Updated: May 3, 2013 12:14PM
Originally published: February 17, 2002
Has the stock market taught you an expensive lesson in the last two years? You can avoid most of those mistakes in the future by reading an enlightening and easily understandable new book: The Secret Code of the Superior Investor, (Crown, $25). The author is James Glassman, the Washington Post financial columnist and co-author of 1999’s best-selling Dow 36,000.
Let’s get that issue of 36,000 out of the way immediately. Yes, even with the Dow struggling to move above 10,000 again, Glassman sticks to his forecast that the popular market average could rise above 36,000 by the end of this decade. (You can find my original column from Oct. 3, 1999, archived on the Sun-Times Web site.) Glassman’s prediction was not based on the market euphoria of those days, but on a belief that rational investors would come to realize that stocks are not inherently any riskier than bonds.
Why the 36,000 Dow is still a good bet
Long-term studies of the stock market show that--over the long run--stocks actually have far better returns than bonds: 11 percent for stocks vs. 5.3 percent for bonds. But since studies by both Ibbotson and Wharton show there has never been a 20-year period when investors would have lost money on a diversified portfolio of large-company stocks, equities should actually be a better investment based on risk and return.
And so rational investors, who now have the benefit of easily available market intelligence, would bid up the prices of stocks to 36,000.
That was the theory. This is the bear market. So, does the theory hold?
Glassman points to the fact that individuals poured $300 billion into stock market mutual funds in 2000, and another $31 billion last year. Those were the first back-to-back years of market declines since 1973-74. And investors continued to pour cash into stocks. Of course, if the market continues to decline in 2002, this theory--and investor optimism--will really be put to the test.
But Glassman remains confident that if the economy returns to its postwar growth rate averaging 3 percent annually, and if corporate earnings keep pace, then stocks are the rational investment of choice.
So how do you really invest successfully in stocks, now that the market has made fools of so many people who thought it was easy to get rich in a few hot growth stocks? That’s where The Secret Code of the Serious Investor comes in.
The not-so-secret secret code
It turns out that the secret code isn’t very secret after all. It’s just going to be a revelation to those who got started investing in the dot-com era. The key principles will be familiar to those who have read the works of market legends ranging from Benjamin Graham to Warren Buffet to Peter Lynch. If you missed them, try Glassman. The secrets have never been explained in a more direct and understandable style. Among my favorites:
Buy and hold: Glassman calls this the key to successful investing. Through up markets and down, growing companies eventually reward their owners.
Know yourself: If you don’t understand your risk tolerance and time horizon, then you’re bound to get swayed by emotions that confront every investor.
Don’t try to beat the market: “It should actually be a relief to learn that one of the most important laws of investing is that nobody can outsmart the market,” says Glassman. Instead of “outsmarting” the market, he advises you to “partake”--just be invested in good stocks.
Time is money: “Time is the single most important factor in investing--more important than the stocks or bonds you pick or your cleverness in buying or selling at just the right moment,” says Glassman, advising parents to start teaching and investing for their children while they are young.
This is the one book I can recommend for the absolute novice investor. The Secret Code of the Superior Investor is not about how you get rich quickly in the stock market. It’s about how the market can grow your wealth over time and with patience and perseverance. That’s the secret code--and that’s the Savage Truth.
Terry Savage is a registered investment adviser and is on the board of directors of McDonald’s Corp. and Pennzoil-Quaker State Co. Send questions via e-mail to firstname.lastname@example.org. She appears weekly on WMAQ-Channel 5’s 4:30 p.m. newscast.