Dear Mr. Berko:
What, in your opinion, is the best way to manage one’s money in the market? I’m 38, recently sold some business assets and have $216,000 after taxes to invest. I know a little about the market and have made a few dollars on some tips, some common sense and some luck. I’m very serious about this money and want it to grow and prefer to reduce my risks as much as possible. But I want to do it myself without a money manager. I’ve taken several investment courses and have read a few books on how some professionals made their money in the market. So do you have any tips on how I should proceed?
P.W., Troy, Mich.
Dear P.W.:
There are basically four types of people who purchase stocks: the trader, the value investor, the long-term buy and hold investor, and the income stock investor.
The trader is a guy who is on amphetamines during the day and steroids at night. Traders are tight as an E string, have the personality of a cobra and makes 20-60 transactions during market hours. They can’t have children, make lousy lovers and sometimes stutter. They either burn out, go broke or get lucky. Many are in counseling.
The value investor has a master’s in finance, a Ph.D. in medieval English history, GERD and is frequently constipated. They are Dumpster sniffers who believe that they can find value in a landfill, wash off the stink and resell it at a high price. Their highly secretive, proprietary methods of analysis ridicule conventional wisdom and common sense. Some make money, some don’t, and most have trouble sleeping at night.
The long-term buy and hold investor is fuzzy-brained and has owned Microsoft, Intel, Hewlett-Packard, GM, Ford, Commerce Bancshares, Sprint Nextel, Verizon and similar pale blue chip issues for l5 to 25 years. They stack old newspapers in their living rooms and keep shopping receipts from 20 years ago. They’re allergic to dogs and cats, vote Democratic, are often 20 to 40 pounds overweight and have been telling the same joke for 20 years. They get lucky every once in a while but when reminded that the average 10-year return for 97 percent of domestic equity mutual funds is less than 1 percent, they go into denial.
The real winner is the income stock investor. These guys are also long-term investors, but only if an issue pays a dividend. They prefer dividends in excess of 4 percent and issues that regularly grow their dividends, and they reinvest every dividend every quarter. These are the smart, canny, patient investors who understand the “Rule of 72” and are wise enough to know they can’t beat the market.
When I was working for Merrill Lynch’em in l959, an income stock investor I knew told me: “Knowledge is knowing that a tomato is a fruit, and wisdom is not putting that tomato in a fruit salad.” Income stock investors sleep well at night and don’t give a freckle if the Dow is up 300 or down 300 points for the quarter. They are fiscal and political conservatives, patient fathers and good husbands. They recognize in the past 20 years that dividends accounted for nearly half of the 394 percent return of the S&P 500 Index.
Now, consider a 20-year, $10,000 investment in a $10 stock yielding 4 percent and grows its dividend 4 percent per year. The income stock investor knows that this investment (assuming the stock price remains at $10) will be worth $34,000 in 20 years and will pay a dividend of $2,720 in the 20th year, $2,937 in the 22nd year and $3,177 in the 23rd year. You wouldn’t believe the 30-year numbers.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate Web site at www.creators.com.
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