for the battery-powered belt that promises the effortless creation of six-pack abs when strapped to flabby tummies and the ad for the all-in-one funds for an all-in-one strategy in just one easy investment. Both are targeted to that part of our nature that wants to believe that lifechanging goals can be achieved by taking the path of least resistance. At some point in the 1990s investment pitchmen took not just a page, but the entire book, from the trillion-dollar vitamin-diet-fitness industry. It is no accident that the words No Hassle, Winning Formula, Superstar, Smart, Easy, and 20 Best, which can be found on the cover of Kiplingers Mutual Funds 2002 Smart Investors Guide, can also be found on Web sites advertising fad diets and novel musclebuilding contraptions. The saying goes that we can never be too rich or too thin, but both of these attributes are very difficult to acquire unless we have inherited either money or perfect genes. So the lure of messages trumpeting the easy solution or the winning formula no matter if it is money we want to make or weight we want to lose is very powerful. But the adult in most of us has learned that life is not so simple. There is no Santa Claus, and there is no such thing as no-hassle investing. There are no investment superstars or 20 best investments. What is available is a methodology that is being used right now by fiduciaries responsible for very large pools of money. It will be necessary for individual investors to use this same method in order to navigate the formulation and acceleration phases successfully. It is sensible that for much of the twentieth century, when the stock market was not as vast and diverse, that the mass marketing business model would have worked as well for investors as it did for customers in all other fields of commerce. But the same realize, capitalize, customize business model that will better serve the twenty-first century consumer of other products and services will also do the best job of sorting through the new complexities of the financial markets. All of the benefits offered by the realize, capitalize, customize investment methodology can be summarized by saying that it will enable investors to function within their own investment zones. We defined this in Chapter 1 as the place where your lifestyle and temperament meet the financial markets. When you are in your zone, you do not have to wonder what the market will do the system has a builtin mechanism to tell you. The old mass-marketing system told you what to do only after market changes had already occurred. Investment decisions are simpler in your zone. If a stock or fund does not fit into your personalized strategy, you dont need it. You will not have to wonder when to buy or sell; the process will tell you. After a while you may find that your assets are less affected by extreme market conditions. Getting to your zone requires the application of accepted and proven investment hypotheses. This will take some time and effort to get started, but it will save both in the long run. Real Diversification What will make the realize, capitalize, customize wealth-creation model work is an understanding of the simple concept we call real diversification. Most people understand abstractly that they should not put all of their eggs into one basket. In reality, most investors are not aware that they have only a single leaky basket into which they have concentrated their financial future. All of the new clients we have accepted into our practice over the last four years thought that they were diversified, but only 2% actually were. The other 98% were only superficially diversified, if at all. This had led to severe losses during the 2000-2002 market declines. If these people had not taken steps to correct the situation, they would have faced further erosion of their assets during the rest of the formulation phase and would miss out on the acceleration phase altogether. Superficial diversification is seductively easy and dangerous. Real diversification is a different matter. There are three reasons why most investors do not do it: 1. Lack of discipline 2. Lack of knowledge 3. Misleading information Understanding each of these will demystify the investment process (something the old investment culture may not want to see happen) and prove that successful wealth creation is often no more than common sense. Lack of Discipline You know what you have to do to lose weight. Call on your willpower to cut out some of those desserts. Instead, our culture encourages us to delude ourselves into thinking that a pill or a miracle diet will work just as well. The quirk in our human nature that makes us seek the easy way out has been exploited by the vested interests of the old dominant investment system in a very creative way. We have been convinced that the wee bit of energy required for investing should be spent in front of a computer, digesting diet pills of data, fed to us with the purpose of making everyone feel like an expert. Empowered with all this information, you more readily open your checkbook. If the dual myths of everyone can be an expert and investing is always easy are to be maintained, presenting tough choices to those from whom you are trying to extract more investment dollars must be avoided at all costs. The scheme devised by the mass marketers to solve this problem is to give ratings to funds based on past performance. Those funds that have risen the most get the highest scores. Investors are encouraged to study Web sites and magazines to develop a short list of best funds and then diversify among them. Any diversity arrived at by this process is an illusion. It fails because the only funds that could have the best performance are the ones that own stocks of the style that has been performing the best. Revisit Figures 1.9 through 1.11 and recall the following: (1) The stock style that performs the best for a few years will peak and then be replaced by another style that will take its turn at being the top performer, and (2) money managers are mandated to specialize in a certain stock style. We are supposed to feel good about diversifying across our lists of top-rated funds, but this kind of diversity can only be superficial. The names of the funds may differ, but to be the top performers, they must all own stocks of the style that has just risen the most. An analysis of the top-rated funds offered by a variety of financial institutions reveals that they all own pretty much the same stocks. In 1999 the top-ranked funds owned large-cap growth stocks. Their ratings were peddled to the masses, and the money poured in. Push what sells. In 1999 some of the funds with the worst ratings were those that specialized in large-cap value stocks. Encouraging ownership of largecap value stocks or the funds that specialized in them was inconsistent with the marketing principle of selling success. According to the rules of the old dominant investment system, only those who were financially dysfunctional would claim ownership of large-cap value investments in 1999. They had averaged only 2% the previous two years, whereas large-cap growth was averaging 39%.1 Yet, the most construc tive decision that investors could have made in 1998 was to move some of their money out of large-cap growth into large-cap value and in 1999 to move even more. The next year large-cap growth lost 17.19%, and large-cap value increased 10.07%. |
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