You’ll recall from yesterday that the first secret to getting rich is that you cannot fear poverty. Otherwise, you can’t take the chances you need to take if you are to accumulate substantial wealth. 

You’ll also recall that there are only three important decisions in life: what you do… where you do it… and with whom you do it. 

Here, we continue our series with more on… what you do. 

Imagine a man who is a great chef. He loves cooking. So he opens a restaurant, and it is an immediate success. 

Seeing the possibilities, he takes his recipes, trains other chefs and opens other restaurants. Pretty soon, he has restaurants all over town… and the money is rolling in. 

But now he is no longer doing what he likes to do. Instead of cooking, he’s running a complicated business; he’s become a manager and an administrator. He’s figuring out tax strategies, leverage and cost control. 

“I’ve become a damned accountant,” he says. “I hate accounting.” 

The real fun is getting money, not having it. Once you have it, the fun is over. 

This is partly because of the nature of wealth. To get it, you have to be expansive, ambitious and optimistic. But once you have it, you have to change your personality to cope with it… protect it… and administer it. 

Instead of being an entrepreneur… and a builder of wealth… you must become a custodian… and a conservator. 

You can no longer be the same person you were. You have to assume that the worst will happen… because it probably will. 

Now you have to be cautious, careful, distrustful, cynical… and pessimistic. You’re no longer expanding your wealth. Now, it shrinks as you do all you can to try to stop nature from running her course. 

In short, you are no longer a young man full of energy and promise; you are now an old man trying to stop the clock. 

And then, when you are no longer building a fortune, you have to do something else. 

But what? 

You look for things to do… ways to pass the time… things you can convince yourself are meaningful or fun. But they are usually just big time wasters – art… charities… sports… entertainments. 

Often, the positions a rich person puts himself in are not only dull, but also they are fraudulent. 

He has made a lot of money in one business, so he thinks he will be competent and successful in others. Remarkably, others think so too! So he could end up as chairman of a local hospital board or maybe the head of its investment committee. 

But nothing in his career prepares him for the petty politics of a charity board of directors… or the deceptive nuances of the investment world. 

He is not only miserable because he feels he is wasting his time, his projects also end in failure. 

The hospital board gets into a nasty internal feud… and he cuts the hospital fund – and his own fortune – in half, mistakenly believing that he knows what he is doing. 

We did not make that mistake. We have not retired. Still, we have suffered from wealth. 

Tune in tomorrow to find out how…

Bill

Market Insight:
Beware of Overconfidence 

From the desk of Chris Hunter, Editor-in-Chief, Bonner & Partners

If you’re watching the Dow and the S&P 500, it seems nothing can go wrong for investors. 

For most folks, watching stock prices rise without so much as a 10% correction induces a very human response: They assume it “means” that prices will continue to rise. 

As Yale economics professor and recent Nobel laureate Robert Shiller put it in his bookIrrational Exuberance: 

Another aspect of overconfidence is that people tend to make judgments in uncertain situations by looking for familiar patterns and assuming that those patterns will resemble past ones, often without sufficient consideration of the reasons or the probability of the pattern repeating itself.

But overconfidence works in many different ways. 

For example, Shiller carried out a survey of investors following the October 19, 1987, US stock market crash to investigate how overconfidence affects market prices. 

He asked, “Do you think at any point on October 19, 1987, that you had a pretty good idea when a rebound was to occur?” 

Of the individual investors surveyed who bought on that day, 47% said yes. And of the institutional investors surveyed who bought on that day, nearly 48% said yes. 

According to Shiller: 

Thus nearly half of those trading that day thought they knew what the market would do that day

Why would anyone think they could forecast what the stock market would do on a particular day – especially one as volatile and frightening as October 19, 1987? 

This certainly does not conform to what we know about the forecastability of markets. 

And when Shiller asked investors what made them think they knew when a rebound would occur, references were made to “intuition,” “gut feeling,” “common sense.” 

His conclusion: These intuitive feelings play a large role in setting market prices. 

The problem is your intuition is just as likely to be wrong as right. Past market movements, although often of interest, do not tell you what is coming next. 

In fact, as far as we know, there is no way of determining near-term market moves in a consistent way. 

That’s why it pays to focus on the long term. 

As we wrote on Friday, if you look back as far as 1926 (the year one of the most extensive publicly available data sources starts) through December 2012, the 30% of stocks with the lowest P/Es has delivered 18.6% annualized returns. The 30% of stocks with the highest P/Es has delivered 10.9% annualized returns.

Clearly, your buy price, over long time horizons, is closely linked with your returns.

So, instead of trying to predict where prices will be in the future based on past price movements, focus instead on the price you pay for your investments.

You don’t know what the future holds. What you do know, with mathematical certainty, is that the lower the price you pay now, the higher your future returns will be. And the higher the price you pay now, the lower your future returns will be. 

With the US stock market trading on valuations at the top of their historical range… now is not a promising time to buy for long-term investors. 

If you are already invested in US stocks, consider taking some money off the table and increasing your cash balance. And consider using trailing stop losses to lock in your gains.

Further Reading: The US is heading down a difficult path. As Bill says, “It already lives on borrowed money… and borrowed time.” If you want to learn how this has happened and what you can do to overcome the financial challenges that will arise as the situation deteriorates, you simply MUST read Bill’s book The New Empire of Debt, which he co-wrote with Addison Wiggin. 

It reveals, in often shocking detail, the financial realities the US faces and what the ultimate outcome may be. Claim your FREE hardcover copy of Bill and Addison’s book here. All we ask is that you cover the shipping cost.