Books

The Motley Fool Investment Guide by David and Tom Gardner

Right up front, I have to admit that I am not a wealthy man. I do not have millions in mutual funds, stocks, international money market holdings or a huge slice of Microsoft. In fact, the only Microsoft stock I have is the software I am currently using to write this article. Like most people, the only money I have is in property (a mortgage), mutual funds (via a 401(K) pension), and an offshore account in the Caymans. OK, so the last one's a lie - it's on a different island.

So I didn't read this book because I had thousands to invest, or because I had won a fortune on my last trip to Reno. No, I read it because I wanted to learn about how investing in stocks works. Funnily enough, making a fortune is not what life is all about for me; I want enough to be able to do what I enjoy doing, and if that doesn't require millions, that's fine by me. But then what if I wanted to be wealthier, how would I do it?

This book is a light, easy read that introduces you to the notion of investing and it actually gives you guidelines on how to do it. By the end of the book, I had written down enough notes to get me started on building my own “just-for-fun-until-I-get-$10,000” portfolio. The writers, David and Ton Gardner, have convinced me that I can make money from investing and I now have a plan in place such that in 2-years time I will have (a) no debt, and (b) $10,000 to invest in stocks. It's that good a book!

So what's the way to do it?

The guys suggest a three-point plan. The first step is to invest 20%-30% of your portfolio in high-yielding Dow stocks. For those who don't know this (and I was one of them) the Dow Industrial Index uses a list of 30 blue-chip companies, which includes such names as AT&T, Philip Morris, Coca-Cola, Disney, and more recently, Microsoft. So, when the Dow goes up or down, it is the price of stock (or shares) in these companies that changes.

The Gardners recommend you split your stock five ways, 2-parts in the second company on the Dow list, and the next three on the third, forth and fifth companies. Thus, your stock is in a 2-2-3-4-5 pattern. You then leave these for as long as you can, with 20 years being a good period to start with.

The authors argue that this strategy will give you returns significantly above average, which they support by example and statistics. Mutual funds get a fair hammering from the guys, who say that stock investment will beat mutual fund investment over 80% of the time. Strong stuff.

The second step is to invest 50%-60% of your money into Growth stocks - Small-cap companies. A “small-cap company” is one that makes between $50 million and $200 million per year. These can make you money because they have more potential for long-term growth than some of the big companies. This means that the return on your investment can be significant. Of course, you can lose money, but that's why the authors have you do step one and buy those blue-chip Dow stocks - to cushion you from the larger fluctuations that can occur with growth funds.

They go into some detail on how to choose stocks based on what you know about (a) the industry you work in, (b) your hobbies/interests, and (c) your general observations of trends in the market.

The final step is to to have 0-20% of your portfolio in Shorting stocks. These are stocks you buy in order to make money when they fall! The basic idea is as follows: you see a stock that you believe is overvalued and suspect it will fall. Let's call it ”Prospero's Books,” an on-line book supplier similar to Amazon.com. Investors, some of whom will buy anything that has dot.com in the name, leap on the bandwagon with dreams of owning part of the next Microsoft (which is probably a Linux-based company). You call your Broker and say, “I want to sell 100 shares in Prospero's Books short.” Your Broker then borrows 100 shares from a current shareholder and sells it at the current rate - in this example, $20. This has now netted you $2000.

Then lo and behold, the bottom falls out and the dot.commers start to sell. The price per share drops to $5 and you then get your Broker to buy 100 of these. She hands the borrowed shares back and you pay $5 to all those investors who sold. This costs you $500. So, you sold at $2000, bought at $500, therefore you've made $1500. Not bad, eh?

Of course, things can go wrong. What is the owner of Prospero's Books turns out to be a genius and the company is so good that share prices go up to $30. Then to buy back costs more, so you end up out of pocket. But this is why the Gardners suggest 0%-20% because shorting is not for everyone. Besides, before you can short stock, you have to have an account with a Broker that can cover losses i.e. you need lots of spare money to make money.

So to summarize, the book tells you to;

• Buy 20-30% Dow top 4
• Buy 50-60% Small Cap companies
• Buy 0-20% Shorting stock

The books goes into some detail about all of these and how to investigate the value of a company's stock and how to decide if a particular stock is a good choice.

For non-economists, it is as easy a read as you are likely to come across. The Gardners, or “Motley Fools,” as they call themselves, write with humor, are sometimes iconoclastic, and make investing seem fun. Recommended to the general reader and the beginning investor.

For more about the “Motley Fools” go to their web site at The Motley Fool where you'll find lots of no-nonsense information about the world of investing and finance. They also write a syndicated column for a number of newspapers.

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