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Investrio Wall Street Mentor Center
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Understanding the Stock Market
This Week's Topic: Principles of Investing

1. You Can Do It Yourself

Most people have what it takes to handle their own investing and personal finances. Well, what does it take? If you have discipline, a long term horizon, common sense, a desire to take control, and a willingness to learn you have the foundation to get started.

The web will be one of the most important tools to help you become a savvy investor. In the past, the pros had a big advantage - access to timely, high-quality information. Even today, they spend thousands of dollars a year on research reports, corporate documents, and quotes. You can now get similar information on the web for very little money. But the playing field isn't just leveled. You have advantages over the pros, both the analysts and the mutual fund managers.

Advantages you have over analysts:

You only have to answer to yourself, so you can make decisions based on reason rather than on worrying about how they will be perceived (by your peers, your clients, or the companies you like or dislike). You don't have to jump on the bandwagon, window-dress, or dump your underperformers. You have a long term perspective. You're not consumed by the day-to-day fluctuations. You are not ruled by emotions like greed and fear.
You can't be coerced into selling when conditions are unfavorable, just to appease others.
Your investment decisions are driven by thorough research and analysis, not by rumors, canned presentations and conference calls. You invest within your circle of competence; you're not making phone calls all day to find out what a company's products do, you're out using the products.

Advantages you have over mutual fund managers:

You don't have to answer to shareholders. You don't have to worry about appearance, only results. You don't have to worry about assets being pulled out all at once the way a mutual fund does. You don't have to concern yourself with advertising, marketing, accounting, legal, and other matters facing a mutual fund company.

Your job isn't at stake, so you don't have to be afraid of taking calculated risks. You don't feel the need to hold small positions in a hundred mediocre companies rather than large positions in eight great ones. You don't have
so much money that you have difficulty finding enough good stocks to go around. You can invest whatever part of your portfolio you feel appropriate in any company. Due to SEC limits, most mutual funds have trouble taking advantage of great opportunities by holding large positions, especially in small companies.
Where do we fit into all of this? The web has everything you need, but it also has a lot of stuff you don't need. The Mentor Center, is designed to help you find the good stuff, so you can stop searching for the information you need and focus on achieving your financial goals.

2. You Should Do It Yourself

Admittedly this doesn't apply to everyone. Some people lack the time or desire to take charge of their financial future. Nevertheless, there are very good reasons to do it yourself. Foremost among these is the fact that out of all the people in the world, the one who is most likely to put your interests first is yourself.

3. Do It Now

We say this not just to discourage procrastination, but because an early start can make all the difference. In general, every six years you wait doubles the required monthly savings to reach the same level of retirement income. Another motivational statistic: If you contributed some amount each month for the next nine years, and then nothing afterwards, or if you contributed nothing for the first nine years, then contributed the same amount each month for the next 41 years, you would have about the same amount. Compounding is a beautiful thing.

4. Know Thyself

The right course of action depends on your current situation, your future goals, and your personality. If you don't take a close look at these, and make them explicit, you might be headed in the wrong direction.
Current Situation: How healthy are you, financially? What's your net worth right now? What's your monthly income? What are your expenses (and where could they be reduced)? How much debt are you carrying? At what rate of interest? How much are you saving? How are you investing it? What are your returns? What are your expenses?

Goals: What are your financial goals? How much will you need to achieve them? Are you on the right track?
Risk Tolerance: How much risk are you willing and able to accept in pursuit of your objectives? The appropriate level of risk is determined by your personality, age, job security, health, net worth, amount of cash you have to cover emergencies, and the length of your investing horizon.

5. Get Your Financial House In Order

Even though investing may be more fun than personal finance, it makes more sense to get started on them in the reverse order. If you don't know where the money goes each month, you shouldn't be thinking about investing yet. Tracking your spending habits is the first step toward improving them. If you're carrying debt at a high rate of interest (especially credit card debt), you should unburden yourself before you begin investing. If you don't know how much you save each month and how much you'll need to save to reach your goals, there's no way to know what investments are right for you.

If you've transitioned from a debt situation to a paycheck-to-paycheck situation to a saving some money every month situation, you're ready to begin investing what you save. You should start by amassing enough to cover three to six months of expenses, and keep this money in a very safe investment like a money market account, so you're prepared in the event of an emergency. Once you've saved up this emergency reserve, you can progress to higher risk (and higher return) investments: bonds for money that you expect to need in the next few years, and stocks or stock mutual funds for the rest. Use dollar cost averaging, by investing about the same amount each month. This is always a good idea, but even more so now that the market has risen dramatically in the last few years. Dollar cost averaging will make it easier to stomach the inevitable dips.

And remember, never invest in anything you don't understand.

6. Develop A Long Term Plan

Now that you know your current situation, goals, and personality, you should have a pretty good idea of what your long term plan should be. It should detail where the money will go: cars, houses, college, retirement. It should also detail where the money will come from. Hopefully the numbers will be about the same.

Review your plan periodically, and whenever your needs or circumstances change. If you are not confident that your plan makes sense, talk to an investment advisor or someone you trust.

7. Buy Stocks

Now that you've got a long term view, you can more safely invest in 'riskier' investments, which the market rewards (in general). This requires patience and discipline, but it increases returns. This approach reduces the entire universe of investment vehicles to two choices: stocks and stock mutual funds. In the long run, they're the winners: In this century, stocks beat bonds 8 out of 9 decades, and they're well in the lead again. According to Ibbotson's Stocks, Bonds, Bills and Inflation 1995 Yearbook, here are the average annual returns from 1926 to 1994 (before inflation):
Stocks: 10.2% (and small company stocks were 12.1%)
Intermediate term treasury bonds: 5.1%
30-day T-bills: 3.7%
But is it really worth the additional risk just for a few percentage points? The answer is yes. 10% a year for 20 years is 570%, but 7% a year for 20 years is only 280%. Compounding is God's gift to long term planners.

If you buy an outstanding company, hold on to them until the indicators tell you it is time to get out. Never sink with the ship. Remember, you can always get back in on the rebound. If you aren't good at selecting stocks, that is what The Mentor Center is all about.

8. Investigate Before You Invest (do your homework)

Always do your homework. The more you know, the better off you are. This requires that you keep learning, and pay attention to events that might affect you. Understand personal finance matters that could affect you (for example, proposed tax changes). Understand how each of your investments fits in with the rest of your portfolio and with your overall strategy. Understand the risks associated with each investment. Gather unbiased, objective information. Get a second opinion, a third opinion, etc. Be cautious when evaluating the advice of anyone with a vested interest.

If you're going to invest in stocks, learn as much as you can about the companies you're considering. Understand before you invest. Research, research, research. Read books. Consider joining an investment club or an organization like Investrio Wall Street Mentors. Experiment with various strategies before you put your own money on the line. (paper trading) Examine historical data or participate in a stock market simulation. Try a momentum portfolio, a technical analysis portfolio, a bottom fisher portfolio, a dividend portfolio, a price/earnings growth portfolio, an intuition portfolio, a megatrends portfolio, and any others you think of. In the process you'll find out which ones work best for you. Learn from your own mistakes, and learn from the mistakes of others.

If you don't have time for all this, or just don't have the desire. You may want to consider mutual funds, especially index funds.

9. Develop The Right Attitude

The following personality traits will help you achieve financial success:
Discipline: Develop a plan, and stick with it. As you continue to learn, you'll become more confident that you're on the right track. Alter your asset allocation based on changes in your personal situation, not because of some short term market fluctuation.
Confidence. Let your intelligence, not your emotions, make your decisions for you. Understand that you will make mistakes and take losses; even the best investors do. Re-evaluate your strategy from time to time, but don't second-guess it.
Patience: Don't let your emotions be ruled by today's performance. In most cases, you don't need to be watching the market's performance every second. (unless your a day trader) Also, don't ever feel like it's now or never; don't be pressured into an investment you don't yet understand or feel comfortable with.

The following personality traits will hurt your chances of financial success:
Fear. If you are unwilling to take any risk, you will be stuck with investments that barely beat inflation.
Greed. As an investment class, 'get rich quick' schemes have the worst returns. If your expectations are unrealistically high, you'll go for the big scores, which usually don't work. It is generally a good idea to avoid making financial decisions based on emotional factors.

10. Get Help If You Need It

The do-it-yourself approach isn't for everyone. If you try it and it's not working, or you're afraid to try it at all, or you just don't have the time or desire, there's nothing wrong with seeking professional assistance.
Except that you have to pay for it, and there is a built in conflict of interest. Stock brokers make money, when you lose money.

If you still want others to handle your financial affairs, you will nevertheless want to remain involved to some degree, to make sure your money is being spent wisely.
Remember, NO ONE CARES ABOUT YOUR MONEY AS MUCH AS YOU DO.

Thank you again, for the opportunity to share our knowledge and experience with you.
Keep an eye out for our next edition of our newsletter, coming to you soon.

�More Millionaires have been created from the stock market than any other source�
--Bloomberg Magazine

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