Episode 32: The Wealth On Any Income Book – Section 3: Investing vs Gambling – Transcript

Hi Folks, Welcome to the Wealth On Any Income podcast. This is where we talk about money tips, techniques, attitudes, information and provide inspiration. I’m your host, Rennie Gabriel.

In the previous episodes I spoke about your five year financial goal; the difference between good debt and bad debt; how good debt can support you to create wealth. We discussed how to complete a Balance Sheet and determine your net worth so you know how close you are to Complete Financial Choice®. For the Income and Expense form, when you focus on expenses first you’re rewarded with more income. We discussed how to measure the level of pleasure based on where you spend your money. And in the last episode we spoke about how to handle emergency spending without creating a financial disaster.

Today, I will read the last of the 12 steps in the Wealth On Any Income book that deals with creating your prosperous financial future. Today we’ll cover the difference between investing and gambling, the questions you can ask to help you pick a financial planner that is a fit for your objectives plus investments terms and products you need to be aware of.  It will be around 20 minutes today.

As I read, I could stumble over some words. I am not a professional voice over actor so please forgive me if that happens.

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Investing versus Gambling

When I speak about investments or investing in the market, I’m referring to purchasing items like quality corporate stocks, not gambling. There is a difference. Many people go to Las Vegas or Atlantic City to gamble, have fun and be entertained. The stock market can be approached the same way. However, I am NOT suggesting playing the market when I speak about investments.

Yes, you can have fun and you can be entertained from your stock market investment portfolio. However, I do NOT speak about playing the market or gambling in the market when addressing clients about investing. Playing the market and investing do not belong in the same sentence. They do not mean the same thing.

You can gamble in Las Vegas, but unless you own the casino, take advantage of neighborhood conditions or take advantage of gamblers, you can’t invest while in Las Vegas. Gambling or playing the market is not the same as investing in the market. How can you gamble in the market? You can bet on the rise or fall of a stock or the market itself. You can bet that certain things may happen by certain dates. Gambling has names like puts, calls, straddles, options, butterflies and derivatives. I’ve heard people say they’re not gambling when they buy a put or call., They say they’re hedging. Well, that’s what gamblers do; they hedge their bets.

Another form of gambling is to use the concept of momentum investing. You buy and sell (trade) stocks on a moment-by-moment basis, taking advantage of price fluctuations due to economic conditions, government actions or investor psychology. You can spend three to four hours daily on a home computer involved in this approach of active trading. If you would like to know more I suggest the book Wall Street Money Machine by Wade B. Cook. Although he has been indicted and found guilty based on his business practices you will understand the concept from his book. I am not recommending this approach any more than I would recommend you become a professional poker player, but if that’s what’s in your blood, if that approach matches your value system, then go for it.

How does gambling pay off? Just like in Las Vegas you lose most of the time, unless you’re a professional. When you win, you can win big with a small bet. This is like roulette when the little ball lands on the number you chose. It looks the same when you gamble in the stock market; a little bet can pay off big.

Unfortunately, gambling and investing have been tied together since the early 1900s. Even the term that represents the largest most stable corporations, Blue Chips, is said to get its expression from the most valuable poker chips, which are blue.

I did enough gambling in my business. I gambled that my education, training and experience would pay off. I spent thousands of dollars publishing another book and it might not sell. I could have asked, “Will I make the level of profit I project on my cassette tape program?” If I fly to some city to sign up another corporate training client, will it go smoothly? Or, might there be unexpected delays or breakdowns? Since it feels like I gambled enough in my business, when it came to the stock market, I invested - I did not gamble.

Most of my money (90%) is in real estate. This is based on my attitudes and values. How did I invest in the stock market? I purchased the stock of companies that had a track record of growing dividends and share price increases. I bought them, reviewed them once per year, and continued to hold them if they continued to meet the criteria I established. By 2001, when the .com bubble burst and people were losing 30-40% of the value of their holdings, I was earning 1%. For more information on how to choose those companies I suggest you read America’s Finest Companies Investment Plan by Bill Staton. You can also read The Motley Fool Investment Guide by David and Tom Gardner, or get their information online at www.motleyfool.com

 While I don’t agree with everything they recommend, there are many basic truths to the investing approach they take. I’ll go over one of the simple strategies in a section after I describe the “Dow.” It’s called the “Dogs of the Dow” approach.

How to Pick a Financial Planner

Again, this is not something you have to do on your own. When I want to discuss some financial planning ideas, I speak to someone I can trust. This doesn’t have to be some high profile financial planner, and I know many of them around the country because of my activities in the past.

How do you find someone you can trust? Ask. Ask other people you trust for referrals. Perhaps you know, or have, a CPA, attorney, bank officer, successful business owner or wealthy friend. Ask someone who may be familiar with a particular planner’s work, abilities and specialty.

The Financial Planning Association (FPANET.org), Certified Financial Planner Board (CFP.net) and National Association of Personal Financial Advisors (NAPFA.org) all have “find an advisor” tools plus other hiring tips.

It is often best to speak with three planners you are considering. When you meet, ask them questions to see if there’s a match for you. Regardless of the credentials or background of a financial planner, don’t abdicate your responsibility to oversee what is going on. You need to continue to question recommendations and be skeptical about the planner’s suggestions. You need to educate yourself on the particulars in any decision. Would it make sense to go to a travel agent to plan a vacation and say, “I’ve got $10,000. Send me somewhere.”? Of course not. You must be actively involved in the process. To assist in thinking clearly, breathe deep and take in oxygen. It’s one of the American Medical Association recommended daily nutritional requirements.

Here are some questions you can use to interview someone you’re considering:

1. What is your background, education and experience?
2. How do you stay current with changes in your field?
3. How do you get paid? What conflicts could arise between your interests and mine?
4. I am most concerned about ________. How might you handle that?
5. What are the typical circumstances and incomes of the clients with whom you work?
6. Are there others to whom you refer that assist you with your recommendations?
7. Are they in your office?
8. Do you get assistance for help in complex areas of tax planning, portfolio management, insurance evaluation or estate planning?
9. Can I see a sample of your work?
10. Do you fully disclose commissions you will earn if you sell products?
11. If you don’t sell financial products, can you make specific recommendations on how I can buy them at the best price?
12. What continuing services do you provide? How much do they cost?
13. Have you been reprimanded or disciplined by regulatory or industry bodies? Can you provide their phone numbers so I can verify that?

Stocks

Stocks, shares, shares of stock and equities refer to the same thing. They represent units of ownership in a corporation. Any of the products you buy or use were probably manufactured, distributed or sold by some corporation. If the corporation is doing a good job and making profits it could be a good business to own, and you may be able to own a part of it, if it’s a public company. A private company cannot be purchased by the general public. This is also called closely held stock. The way to own part of a public company is to purchase shares of stock that the company issues and offers for sale. It is usually purchased through a stock exchange, like the New York, American, Pacific, or Nasdaq. Some companies will sell directly to the public and you can read about that under the heading, “How to Invest Without Paying Commissions.” This information is also available in Staton’s book America’s Finest Companies, which I mentioned earlier.

Bonds

Bonds are issued by a corporation or government entity. A bond represents a promise to pay for money borrowed. Interest is paid to the lender, who is the bondholder. This can be an individual or other organization that loans the money. The face amounts are often issued at $1,000, $5,000 or $10,000 amounts per bond. Interest rates are higher than bank interest and increase based on the risk involved, or the ability of the borrower to repay the loan. The term junk bonds refer to bonds issued by companies where the risk of default is high. Maturity dates are often 10 years or longer. Interest is paid during the maturity period and the amount loaned is repaid at the end of the period.

The value of the bond can rise or fall, based on changes in the interest rates available in the general market place. If you have a bond that pays 10% interest, and new bonds are issued which have rates at 8%, the value of the 10% bond will rise above its face value. This excess over the face amount is called a premium. Bonds do not have to be held by the owner to maturity, they can be sold earlier and fetch more or less money than the face amount depending on changes in interest rates. (If you would like more education on bonds, there are several excellent books available at your local library, bookstore or on Amazon.)

The Dow

You’ve heard it on the evening news, you hear it on the radio while you commute, it often makes front-page headlines, and you may not know what it is. It’s the “Dow.” This is the term often used for the Dow Jones Industrial Average, also called the Dow 30 Industrials. This is the most frequently quoted index which lists the prices of one share of stock from 30 household names such as Disney, McDonald’s, Coca-Cola, and so on. It is supposedly designed to measure the health of the economy based on the products manufactured and sold by these corporations. Its validity as an accurate gauge of the economy is widely debated and many of the companies listed are not even in manufacturing, unless you consider movies and hamburgers manufactured products.

Shortly I will talk about stocks that were on the Dow in October 2008. The companies on the list have changed over the years, which also detracts from the ability to accurately gauge numerical changes in the index over time. Prior to the year 2000 prices were quoted in fractions, such as Coca-Cola at 80 5/8, which would be $80.625. By 2000 this was changed to real dollar and cents denominations.

As an example of the Dow changes, in August of 1999, Union Carbide, which had been on the Dow since 1928, was to be acquired by Dow Chemical, which is not on the average. This means a slot opened up for another company to be listed that was chosen by the editors of the Wall Street Journal. They have the right to decide who will and won’t be listed on the Dow.

Another change on the list occurred when Travelers Insurance bought Citicorp. The Dow used to be limited only to corporations who had issues traded on the New York Stock Exchange. Corporations like Intel and Microsoft, among the country’s largest corporations, were not on the list until 1999 because their issues were traded on the Nasdaq Exchange.

The concept behind the Dow is as follows: If we look at the value reported on 2/21/96 (not shown), you could add the price of one share of stock from each of the thirty corporations and it would total 5458. (Stock prices are quoted without a “$” symbol.) That final number also includes an adjustment of each share of stock calculating its worth based on how much money the total corporation is worth. This is the number you would have heard in the news that evening, or printed in the paper the following day.

On August 5, 1999, the index was at 10,674. This is an increase of 95% over a three-and-half-year period, representing a 21% annual compounded rate of return, more than four times the interest from a bank savings account. This was a very strong period of growth in the market, as measured by the Dow. By October 2007 the Dow reached 13,930. By October 2008 it was down to 8,379, a decline of 40% in one year. On May 21, 2014 it was at 16,533. The point is volatility exists.

Disclaimer: This listing of stocks is not an offer to sell securities. This listing has not been approved by any government agency. Securities may only be offered through a current prospectus. All investments are subject to certain risks. For example, those that include common stocks are affected by fluctuating stock prices. No investment advice is being offered through this list. Registered Investment Advisory services can be offered through securities representatives of a registered broker/dealer.

The following are examples of some of the 30 stocks listed as a part of the Dow Jones Industrial Average as of October 24, 2008          https://money.cnn.com/data/dow30/

1. 3M   59.61

2. Alcoa    9.41

3. American Express   24.05

4. AT&T     24.68

5. Bank of America   21.07

6. Boeing    45.24

7. Caterpillar   33.30

8. Chevron   63.91

9. Citigroup  12.14

10. Coca-Cola 41.61

11. du Pont  29.33

12. Exxon-Mobil   69.04

13. General Electric 17.83

14. General Motors    5.95

15. Hewlett-Packard  32.44

16. IBM 82.07

17. Home Depot   18.51

18. Intel  14.28

19. Johnson & Johnson   60.79

20. JP Morgan & Chase  35.43

21. Kraft Foods   27.10

22. McDonalds  53.06

23. Merck & Co  27.35

24. Microsoft 21.96

25. Pfizer 16.57

26. Procter & Gamble  58.87

27. United Technologies  47.31

28. Verizon Communications 25.08

29. Walmart 51.40

30. Walt Disney  22.61

On October 24, 2008 the value was at 8,378.95.

On October 24, 2020, 12 years later, the Dow was at 27,685.38. After dropping 650 points that day it was still an annualized increase from 12 years earlier of 10.5% compounded annually.

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Here’s your opportunity to grow: Buy either the paper version or PDF version of the Wealth On Any Income book from my website instead of Amazon. Profits from any book purchased from my website are donated to the charity Shelter To Soldier.
Go to www.WealthOnAnyIncome.com/books

In the next episode we’ll cover more of the financial terms you need to understand to create a prosperous financial future like how to invest without paying commissions, Dogs of the Dow, loads, Dollar Cost Averaging and more.

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Until next week, be prosperous. Bye, bye for now.

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