Life & Liberty: Hints for the Very Small Investor


I become morose when I read magazines that give advice to the "small investor." It's just that what the investment mavens therein consider small investments is not what I would consider small. This might have something to do with my worldview and the worldviews of those with whom I am able to associate.

To me, a small investment is made when I decide to buy extra toilet tissue as a hedge against an upcoming price increase in aisle 3 at the grocery. Past that, a lot of my net worth is tied up in nonliquid intangibles, such as this month's rent and the first installment on whatever it is I lately owe to the paperboy. My latest acquisition in metal was a muffler and tailpipe for an aging 1969 Volvo, my most mature asset.

Tax-sheltering ideas such as buy a condo and rent it to your brother-in-law just cause my eyes to glaze. If I could get my brother-in-law out of my house, I would have bought him a condo years ago, tax shelter or not.

So in the best entrepreneurial spirit, I would like to fulfill what I see to be an informational gap for persons of my lowly ilk: an investment column for the unwashed masses, the very small investors. Here it is:

The economy is going to soon change dramatically and you're going to get royally screwed unless you do something really smart and do it fast. But let's face it, you probably won't. Two years from now you'll be reading ad copy for some investment newsletter, its author famous for predicting accurately the very trend which will be at that time eroding what meager buying power you might have today. Not to worry. You have one advantage: You have so little to lose that it's really not going to matter. The rich get poorer and so do the poor. Still, you might want to fight the good fight, so consider carefully the following advice.

If you buy gold its value will likely decline. If you buy stocks, the market will fold up. A move to diversify one's portfolio by purchasing both gold and stocks is generally followed by either (1) a downturn, (2) a recession or (3) a depression. These are all the same thing.

Decisions to buy stocks should be done scientifically, never emotionally. This requires explanation. A case of an emotional stock purchase would be if you continued to amass Chrysler stock throughout the middle 1970s just because your old Uncle Hubert used to work for them.

Better would be a scientific approach. There are two kinds. Market analysis requires the potential investor to carefully study sociological and demographic trends in order to better predict what goods and services will be in most demand and hence increase the values of their respective stocks. Technical analysis is a method by which stock performance is measured over time in order to ferret out a cyclical pattern that can be predicted and subsequently acted upon with little regard for other "softer" market indicators. Thus, foolish emotional buying would today leave you with a large chunk of Chrysler, while shrewd market analysis would have pointed the way to a large holding of Atari and technical analysis to a big stake in LILCO (Long Island Light Company).

Financial advisors often suggest that we carefully watch certain market sectors for discrete uptrends and downtrends. They postulate that it is only necessary to get in shortly after an uptrend starts and get out shortly after a downtrend begins. Unfortunately, this is more easily said than done, because very small investors tend to confuse the tops and bottoms of these trends. Hence, we are prone to doing things like selling our Wendy's to buy a nice big block of Continental of Illinois.

Another market strategy involves so-called trend-bucking. As the name implies, this strategy suggests that we buy and sell in the market in ways that are exactly opposite of what all common sense would otherwise lead us to do. This could often work, but it requires guts and stamina, which is often beyond the very small investor, whose backbone is often studied as a topic in invertebrate biology. Face it, if you were a trend-bucker, you wouldn't now be enrolled in break-dancing classes at a studio above your favorite sushi bar.

What about metal? you ask. Metal is the ultimate hedge against inflation, if you assume they'll be willing to take a Krugerrand down at the K-mart so you can buy a new set of wiper blades for your Torino. Otherwise, this stuff is hard to store. You just can't tell the UPS deliveryman to put the two dozen ingots in the family room until you make room for them in the garage. You need a depository, which is a nice safe place to keep the metal until times get rough and the government comes to confiscate it.

An alternative that is often mentioned involves no actual delivery of the metal. You simply pay the money and are issued papers that assure you that you own the metal and that it's available on demand. If this sounds like a good idea to you, then I have some investment property in Arizona I'd like to talk to you about.

Next time, we'll talk about why I think US Savings Bonds and current-issue US postage stamps are the way to go in the future. In the meantime, remember: to get ahead of inflation, get behind the dollar!

Stephen Barone, a children's psychologist, is a very small investor.