Money Talks

Want to be a successful purveyor of an investment system? Don;rsquo;t worry about knowledge or experience. I’ll hook you up with everything you need to know right now.

First, buy a mailing list of people who are suitable candidates for your new system. It’s not hard to find a list of people who have bought investments, or even people who have thrown money at other people’s investment systems.

Next, randomly select four stocks. Just get the listing of stocks from the local paper, close your eyes and take four stabs.

Now, write a letter proclaiming the benefits of the Turbo-Charged Super-Stock Selection System. Make up a bunch of hoo-ha about how the system has worked for thousands of investors who were willing to gamble a mere $500 in exchange for learning the secrets of turbo-charged investing. Put in some charts and graphs showing how $5.00 invested using this system 10 years ago would now be worth $5 million. Don’t forget to use lots of exclamation points! Close your letter with a few sentences something like this: But wait, friend! I DON’T WANT YOU TO SEND MONEY TODAY! I know you have no reason to believe me! Instead, just watch one stock, the one mentioned at the bottom of this page, for the next few weeks. The Turbo-Charged Super-Stock Selection Model SAYS IT’S GOING HIGHER!!! SEE THE RESULTS FOR YOURSELF!!! Who else would offer you FREE TIPS THAT PROVE THEIR SYSTEM WORKS? NOBODY, THAT’S WHO!!!!!

Now, divide your list into four groups, and suggest one of the four stocks you selected to each group. Wait a month. Odds are that at least one of the four stocks you blindly selected will have gone higher. If the market is generally rising (a safe bet, since on an annual basis the stock market goes up about 75% of the time) they may all go up.

Throw out the group to whom you mailed bad suggestions. Write a second letter to the groups who got profitable suggestions. Basically just restate the benefits of the Turbo-Charged Super-Stock Selection System, and sprinkle in a few more outlandish claims. This time include some testimonials from “real” people who have used the system. At the end, include something like this: I STILL DON’T WANT YOUR $500! NOT UNTIL I’VE PROVEN WITHOUT A DOUBT THAT THE SYSTEM WORKS!!! AT THE BOTTOM OF THIS PAGE IS YET ANOTHER STOCK THAT THE TURBO-CHARGED, SUPER-STOCK SELECTION SYSTEM SAYS IS GOING HIGHER!!! WATCH IT FOR ONE MONTH FOR MORE PROOF THAT THE SYSTEM WORKS!!!

Use the blindfold and point system to select four more stocks. Divide your list of remaining prospects into four groups, giving each group one of your new suggestions.

Repeat this process two more times, until you’ve arrived at a list of prospects to whom you’ve mailed four consecutive winning stocks. Each time, you’ll be including more hyperbole and exclamation points. Ask for $500 from each of these people. Many will bite. Congratulations! You’re in the investment system business! Continue to take in checks and send out randomly chosen stock selections until you screw up. Don’t worry about people hating you when this inevitably happens, because that ultimately happens to honestly developed investment systems too.

If you happen to accidentally continue to pick winners for any length of time, hire a publicist, write a book and hit the talk-show circuit. When the money starts petering out, simply expose yourself for the fraud you are and write another book. Call it “There’s One Born Every Day. The Story of ____________” (your name here).

There. You’re rich and famous. And now that you’ve got some money to invest, maybe you’d like to know about an investment system that really does work. And this system is simple, free, involves no smoke and mirrors and can be proven in less than a minute. Not only that, you’re probably already using it. It’s called dollar cost averaging, or systematic investing.

Both dollar cost averaging and systematic investing are 10-dollar words for a 50-cent concept: investing fixed amounts of money at regular intervals over periods of time. In other words, doing what you may already be doing in your 401(k) or other savings account: putting $50, $300 or whatever you can every month into a fluctuating investment. The concept is simple. When you put a fixed amount of money into a fluctuating investment, you’re automatically buying fewer units when prices are high and more units when prices are low. Do this over time and you’ll find that you create wealth even if the investment ultimately doesn’t go up in value! Impossible? Check this out...

This chart shows what happens if you invest a fixed amount ($100) in a hypothetical stock (or mutual fund, or gold coin or tulip bulb...anything that fluctuates in value) every month for six months. When you start, the price is $10, so your C-note buys 10 shares. The next month the price drops to $8, so that same 100 bucks buys 12 ½ shares. In the third month, the price zooms to $15, so your money only buys 6.7 shares. Yada, yada, yada...six months go by. At the end, the stock is back where it started: 10 bucks. But you’ve accumulated 66 shares, now worth $660. You’ve made 10% on your money, even though the stock is exactly where it started. How did this happen? Because your investment was fixed, you automatically bought more shares when prices were low and fewer when prices were high. And you didn’t need to write a check to some phony wizard or obtain an MBA to do it. All you had to do was keep showing up.

You’ll recall that earlier I told you that since 1929, the stock market has averaged about 10% a year. But even if you’ve never gone near a stock, you know that the market doesn’t grow steadily by 10% year in and year out. The stock market’s going to go down 10% one year, up 20% another year, be flat another year and basically do whatever is necessary to make complete idiots out of as many people as possible. While it may seem unsettling, this volatility isn’t a bad thing; it’s a great thing. It’s exactly why systematic investing works. Because when prices are low you’re going to buy more shares and when prices rebound those shares are going to make you much wealthier than you’d have been with a steady 10%.

Let’s use an example from real life to see how using systematic investing in a fluctuating stock market compares to earning a steady, consistent rate of return. Say we travel back in time to January 1,1980. (While we’re here, lets pick up a few shares of Microsoft and Wal-Mart, ok?) We’re both going to start putting $500 each and every month into separate investment accounts. You’re going to put your money in the bank and earn a steady 10%, year in and year out on some type of loaner investment. And I’m going to invest in the Vanguard S&P 500 Index Fund. Now, fast-forward 20 years to December 31^st, 1999. How much have we accumulated? We’ve both invested $120,000 ($500 per month = $6,000 per year times 20 years.) At a steady 10%, you’d have about $363,000. But I’d have ended up with about $987,000! Why did I beat you? Primarily because the S&P 500 did a lot better than it’s historical average of 10% per year: during that particular time period: it actually averaged more than 17% per year. But some of the difference comes from investing fixed amounts of money over fixed periods of time. In other words, from buying more shares of the fund when they were cheap and fewer when they weren’t.

It’s also important to note that there’s no way you’d have been earning anything like 10% in high quality loaner-type investment. You’d have probably averaged something more like 5%, which would have brought your final balance down to about $204,000.

I could leave this example alone, since it presents dollar cost averaging as a great system in the most dramatic way. But I think to do so would be misleading. In doing the research to investigate this example, I also obtained data for additional 20-year periods in addition to the one I just used, and they’re illuminating enough to briefly sidetrack us. Let’s have a look.

Growth of $500/Month Invested for 20 Years in S&P 500 Index Fund

Adjusting our starting and ending points by just a few years changes the outcome dramatically. If we stop our experiment in 1999, we end up with more than twice the money we’d have by ending in December 2002. You probably already know why: the stock market lost oodles in the first two years of the new millennium. From January 1, 2000 to December 31, 2002, the S&P 500 Index lost 40% of its value, one of the biggest setbacks since the great depression. In addition, a large rally began in August of 1982, so by starting our program after that point we miss some of that gain as well.