I Saw My Doctor Today

I saw my doctor today and things are going well.

Right off the bat, he told me that he does not understand what I send him. My articles go over his head. Yet, reviewing his recent investment activities, I find that he is making all of the right decisions. He is learning the right lessons. He is avoiding the common, disastrous mistakes.

Keep this in mind. If you do not understand everything in my articles, it does not reflect badly on you, or your intelligence or your decision making. Most likely, it means that you do not have specific training and that you have not followed all of my research on a daily basis.

My doctor asked me what he would have to do to be wealthy within a very short amount of time, less than five years. My answer: redefine wealth.

I mentioned my latest article, The Next Recession, and how strongly some people resisted the message: it makes sense to hold cash right now.

[Recessions occur. It has been several years since our last recession. Stock prices fall during a recession. We are likely to have a great buying opportunity before too long. Capping this off, today’s ten year upside potential for stocks is poor.]

The Next Recession

This does not mean that you have to stay out of stocks. Just remember that you have an alternative. Stock prices are likely to be a lot better before too long.

[Almost anything can happen in the next year or two. Single year confidence limits of stock prices are plus and minus 40% to 50%.]

My doctor had already acted on this theme. He recently put his money into a short term certificate of deposit. The reason: today’s short term interest rates are much better than before and my doctor could not find attractive stocks to buy.

My doctor asked about price to earnings ratios. I mentioned that, when I was just starting out, the highest (single year) price to earnings ratio that I was willing to tolerate was 8. Today, it would be 16 (since valuations today are twice their historical levels). I allow this to rise up to 20 over brief periods of time.

I emphasized the need to look at several years of earnings. Never be deceived by short term fluctuations, either up or down.

Then I mentioned an important point: stocks don’t have to come down to normal levels to be outstanding investments. Yes, prices are too high today. They will fall enough during the next recession.

My doctor mentioned a speculative investment that he made. I checked: it was not part of his core holdings. In fact, it was a small investment. My own advice is to set aside about 25% of your portfolio for such choices. In this case, my doctor selected a stock that is likely to grow, that is unlikely to hurt much if it does not succeed, and that has a reasonable chance (my estimate, around 25%) of producing a spectacular return. This is much better than gambling. His choice beats the roulette table many times over.

I mentioned that the typical investor makes good selections. His problem is bad timing. My doctor mentioned that many of his associates are selling their real estate investments to buy stocks. This confirms my observation. The best time to buy stocks is NOT when the Dow Jones Industrial Average has just reached new, all time highs. (The S&P500 is still below its highs.) In fact, this is among the worst possible times.

In contrast, my doctor put his money into the certificate of deposit.

My doctor likes dividends. Need I say more? My doctor is investing exceptionally well.

Reflections

My initial suggestion, to redefine wealth, sounds flippant. It is not. This is what Rob Bennett talks about at his site. Read “Personal Finance Planning Is Not About Self-Denial Anymore.”

Personal Finance Planning Is Not About Self-Denial Anymore

Rob Bennett recently put many important concepts into an outstanding article, “Market Timing--What Works and What Doesn't.” He deserves the credit for noticing that stocks do not have to fall back to typical levels to become an attractive choice.

Market Timing--What Works and What Doesn't

Susan, the college student who has opened up the new web site that I am following, favors gambling as opposed to investing.

That is OK. She is just starting out.

Smart-Investing-Guide Web Site

I think that she will do better if she puts 75% of her money into stable, boring, long-term core holdings and allows herself the remaining 25% for exciting, speculative issues.

Along similar lines, I recommend George Clason’s “The Richest Man in Babylon” for those who are just starting out. There are some subtle lessons within this enjoyable work of fiction. One of them is to set aside money for your retirement even when you have large debts. Otherwise, the money that is supposed to end up in the retirement account never seems to get there.

Have fun.

John Walter Russell
October 11, 2006