Story goes that back in 1929 Joseph Kennedy was getting his shoes shined and the shoeshine boy began offering him stock tips. Kennedy promptly returned to his office and sold all his shares. The market crashed and the cash he was sitting on suddenly became the most valuable thing you could own in the new deflationary age of cheap assets.
The Simple Path to Wealth was the winner of the 2021 March Madness Tournament for the Best Personal Finance Book.
While I am honored by the accolade the fourth runner-up, and a book I happened to be re-reading at the time, is more deserving of the win:
This short, 158 page book by George S. Clason first published in 1926 and then again several times during the depression, is easy to dismiss. The stories, parables really, in it are charming and quick to read. Indeed my only criticism is that too many breeze through it without the needed reflection to absorb its profound lessons.
The Five Laws of Gold
The First Law
Gold cometh gladly and in increasing quantity to any man who will put by not less than one-tenth of his earnings to create an estate for his future and that of his family.
I wonder how many read that and miss the “not less than” part. In later stories in the book, he more commonly tells of people who “put by” 30%. My own book has occasionally come under attack for suggesting 50%. Maybe Clason was just smarter than I and figured he’d scare off fewer people by easing them in with 10%.
The Second Law
Gold laboreth diligently and contentedly for the wise owner who finds for it profitable employment, multiplying even as the flocks of the field.
But it is up to you to find that employment for it.
The Third Law
Gold clingeth to the protection of the cautious owner who invests it under the advice of men wise in its handling.
This might sound like advice to run to a financial advisor. It is not. It means don’t be careless with your money and don’t invest on the tips of your friends. Or your shoeshine boy.
The Fourth Law
Gold slippeth away from the man who invests it in business or purposes with which he is not familiar or which are not approved by those skilled in its keep.
This is why you can find many people who have sworn off the stock market. They invested on a hot tip that seemed to be working for others and lost. They didn’t take the time to understand what the market really is and how it really works before sending their gold to work there.
The Fifth Law
Gold flees the man who would force it to impossible earnings or who followeth the advice of tricksters and schemers or who trusts it to his own inexperience and romantic desires in investments.
This one seems pretty clear.
One very interesting thing, maybe because I get so many asking about buying gold as an investment, never once does the book suggest holding gold for its own sake.
Today’s FOMO investments
As you read through those five laws of gold, do all those recent “investments” that seem to be making everyone millionaires overnight come to mind? Me too.
And for all those racked with FOMO who have been asking my opinion of them, perhaps even looking for my blessing, I refer you now to these five laws.
But what, you may ask, about those who have become millionaires with these investments? Even if they are few, doesn’t that mean it is possible? Worth a shot?
A couple of years ago, I shared with you my sad tale of Mariah International. It cost me a cool $50,000, at a time when that was real money.
It was a very tough loss, hard on my wealth and my ego. But it was not the worst possible outcome. In that post I also shared with you this:
“It could have worked. And if it had, I very likely would have myopically seen it as the result of my astute investing prowess and totally missed how much a role luck would have played.
“That last, of course, would have lured me into being even more confident and aggressive on the next one. And that hubris mostly leads to tears.”
Casinos typically pay out upwards of 90% of the bets placed in winnings. Ever wonder why? The obvious answers are…
- If people walking in saw no one winning, they’d be less likely to play themselves.
- The house wants people around the roulette wheel and crap table pumped and excited, and those slots showering out coins and flashing lights.
- It creates excitement and dreams of possibilities. It encourages reckless behavior.
- That seemingly small 10% or less take makes for huge and sustainable profits.
But the less obvious, and more insidious reason is this:
Those winners will return and, with rare exception, will eventually lose it all back. And then some.
Do these FOMO investments = Kennedy’s shoeshine boy’s tips?
So to answer all those who have asked me in recent months, is this time different? Is this the time to sell and wait it out? To try to time the market and “dance in and out” as Warren Buffett once said (meaning it was the road to losses)? In short:
As I have said from the beginning, the market is unpredictable. Timing it, even when – maybe especially when – what it must do next feels so obvious, is impossible.
I’m tempted to belabor this point, but if you have read this blog and/or The Simple Path to Wealth you’ve already heard it. If you haven’t, I invite you to do so now.
So what should you do?
Now is the time to be absolutely sure you are prepared to do…
As always dealing with market volatility lies not in timing, but in your Asset Allocation and cash flow. Those depend on whether you are in the Wealth Accumulation or Wealth Preservation stage of your journey.
If you are in the Accumulation Stage and are aggressively adding to your stock investments from the cash flow of your earned income, a market crash is a blessing. Your dollars buy more shares at lower prices.
If you are in the Preservation Stage and living on your investments, your allocation in bonds serves to smooth the ride. During market run ups, as your allocation tips to a greater percentage of stocks, you are rebalancing your allocation by selling those off at high prices to increase your percent of bonds. When stocks plummet, your bonds are your “dry powder” which allow you to pick up those now cheap stocks as you rebalance again.
The market may be crashing as you read this. It might crash next week. Or next month. Or later this year. Or years from now. But as the very first post in my Stock Series is titled…
And another after that. They are a natural part of the process. No one can predict them. As long as you don’t panic and sell, they don’t matter. But make no mistake, they can be terrifying.
Now is the time to make sure your Asset Allocation is such that you can tolerate the storm. If you wait until the storm is upon us, it is too late. Review and, if you feel the need, adjust now while the seas are calm and then…
Tie yourself to the mast.
What you should not do.
In these times of a seemingly endless rise in the markets, don’t fall prey to the temptation to become more aggressive in your holdings. Stay faithful to the allocation you chose when market crashes might have seemed more likely.
And, when the crash does finally come, don’t panic and sell. Stay the course. Resolve now that, for you, during a market crash:
Selling is not an option.
If you have any doubts about your ability to do this, do not follow my investing path. There is no shame in this, and here is an alternative to consider…