Investing Made Simple, Part I

Investing is defined as setting aside a sum of money in order to gain a financial return in the future. It is amazing to me how there exists so much ignorance with regard to investment advice. Actually, I really shouldn't be amazed since common sense seems to be not so common these days. Here is a case in point: my mother.

My mother is a reasonably intelligent woman, so I don't want you to get the wrong idea about her. However, she does seem to have a streak of ignorance when it comes to investing. To begin with, she tends to be very conservative when it comes to investing. That itself is not ignorant. Everybody has different levels of comfort when it comes to taking risks. Each person needs to assess their own choices in order to determine what will allow them to sleep at night. Most of her excess money is kept in CD's and savings accounts, which are relatively safe investments. However, she has two strange attributes when it comes to investing.

First, for some reason she has a soft spot for investing in coins, which generally aren't the safest of investments. She isn't what you would call an coin collector in the sense that she doesn't spend her off-hours going to coin shows and such, so she doesn't derive any joy out of her coins. Basically what she does is every year she takes a chunk of money, buy some US Mint Proof sets, and hides them away in a closet. Now it usually isn't a large chunk of money, but it is still odd behavior for someone who keeps all of her savings in FDIC-insured accounts.

Second, for some reason she also has a soft spot for one particular local bank stock. This is the only stock that she has ever owned to my knowledge, and she has quite a big stake in this stock. Investing in stocks is inherently more risky than putting your money in a CD, so that seems out of character for her. However, buying one stock and one stock only seems adds to the mystery to me. I have tried to ask her why she feels "safe" investing in this one particular stock, but not safe investing in, say, a S&P 500 index fund where she would be holding shares of 500 of the biggest companies. Usually, her reply is that this particular bank stock always seems to do well, so based upon this track record, she feels safe holding onto it.

Like I said, she is an intelligent person, but when it comes to investing, she seems to become irrational.

To be fair, this behavior is not exclusive to her. I have stories of people who have invested in all sorts of crazy ways which defy reality. In my younger days, I myself plunked down $200 to buy shares in a company that was building french-fry vending machines. I had somehow convinced myself that this was the "next big thing", but I have yet to see a single french fry vending machine anywhere in my travels.

The interesting thing about the french-fry stock was that I was sold on it by a friend of mine from high school who ended up working for a Boiler Room type brokerage which employed a "pump and dump" strategy spearheaded by a bunch of wide-eyed kids seduced by the allure of making money. My friend ended up getting out of that situation once he realized what was going on, but not before he had convinced himself and some other people that french-fries from a vending machine was the next Microsoft. In fairness, he lost a few hundred bucks on the stock too, which is why I don't hold the loss over his head. The Vin Diesel movie certainly does portray this brokers quite accurately from what I can, by the way.

Anyway, the fact that these "Boiler Room" outfits even exist is a testament to the general ignorance of the population with respect to investing. In the coming weeks and month, I am going to attempt to rectify the situation through the application of education and logic. Now I am not hopeful that I was succeed since people will continue to be irrational when it comes to the pursuit of wealth. However, I feel as if I have an obligation to share my knowledge about this topic.

If you cannot tune in to future blog postings, I urge you to read the most sensible and down-to-earth investing guide I have ever come across. It is called The Only Investment Guide You'll Ever Need, by Andrew Tobias. This isn't a "get rich quick" type of book, so if you are looking for a quick windfall, you won't find it here. However, it gives realistic and practical advice on how to invest and manage your money.

By the way, if you ARE looking to get rich quick, my observations tell me that the best way is to publish and sell a book on how to get rich quick. People seem to eat these types of books up, regardless of their validity. After all, anyone who really has a way to get rich quick is going to be saving that knowledge for themselves, and not selling it for $20 a pop to anyone who can read.