I came from a family of risk takers. My father was a crack stunt flyer and U.S. Air Force tanker pilot. He once landed a KC-97 Stratotanker on an ice patch at Dow Air Force Base in Bangor, Maine, when he was attached to the 308th Air Refueling Squadron of the 2d Bombardment Wing. I had three brothers. The oldest was a Navy aviator who bested my pop by landing A-4 Skyhawks on aircraft carriers. The next brother bested my oldest brother by landing in an alfalfa field in Eloy, Arizona (without deploying his parachute). My youngest brother (a former world record holder in motorcycle drag racing) bested him by spearing his helmet (with his head in it) into the back windshield of a car at 120 miles an hour on a busy street in Nashville, Tennessee. He beat my skydiving brother. He lived.
I was different. I have always been risk averse: no broken bones, no major surgeries, no injuries, no excitement, no stories—nothing. Perhaps this is because I have seen so much risk around me. My dad carries a knife in his pocket. I carry a BandAid in my wallet. Much like Paul Varjak from Breakfast at Tiffany’s, I have always been the “sensitive, bookish type.” The closest that I got to physical risk was looking up the word risk in my 11-pound Compact Oxford English Dictionary and, in my excitement, almost dropping the book from its spindly Bombay Company pedestal onto my toe. Thus, I wanted to call this book Risk & Other Four-Letter Words, but former Citicorp CEO Walter B. Wriston beat me to that title.
This is about risk—managing risk. The word risk appears in this book 355 times. My thesis is simple: If you want to manage risk long-term you need to invest. And if you learn that risk does not equal reward, your life will be better. You might even find that money can buy a little happiness. Those who believe money cannot buy happiness probably have very little of either.
I started in the investment business in August 1982. The S&P 500 rose 8.7% in one week just two months later, one of the best one-week records in the stock market.1 This was the same year that Steven Spielberg’s ET: The Extra-Terrestrial came out. It is fitting that this other-world stock market that grew into one of the great bull markets should start the same year that ET came out. As good as it was, in truth the 25-year period ending December 31, 2007, America’s Bull Run, was only slightly better than average, but it makes a nice back story. (The best 25-year period ended December 31, 1999, with the S&P 500 gaining 17.25% yearly.)2
You might say, then, that I am spoiled and only recognize the stock market when the little numbers on the computer stock quote screen are green and have little plusses by them, but it hasn’t all been easy. In exchange for the 13% annual market returns, my clients suffered through, in 25 years, half of the biggest one-day falls in the history of the Dow Jones Industrial Average, the first time in history that the three major stock markets (Dow Jones Industrial Average, S&P 500, and the Nasdaq) were down three years in a row, two (very expensive) wars, and 9/11. Next, in year 26, were the great mortgage meltdown, the worst one-year return in the S&P 500 since 1931, and the worst 10-year return in the S&P 500 in its history.
It is from watching my clients optimize the good times and survive the bad times that I convey these investment principles. And they are indeed principles that can be easily taught and easily learned.
There are many books about investing. The books tell you how Warren Buffett became the world’s authority on value investing, how Peter Lynch developed a sixth sense about the market with Fidelity mutual funds, how John Bogle popularized index funds, and how Donald Trump inherited $10 million and leveraged his way to the top in a rising Manhattan real estate market. If you read their stories all you have to do is put down the book and go do the same thing—that is if your circumstances, resources, and timing exactly match theirs. Or you can mimic Jean Paul Getty. “My formula for success?” he said, “Rise early, work late, strike oil.”
There is certainly something to learn from each of those books, but you cannot follow their paths as a passive investor and achieve their level of success. Their success is too personal, discrete, and time and context sensitive. Trying to divine and apply their secrets is like trying to tap the power of a racehorse, yet as writer Frederick C. Klein lamented, “The worst part about writing about horseracing is that you can’t interview the athletes.”
With the principles in this book you can be you instead. You can apply each of the lessons found in this book and achieve greater success than you otherwise would.
My premise is this: Risk does not equal reward. My wealthy clients know it. They taught it to me. It’s how they got wealthy. It is how you may either get rich or stay rich. You won’t understand this by simply memorizing it and reciting it; you must approach this from multiple angles so it has reference points and will stick.
Keep in mind as you read this that I am not a financial writer; I am an investment advisor. Financial writers say stuff like “Never buy variable annuities”—but they have never paid out a death benefit that was higher than the account value to a grieving widow, nor have they ever delivered tax-deferred returns to their readers. Financial writers say, “Only buy no-load funds,” but they don’t tell you that no-load also means no help, and that you have not improved your odds of success by buying them, or that even no-load funds have expenses. Financial writers say instead of buying “expensive” whole or universal life insurance to “buy term insurance and invest the difference”—but they don’t mention that most people out-live term insurance and that the savings rate is dreadfully low, so the net return from that advice is wasted premiums.
What many financial writers don’t understand, because they don’t get to test their perfect theories, is that people have two parts: reason and emotion. Financial writers deal with reason (sometimes), but investment advisors have to deal with emotions and the results of investor decisions long after the writer is on to the next assignment about electric cars, women’s shoes, or the best low-fat hot dog.
Nor is this a “my algorithms are better than your algorithms book.” I do not try to baffle you into submission with startling complexity. I would rather serenade you with simplicity.
This is not an auto-biography or an attempt to make a Donald of myself. There are many charts and graphs in this book, but they should be used as a shorthand visual cue, not as an exhaustive proof of a position. I am not interested in being right, nor should you. I am only interested in being effective. When you deal with people I have concluded that successful investing is more about investor behavior than superior investment products.
An astounding 97% of investors admit that they need to be better informed when it comes to investing.3 If I can help you become better informed, or at least help you ask more effective questions, this will be a valuable experience.