If Henry Hazlitt can reduce the basics of economics to one lesson, I can do the same for investing. The best way for me to synthesize the world of finance into a single lesson is to tell a story.
While attending an investment seminar last year in Los Angeles, I was awakened in my hotel room at 7:00 A.M. by a frantic phone call from a subscriber to my investment newsletter. He said he had recently retired and had invested nearly $250,000 in an offshore mutual fund that purported to make constant profits of 25 percent or more a year. Several months later, he had become concerned when the fund failed to respond to a request for a modest withdrawal. He had called the foreign company, only to discover that the telephone had been disconnected. Now he wanted to know if there was anything I could do for him.
Sadly, there was little I could do. I told him that I had heard of the company and that the investment advisor had embezzled his money and millions more. Currently, the investment advisor is in jail, awaiting trial. Meanwhile, almost all the money is gone—forever.
The worst part was that this investor—it was hard to believe he was one of my subscribers, since I have warned repeatedly about financial frauds—had invested his entire life savings, and his wife's as well, in this fraudulent scheme. I was sincerely sorry for him. But I had to wonder how a man who spent his entire life working hard and saving a quarter of a million dollars could lose it all in a matter of months.
Every year at financial seminars, I meet thousands of investors—businessmen and entrepreneurs who have been extremely successful in their careers. Very few come to seminars to learn how to make their first million. Most are already successful and are just trying to keep the surplus funds they have worked long and hard to obtain. They want to become successful investors, just as they have become profitable business or professional people.
Well, to tell you the truth, most of them can't be successful investors. People will never be as successful in investing as they are in their own businesses unless investing is their business. You may think you can be great speculators by reading a couple of financial books, going to a few seminars, or reading this column once every two months. But you should think again. You can't be passive investors and expect to achieve the same monetary rewards as you do in your active professional or business lives.
Even in the financial world, the most successful investors are full-time businessmen and entrepreneurs who provide the services to investors—stockbrokers, money managers, coin dealers, real estate brokers, mutual fund managers, insurance salesmen, mail-order promoters, tax-shelter brokers, and yes, even newsletter publishers. They are the ones who make it big. Usually the investor is the last one to make any money.
Want proof? Look at the Forbes 400 Richest People in America. How many made their fortunes investing in the stock market? Only three! How many made it investing in rare coins or artwork? None! Admittedly, more (70) made it in real estate, but many of them are land or shopping-center developers or have inherited property from financial tycoons who made their fortunes in other ways.
By far the most prevalent way to riches was not real estate, not the stock market, not mutual funds—in fact, it was not investing at all. It was people's own businesses—manufacturing, retailing, banking, shipping, computer technology, etc.
So what is the lesson? If you want to be a successful investor, you have to give it the attention of a full-time business.
Review why people are successful in a business. It is because they concentrated on doing things right. They took the necessary time to educate themselves, to research ways of becoming more proficient. They got involved. They relied on the expertise of others, but they didn't let them do the job. They spent hours, often overtime, to make sure that they understood everything.
That's the same attitude you need when it comes to investing. You can make money in the stock market, mutual funds, and gold, but only if you take the time to learn what it's all about. You'll undoubtedly make mistakes, but you will learn from those mistakes and become better at it, just as you did in your business.
You might say, "But I'm too busy in my own business to take on another full-time job of investing. I'd rather rely on a professional money manager." You're asking for trouble. No one will watch your money more closely than you. If you can't take the time to investigate an investment area thoroughly, you're better off not getting involved. I've seen too many people get burned by blindly turning their money over to the "professionals." Stay only with areas you are familiar with. If that means only the stock market, or rare coins, or even money market funds, so be it. Don't let diversification be a cover for ignorance of the marketplace.
Two classic books on the subject are worth reading: The Battle for Investment Survival, by Gerald Loeb (Simon & Schuster, 1230 Avenue of the Americas, New York, NY 10020), and The Richest Man in Babylon, by George S. Clason (E.P. Dutton, 2 Park Ave., New York, NY 10016). Both are often available in bookstores or libraries.
Remember: Invest as though it were your full-time business, or don't invest at all!
Mark Skousen, editor of the investment newsletter Forecasts & Strategies, is adjunct professor of finance and economics at Rollins College.
This article originally appeared in print under the headline "Investments: It Takes Time to Make Money".
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