Do you understand the diffference between investing and speculating?  Watch this video with Roland and Don to find out.

Image Credit:  BehaviorGap.com

Far too many investors are waiting for IT to happen.  IT is that fictional moment when the economy is “normal” thus signaling the moment when one can safely increase their stock market positions. 

Here’s the problem:  By the time they react the ship will have sailed and this could very well be the biggest ship we have ever seen. 

INVESTOR REALITY CHECK:  There is no magic potion you take that instantly teleports you the best time to invest.  As a wise investor once said, “Markets don’t settle down; they settle up.”  And that is precisely why you must make investment decisions with your head and not with your gut.

BAD NEWS:  There are countless investors out there standing on the sidelines waiting for someone to hand them the magic potion.

Not having enough money to fund your retirement is not a problem.  It’s a symptom.  And it’s caused by not having enough assets allocated to ownership positioned to outpace inflation over the long haul.

GOOD NEWS:  The smart investors today are taking action before they spend too much time rationalizing why they should not. 

GREAT NEWS:  You have the opportunity to do the same.

Or maybe someone will eventually discover that magic potion for you.

When my colleagues and I discuss the foundation elements of our investing philosophy to new clients, the topic of value investing is one that quickly enters the conversation.

A simple way to describe value investing is trying to buy a dollar worth of something for 50 cents.  Basically you’re shopping the market looking for bargains.  Two names in the value investing space you probably recognize are Warren Buffett and John Templeton. 

So how do we help our clients become value investors?

We hire value mutual fund portfolio managers who basically don’t know or care what the market is going to do over the short term.  They’re looking to buy quality businesses at a cheap price so it’s no different than you or I buying winter coats during the summer. 

But what about growth?  Do we ignore that?

Of course not. 

While in most cases our investment portfolios will be weighted toward value stocks we will maintain growth positions for the diversification.  However, over long term periods value tends to outperform growth significantly. 

Here’s Buffett’s take on the value/growth debate:

Growth is always a component in the calculation of value, constituting a variable whose importance can range from negligible to enormous and whose impact can be negative as well as positive.

In addition, we think the very term “value investing” is redundant.  What is “investing” if it is not the act of seeking value at least sufficient to justify the amount paid?  Consciously paying more for a stock than its calculated value – in the hope that it can soon be sold for a still-higher price – should be labeled speculation.

But the key point for you is not to overwhelm yourself with owning the right mix of growth and value.  Your focus should be to avoid the insidious force of purchasing power confiscation.  And your best defense against this is by spreading your capital across ownership positions. 

Nobody I know and nobody you know has the slightest clue which areas of the market will deliver the best returns over the next year or two.  It is for that reason I sleep well having my assets spread broadly across the equity spectrum. 

It is my hope that you are doing the same.

In over 2500 years of economic history, never has a bear market not been followed by a bull market.  So why do people think otherwise today? 

Instead their fear should be directed at those who believe taxing people that create jobs will lead to more job creation.  If you believe this, I have some oceanfront property I want you to buy in Wahoo. 

Get the picture!?

History is littered with tragic examples that prove my point: 

Take Spain in the late 1400’s.  Back then Jews were among the wealthiest members of Spanish society.  Spain’s rulers saw the Jews’ wealth and claimed it as their own by confiscating everything they could get their hands on.  Most of the Jews left Spain and set up shop near modern day Turkey in the Ottoman Empire.

Actions have consequences so what happened next is no surprise. 

The emerging empire went on to experience never-before-seen levels of prosperity while Spain was plunged into an era of financial devastation.

“But Roland,” you say.  “What does this have to do with my finances today?” 

Everything!

See, what we are experiencing in the present day can be seen one of two ways:  1.  The opportunity of a lifetime (for those who understand what is taking place and know how to take advantage).  2.  Or, it’s the beginning of long decline of personal struggle for those that do not. 

Your choice.

Some people will come out of this recovery with more profits than they could have imagined while others will be forced to adjust to a much lower standard of living – i.e. learn the rules and play to win. 

Recessions are fun to study but not to live through so our job is to help as many people as we can get through this in the best shape possible. 

If it’s been awhile since you last attended our seminar series, now is as good of a time as any to visit us again.  The only cost to attend is your time and what you will gain is greater piece of mind, which may be the best investment there is today.

Here’s an interesting thought:  If governments could create wealth and solve all our economic ills, why don’t they do it all the time?  Why wait until a financial collapse before taking action?

Could it be because they can’t? 

In my view, it’s all part of their smoke and mirrors ploy.  Unfortunately for John and Sally Public, they often get caught up in the hype and believe that Washington will make them better off. 

This is why we invest a great deal of our time helping people master their emotions so they will be better suited to participate in the investment process while ignoring the spinmeisters on Wall Street and in Washington.   

So here we are stuck in the precarious economic environment where everyone is wondering:  Where can I put my retirement money so that it will be safe?

Since 1971 that has become a difficult question to answer. 

That was the year Richard Nixon added a heavy dose of government to the financial world by removing the final link between the money in your pocket and gold.

Question:  Which do you see as the safer long term investment – a portfolio filled with dollar-denominated investments such as bonds and CDs or a portfolio managed by Bernie Madoff?

Think hard because it isn’t an exaggeration to say the value of both are tied to assets created out of thin air. 

Here’s another thought:

John Dewey (1859-1952) once stated “You can’t make socialists out of individualists.  Children who know how to think for themselves spoil the harmony of the collective society.”

It should be noted that Mr. Dewey, a member of 15 Marxist front organizations, is often labeled the “founder of modern education.”

So what does this have to do with your financial safety?  Sadly, too much.

Growing up most people never taught the basics of managing money and the impact Washington has on our bottom line.  With pensions drying up and the risk of reduced Social Security and Medicare benefits, one then has to rely on individual savings and investing habits.    

Look across your peer age group and you will see that the majority of folks around you are totally baffled when it comes to these issues, including virtually every one of this nation’s elected officials.

Consider the baby boomer presidents we’ve had:  Clinton, Bush and Obama.

In 1990, three years before Clinton took office, there were 1,176 federal subsidies.  Near the end of the Bush administration that number had surged to 1,804.  To put this growth in context there were 1,019 subsidy programs in the 1970 federal budget.   

For those approaching retirement who remain convinced Obama’s hurt-the-rich campaign will benefit them, I feel sad.  Their retirement futures grow bleaker by the day until they begin to understand the consequences of Washington’s actions. 

For those informed it is proving to be an excellent wealth building opportunity.     

The gloom is easing up a bit and we’ve experienced a nice stock market rally but there is still the chance we have not seen the end of this shakeout.

In order to prosper in your financial life and get through this economic environment with the greatest peace of mind, you must rid yourself of any short-sighted thinking that may negatively impact your financial life. 

Every major downturn has its own unique characteristics.  This frightens investors into making the wrong decision at the wrong time.  For example, over the past 18 months I’ve witnessed investors dump their stock market holdings regardless of how well-managed the companies might be.  

A classic short-sighted decision.    

“But Roland,” you say. “Shouldn’t you move more of your money over to cash until you know the market recovery has arrived?  Isn’t that the safe thing to do for now.”

Nope, and here’s why:  For 95 years now the Federal Reserve has destroyed the buying power of our dollars.  With the massive amount of money that’s been created in recent months, I expect inflation to continue being the dominant, long-term trend throughout my lifetime. 

Cash is the LAST place I want my long term savings to be.  For more on this see my previous posts on derivatives. 

Knowledgeable investors I know realize that putting money in the bank today that could buy a loaf of bread will one day be given back those same dollars but this time they will only buy a few crumbs after inflation has taken its share.   

See, there is a difference between money and wealth.  Money is just the tool society uses to measure and trade wealth.  The true wealth: businesses, stocks, land, real estate, and precious metals cannot be created without limit; money can. 

My suggestion is that you recognize the difference between the two and if you have not done so already, start dipping a toe into the market by taking money and buy up the abundance of wealth that so many of your peers are ignoring. 

Here’s one last bit of common sense that explains why now is not the time for cash:

FINAL NOTE: I could be wrong but the chance we saw the market bottom back in the early part of March grows by the day.  Don’t get too excited yet because the windbags in Washington could quickly change that with a speech or a new piece of legislation.  But please stay tuned - the remainder of the year will likely be filled with many twists and turns.  

Video used with permission of WOWT Channel 6. 

The below charts are referenced in the video (click for a larger image):