An Investor's Perspective

The following is a guest post from PW at Pursuing Wealth. PW is a full time stock market investor who also holds a regular job.

I admit my blog caters to a different audience and the readers of FMF will most likely not find value in what I write. However, I volunteered to write a post for FMF while he’s on vacation because I’m sickened by what I see happening in the stock market and society in general. Because I’m a stock market investor, I have learned to make money whether the stock market is going up or down, but everyday working Americans don’t know how to do that. I’m watching my co-workers realize that they can’t retire because their 401K has lost so much money. I spoke with an elderly lady this weekend whose $300,000 nest egg left to her by her late husband has now dwindled down to $60,000. People are losing their hard earned dollars, and they feel helpless. So as an investor, I wanted to share my thoughts with you.

I’m a regular reader of Free Money Finance (FMF) and the only way I was able to free up cash to pay off debt and invest in the stock market was by following the principles you’ll find here at FMF. Do you remember the insurance article I wrote? Just by following one money-saving tip, I freed up $107 a month to invest or pay off debt. Please read everything you can on personal finance and don’t buy into the get rich quick hype. Use common sense principles taught by people like FMF and Dave Ramsey. Three years ago I couldn’t even tell you what a mutual fund was, much less how the stock market worked. But a severe financial crisis caused me to reach out for help and become educated about personal finance. I was fortunate in that one of the people I reached out to happen to be a millionaire who taught me not only the basics like buying cars with cash, but also how to invest in the stock market. He taught me how to get rich slowly and how to get rich fast. The lesson that stood out the most was not to learn about money management from the government, if you do you’ll end up broke, in debt, and needing a bailout. I also learned that it pays to stay educated. Education alone can’t recession-proof your life, you have to take action.

I found an article (PDF) written by State Farm that will help to keep things in perspective concerning the stock market such as:

“Despite the current challenges faced by the financial markets, investors should remain mindful that we have seen market cycles like this before. In fact, over the past 100 years, the S&P 500 Index has declined 10% or more, on average, once per year. Declines of 20% or more occur once every three to four years (source: Ned Davis Research). In other words, market declines are normal and as we work through and rebound from these current challenges, odds are there will be others on the horizon…the stock market has never produced a loss during any rolling 15-year period (1926-2006)”

Does that mean we won’t have another Great Depression or that you won’t lose money? No. But that does help you to keep things in perspective so that you will not make short-term impulsive decisions (like cashing out your 401K) for a long-term need (retirement). If you do not have the proper education necessary to make good financial decisions, then please find someone who does.  Just be sure that they are producing results based on what they know.   

In the November issue of Kiplinger magazine, an article titled “Bad Decisions in Bad Economic Times” states that “Investors will endure all kinds of risk, crazy risk, to maintain the status quo”. This doesn’t just apply just to investors. Families also take on all kinds of risk to maintain the status quo. People finance cars for 5 years or more, they buy big houses they can’t afford, buy clothes on credit they don’t need, or might not wear. Whenever you take on an enormous amount of debt, you have also taken on an enormous amount of risk. We are seeing the effect that risk has on the economy when things go awry. I know, I know, people don’t want to buy old cars with cash or live like a pauper because it makes them “feel” poor and generally people don’t like to feel poor and that is why they spend the way they do. I used to feel like I was poor when I first started my personal finance journey and sold all my “toys” and started to get out of debt. I was given a 15 year old Honda Accord, which I still drive. However the feeling quickly faded as my bank account grew. Then I started to feel like the people I read about in The Millionaire Next Door.

Also when things in the economy are at their worst, people emerge to prey on your panic. Be careful about buying into the “get rich quick” mentality. Common sense personal finance, spending less than you learn, will get you there just fine. Here is a vague recount of what a get rich quick guru told me:

“The secret to becoming wealthy is that it’s no secret. The steps are easy and elementary and anyone with a fifth grade education can do it. However, they are so elementary that people often overlook them because they convince themselves that becoming wealthy involves some special skill or knowledge and that it can’t be that simple. It’s also definitely not in the how to, if it was then all the people that read my books would be rich. Your results are in the why (why is it a must that you become wealthy). When your why is big enough you will figure out the how to. You make a choice to become wealthy and then take the necessary steps to get there. That’s it! It’s not oh let me wander aimlessly through life spending my money the way I want, getting in debt, and hope that someday I’ll be rich…People see that I have amassed a fortune investing in XYZ. They want to know how I amassed my fortune. They convince themselves that there has to be an easier and faster way to riches. Yes there is an easier and faster way, but it certainly isn’t found listening to the sales pitch of someone trying to exploit the fact that you are looking for a secret. The intense desire to become wealthy causes one to make irrational decisions. I became wealthy and then become wealthy two times over by selling my knowledge to you in the form of seminars, books, and personal coaching.”

I was blown away. Spilling his knowledge is free, it doesn’t take much effort on his part, the hard work has already been done, and yet people will pay for it. Secrets are for suckers and he suckered me into buying his product.

A fortunate and unfortunate truth about life is that for those who are educated about personal finance and have spent years following the principles of wealth building, the worst of times are also the best of times. Everything is on sale for them. They aren’t strapped down with debt and they can take their cash and get a great deal on a home for their family. Warren Buffet, one of the words greatest investors, is now starting to buy stocks because the prices haven’t been this low in a long time.

Les Brown said that, “once you stop fighting for what you want, what you don't want will automatically take over!” If you stop fighting for a healthy body, you become overweight. If you stop fighting for your marriage, you grow apart, and when you stop fighting to become wealthy, you become poor. Fight to keep your life recession-proof and fight to take care of your family. You deserve to live the life you’ve always dreamed of, now go and make it happen!

Comments

[Caleb Nelson]

What I think people should notice is that, the rich aren't panicking. The people panicking are those who truly aren't really financially free. Even those who have decided to become financially free are jumping into the market with greedy eyes because they see the opportunity amongst us. I think that it should be well noted that Buffet is getting in. Warren Buffet, the King Solomon of our day is buying American stocks while Americans are jumping out by the truck loads.
Amazing article.

Caleb
www.mefinanciallyfree.blogspot.com

[Santos]

This was a great article!

What I don't understand about Warren Buffet is why he is supporting "The (Empty) One" Obama. There must be a "secret" that explains why Warren is supporting a socialist ;-)

[Kevin M]

Good guest blog. Kudos to you for having your financial revelation. We had ours about 5 1/2 years ago and just today the wife and I were talking about how far we've come and how much cash we have in the back. It's a great feeling knowing that safety net is there.

[kitty]

Santos, this is what I am wondering about too.
Keeping in mind that Buffet warned about the internet bubble in 1999 and about the risk of derivatives in 2004, makes me want to listen to him now at least in terms of buying stocks.
I do wonder about his support of Obama. Is there something we don't see that Buffet does? I am scared of what Obama would do for economy, even if I don't like McCain either.

[Ben]

What a wonderful post! I will be subscribing to your blog! @Santos - I TOTALLY agree!! Kudos!

[Frank]

@ Santos, Kitty, Ben

Are you serious? I mean... seriously?
Because Buffet has common sense and DECENCY?

Buffett blasts system that lets him pay less tax than secretary
http://www.timesonline.co.uk/tol/money/tax/article1996735.ece

Speaking at a $4,600-a-seat fundraiser in New York for Senator Hillary Clinton, Mr Buffett, who is worth an estimated $52 billion (£26 billion), said: "The 400 of us [here] pay a lower part of our income in taxes than our receptionists do, or our cleaning ladies, for that matter. If you’re in the luckiest 1 per cent of humanity, you owe it to the rest of humanity to think about the other 99 per cent."

Mr Buffett said that he was taxed at 17.7 per cent on the $46 million he made last year, without trying to avoid paying higher taxes, while his secretary, who earned $60,000, was taxed at 30 per cent.

[james]

There is no doubt these are trying, historical times in the financial markets. The whole notion that everything is going to be okay on Wall Street rings hollow when you realize that, within a few short months, every major investment house on the Street has ceased to exist! These companies represented the apex of free market capitalism, and now look at them. If Bear and Lehman and Morgan and Goldman and Merril can't make it on their own, what makes me think I or anybody else can?

Stock markets rarely move in a linear fashion. We've had a tremendous fall to this point. Perhaps we bounce back soon and continue higher for a couple of weeks/months. But something tells me the real pain will come next year, when the market grinds lower week after week, the S&P grinds lower, taking out the 2002 lows, and the bobble heads on TV give up asking "is this the bottom," and everybody is totally disgusted by the mere mention of stocks.

The other scenario is that we crash from here over the next couple of weeks. S&P 600 just in time for Thanksgiving!

If the current financial malaise is the product of decades of parabolic debt expansion, debt which can no longer be repaid, and which probably never could, it will take years to destroy all the excess debt. Credit contraction will only increase in the meantime, making the economy worse, thereby increasing defaults, which leads to even tighter credit, etc. It's a downward spiral.

What to do? For starters, consume less, save more. This mantra is nothing new to the readers of FMF, but soon everybody will understand it.

Second, and most importantly, educate yourself like our guest blogger did. Knowledge is your most potent tool in a time of crisis.

And third, to hedge yourself against the government hyperinflating its way out of this mess, buy gold.

Good luck.

[PW]

Thanks for the comments! You all have a good discussion going here and I enjoyed reading your feedback.

[headknocker]

The greatest part about being financially free (no debt but the house), is that there is no need to panic. I am investing for the long-term and accept that the market will come back.

I like what Proverbs 21:5 says, "The plans of the diligent lead surely to plenty, But those of everyone who is hasty, surely to poverty."

[SAHM]

Great post! I've enjoyed being reminded that it is a process. My favorite statement is his last paragraph. We have to keep fighting to become recession proof!

[Jenny]

I don't know why everyone's so surprised that Buffett supports Obama. GOP leaders have been ignoring the "fiscal conservative" idea for years - and without that, the stereotype of the rich supporting Republicans is out the window.

From what I've read of the candidates' economic plans, they're both bad but McCain's is slightly less coherent. Obama wants to raise taxes and raise spending, which is troubling, but McCain wants to cut taxes while raising spending ($300bn to buy bad mortgages) and still promises to balance the budget. How, exactly?

Back to the article: Good stuff. Getting through this downturn is going to be about 90% mental. It's the worst environment many of us (myself included) have seen as investors, and remembering that it's happened before and that good times are ahead is the hard part.

[Santos]

Frank,

Yours is the the common charge of the liberal/democrat/populist (take your pick),that charging taxes to one group to give the money to other group is decent (I guess it is more powerful when you yell it: DECENT ;-)

May I suggest that when someone uses their vote to use the power of government to take money from one group and give it to other he is stealing (I will not yell, though). Stealing is not what decent people do.

Besides, are you suggesting that only after Buffett became the richest man in the world he suddenly grew a conscience. To quote you friend "Are you serious? I mean... seriously?

[Santos]

Jenny,

I agree with you that the republicans as the party of the rich is a myth.

The reason I'm surprised that Buffet supports Obama and frankly, that Obama himself has an ideology that is borderline socialist, is that both these men are living examples of the conservative ideal: Individuals that worked hard, took chances and succeded. Then they go around and promote ideas that are neither decent nor smart and that seem to say "I could succeed despite this terrible system but not everyone is gifted like me". This is an elitist view. This is why Obama is seen as one. But Buffett? that one is new.

[Frank]

You disregard that there is an element of luck (and admittedly VERY hard work) in success that great (45mil/yr), and Buffet admits it when he says "Those of us LUCKY enough to be in the top 1%"

Your typical "Obama is socialist" tirade is a tired call of the right wing. The right wing did a great job in the 60s-80s making anything progressive seem like socialism to the point where mainstream democrats have shifted a little right.

How do you even relate to todays Republicans though? All they are doing is delaying an inevitable crash. No country has ever deficit spent as much as us and made it out alive. Buffet knows this. All economically able minded people know this. You can not cut income and increase spending (right FMF?). Yet that is Mccains plan. Mccain will actually put us in the hole MORE than Obama.

And PS I am not yelling? Its emphasis. I do not see an italics function?

[Edward]

I'm glad this blog exists. Good job!

These days the middle class has to challenge what is going on and dig deeper than the surface. Neither John McCain or Barack Obama are going to help us. The answer is not to pull money from one group and give to another who may not even be working.

We must read up and overcome fear by learning how to pull ourselves out of this mess. The politicians won't help us.

Thank you for your help in this blog!

Very good.

Ed