Sunday, May 26, 2013

Nothing Up My Sleeve

I enjoy watching a good stage magician, especially the ones that do those little hand magic tricks. Right under your nose, the Jack of Diamonds disappears into thin air. Then the Queen of Hearts appears from nowhere in that same hand. Once at a conference booth I watched a magician performing card tricks, literally right under my nose. At some point he stole my watch. Of course he gave it back, but I never felt a thing. How did they do that? At least part of the answer is misdirection. The magician gets you looking at the wrong thing. The big green consumer machine is performing its magic tricks every day. Most of us never notice until it is too late.

The other day I watched a new promotion from Kmart. If you spend $50.00 or more at Kmart, you get a coupon that gives you a 30 cent a gallon discount on gasoline. The big message screams, “Free Gas!” You can redeem these coupons at participating BP and Speedway stations. They limit the purchase using that coupon to 20 or 15 gallons respectively. Both companies only allow the use of a coupon for one fill up. If you use less than the maximum you lose. So, the best case scenario is a $6.00 savings after a $50.00 expense. I seldom buy more than 9 gallons of gas at a time. That would give me $2.70 if I didn’t have to drive out of my way to find a BP station. I drive past a BP station once a week, so that is covered. However, the BP station probably charges an average of 15 cents a gallon more than the nearby 7-11 Store. That would make my big savings about $1.35. Don’t get me wrong. If I needed to buy $50.00 of stuff at Kmart, I would certainly redeem that coupon if only for $1.35. I don’t look down my nose at free money whenever it is offered.

Now, let me teach you a better trick, free gas for years! In April 2012 gas prices were headed past $4.00 a gallon. Those kinds of prices are really painful. As a thought experiment, I looked to see how much of my gasoline purchases over the years were covered by my investment in Chevron (CVX). The answer was shocking (at least to me). The answer was, almost all of it.

$4.00 a Gallon Gas

Watch my hands; nothing up my sleeves. You don’t increase your net worth by spending more money. Change the way you view the world. Become an investor. It really doesn’t take all that much to get started. A no fee (that is an important concept) Schwab 1 account requires $1,000 minimum. Trades are $8.95 a pop. There is no minimum trade size. It doesn’t take anything but your signature on a form from your personnel office to start a 401K account. Just do it. Then you will find yourself asking the right questions like, “How can I profit from $4.00 a gallon gas?”

From time to time I am asked for highly specific investment advice by people who don’t want to do the research and don’t want to take any risks. I don’t give that kind of advice. In fact, I can’t give that kind of advice. Any time you invest in anything you are taking a risk. No one knows what the future holds. If any salesman tells you that his company has a secret formula to predict the future, run away. The bad news is that if you invest in the stock market you will lose money. The good news is that it is likely that you will make considerably more money than you lose if you are careful not to invest too much in any one thing or at any one time.

Consider: The most you can lose in a trade is all of it. It is highly unlikely that you will buy stock in a company that will go bankrupt if you exercise a reasonable amount of common sense. Even if that were to happen, if you have invested less than 2% of your net worth in that company it won’t be the end of the world. It is somewhat more probable that you might lose something like 50% of your money in a highly unlikely disaster (sometimes called a black swan) like the BP platform fire, but BP is a well managed company with many assets. If you are patient there is a good chance you will recover most of that money. If you are a bit of a gambler you might even put a little more money into BP after the price of your shares drops 50%. In a bad year all of your positions could lose as much as 40%. Then is the time to buy quality and dividends. Boy that can be hard on the stomach, but Baron Rothschild taught, “Buy on the sound of cannon fire. Sell on the sound of the victory bells.”

There is more good news. In the stock market there is no upper limit on gain. It is pretty easy to double your money in a reasonable time period, like seven or ten years. Tripling your money over the same kind of time periods isn’t impossible.

Remain humble and thankful for any blessings you receive as you invest your money in the market. There is an element of luck in picking what shares to buy.

Now just for grins the famous Penn and Teller Cigarette Routine, one of my favorites. Be sure and always watch what the big green machine is doing—but always watch from the other side.

The Seven Laws of Magic

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