| A young man I know started to break into the | | | | earned assets? |
| executive ranks at the multinational company he | | | | By the end of the very next day, the market not only |
| worked and realized he should focus more on | | | | started to recover, but regained about half of |
| investing his personal assets. Eventually he wanted to | | | | Monday's loss. The world did not end, and he could |
| stop working for money, and let his money work for | | | | continue his vacation much more relaxed than he had |
| him. He had bought and sold his first two houses for a | | | | been for the last 36 hours. Oh maybe I forgot to |
| tidy profit and was now living in the third home, situated | | | | mention - and you may be wondering who that young |
| on a half acre lot in a nice suburban neighborhood. Up | | | | investor was - it was me! |
| until that time he had been investing primarily in his | | | | What is the lesson we all should learn from my |
| home and investment (mutual) funds. He also had used | | | | experience? There is an appropriate saying (for which |
| debts wisely, and watched Louis Rukeyser's Wall | | | | I cannot find the original source) - "The night is darkest |
| Street regularly. Other than one nearly catastrophic | | | | just before dawn". When the market is down it is a far |
| experience with trading stock options, his investments | | | | better time to buy than when it was up. Had I invested |
| were rising steadily year after year. | | | | more at the end of that gloomy day I would have |
| One particular weekend was especially exciting. The | | | | earned a 10% return the next day! In the stock market |
| day after watching his favorite weekly television | | | | I could have borrowed (on margin) to buy and would |
| program for investors, he would be leaving his two | | | | have earned a very large return on someone else's |
| young kids with his in-laws, and boarding a flight with | | | | money. |
| his wife for a second honeymoon in Hawaii. The stock | | | | So the First Commandment of Investing: Buy Low - |
| market had been rising for several months, and was | | | | Sell High is simple... but like the other Commandments |
| already up 17% year to date. His assets were rising | | | | you will read about in future articles... it is simple, but not |
| along with the market. These assets along with their | | | | easy to follow. This is the same as the 10 |
| two salaries allowed them to travel without a care in | | | | Commandments in the Bible, Torah, Koran, or the list of |
| the world. Unbeknownst at that time, this young | | | | negative actions in the Buddhist teachings. Those |
| investor would be a billionaire within 20 years. Life does | | | | universal rules are simple... but not easy to follow all the |
| not get much better than this! | | | | time. |
| One of the panelists on the show that week was Dr. | | | | How do you know when the market or a particular |
| Martin Zweig (the regular viewers know him as Marty). | | | | stock is at or near a low? You will never know for |
| This particular weekend he was the gloomiest of the | | | | sure until after the fact, although the best indicator |
| panelists, and said boldly his indicators were so | | | | when you have a lot of money invested and the price |
| negative, he felt we were about to have a [stock] | | | | continues to drop is the knot in your stomach. The |
| market crash. The other panelists and the special | | | | more intense that knot becomes the more likely you |
| guest that evening were much more upbeat given the | | | | should ignore the pain and buy more. Simple... but not |
| great momentum and the cash still flowing into stocks. | | | | easy! Did you buy more stocks in 2001 and 2002, or in |
| On Monday morning, the young couple woke up in their | | | | 2008 and 2009? |
| luxurious Maui hotel room at 6:00 AM to take full | | | | How many times have drops in prices led to a mass |
| advantage of what the Hawaiian beaches and that | | | | exodus of investors? It happens one or more times |
| crystal clear blue ocean had to offer. As they got | | | | per year in most markets around the world. |
| ready for breakfast, they watched a few minutes of | | | | Unfortunately for many novice investors it only |
| CNN and felt a bit disoriented and of course jet lagged. | | | | happens once. They sell, calculate their losses and |
| For those that have only seen Hawaii on one of the | | | | vow to never "gamble" again. I remember well what |
| maps showing it in an inset off the coast of California, | | | | happened in 1994 in Poland when the young stock |
| may not realize that 6:00 A.M. in Hawaii is 12:00 noon in | | | | market crashed about 90%. The money they lost was |
| New York, and 6:00 PM in Europe. It really is a long | | | | earned by some smarter investor who bought their |
| distance from the US West Coast. The newscaster | | | | low priced shares - and sold them later for a profit. |
| was saying the stock market (US Dow Jones Industrial | | | | Maybe that is the thing we forget - every time we buy |
| average) has already dropped 250 points (10%) and | | | | a stock someone has to be willing to sell it to us at |
| seemed to be in free fall that morning. | | | | that price. When we sell - someone buys it from us. |
| Well breakfast could be delayed for a few minutes for | | | | The smart investors buy low... and sell high. |
| a call to the stock broker and investment fund | | | | During 2008 and the first quarter of 2009 the stock |
| company to find out what is going on and maybe put | | | | markets around the world dropped 50% or more from |
| in some sell orders. Well several million people had the | | | | their highs in 2007. Following the First Commandment |
| same idea and every number he tried to call was | | | | faithfully meant as the market dropped I invested |
| busy. Probably the best thing to do was have a calm | | | | more. Unfortunately, the market dropped further and I |
| breakfast, a brief walk on the beach, and then try the | | | | started to get that knot in my stomach. I invested |
| phones again. By the time he could place a call the | | | | more until I reached my maximum leverage (I not only |
| market had slowed its decline, but the lines were still | | | | invested all my cash, I also used margin debt to buy |
| busy. Does this sound familiar? What would you do? | | | | more). What happened? The market dropped again in |
| The day ended with a 508.3 point (22.6%) drop from | | | | 2009 and I was starting to feel a knot about the size |
| the prior week's close. This was the biggest one day | | | | of Black Monday. It was to the point I was starting to |
| loss in history, now known as Black Monday - it was | | | | question this fundamental principle and debating |
| October 19, 1987. He was young and an inexperienced | | | | whether to put sell orders in to lower my debt. Within |
| investor and really not sure what to do. And given that | | | | weeks the market jumped and my worries were once |
| the phones were all blocked there was not much he | | | | again proven to be a waste of time and energy. |
| could do. | | | | Much has changed in those many years since Black |
| In the news that evening, and in all the newspapers the | | | | Monday. Even though I am still young I now have a lot |
| next day, the journalists were drawing parallels to the | | | | more investment experience. The world has changed |
| market crash in September 1929 which led to the | | | | dramatically, including New Europe being freed from |
| Great Depression. The percentage loss was nearly | | | | the Soviet Union, and willingly joining the European |
| double that in 1929. The charts looked eerily similar | | | | Union. China has shifted to a capitalist based economy, |
| when rescaled and 1987 overlaid on 1929. Was the | | | | despite centralized government control. Many trillions of |
| world about to go into the next depression? Would | | | | dollars have been earned - but one thing did not |
| millions (along with he and his wife) be losing their jobs | | | | change. The basic principles of sound investing did not |
| as happened in the early 1930's? The more he read | | | | change. Learn them, starting with the First |
| and watched the news the more he worried. Would 11 | | | | Commandment: Buy Low - Sell High, and stick with |
| years of hard work, savings and investments be lost? | | | | them. You will be glad you did! |
| Was it too late to sell and recover some of his hard | | | | |