Read an Excerpt
Introduction
Taking charge of your money is the first step toward taking charge of your life. No man has ever had his personal house in order whose financial house is in disarray.
Why Bother with Another Money Book?
In our first book,
The Market Guys’ Five Points for Trading Success, we included a question that is often asked of us by people who have yet to hear us speak: “Why should I listen to anything you have to tell me?” It’s a fair question. You have every right to question the authority and credentials of someone who offers you their advice. You well know that there are many gurus and experts out there propounding their philosophies of health, wealth, and happiness. The philosophies, ideas, and strategies range from bizarre to inspirational. So how do you decide between sound advice and nonsense? To help you answer the question we just posed, it might be useful to plant another question in your mind. You are holding in your hand a book about taking charge of your money–and doing it now. Maybe you’ve gotten to this point without asking yourself this question: With the many hundreds of books published about money and personal finance, why bother with yet another money book? There are three key reasons why we’re confident this book will help you take charge of your money.
1. Wall Street and Main Street We bring the lessons and insights of the world of professional trading and investing to the everyday needs and challenges of Main Street. You have to be in the markets to really understand how they work. You can’t simply read about the trading floor in New York or listen to the news reports on the financial networks. You have to put your own money at risk and know what it feels like to make a profit and suffer a loss. Have you made a great money decision and felt the excitement of winning? Or have you made a serious error and lain awake all night wondering how you’ll recover? Very few people get that opportunity, and even fewer are willing or able to take that experience and extend it to real- life financial issues. We have been in the trenches of Wall Street and know how the financial world operates. We’ve seen what it takes to win and what happens when you lose. We didn’t create The Market Guys as a marketing brand to make money in the world of business advice. The Market Guys brand grew out of our understanding and passion for the markets and investing. Along the way, we realized that professional trading and investing principles can be applied to personal finance with great success. Key lessons that every Wall Street professional knows are brought to you in this book to help you manage your money like the pros.
2. Practical, Time- Tested Strategies
Gimmicks may sound great in advertising, but they rarely stand the test of time. Through our many years in the financial business, we have had the privilege of working with millions of traders and investors around the world. We have seen the practices and habits of people who are successful with their money, and we have seen other practices and habits that are common to the unsuccessful people. This book brings our years of accumulated observations and experiences to you in an easy- to- follow format. We’re not developing a theory of finance here; many others have traveled that road before us. What we’re offering in this book is a map–a practical, useful guide to getting to your destination, regardless of your starting point. If you diligently follow the map, you can achieve success with your finances and take charge of your money!
One of the reasons we’re so excited about offering you this book is that we are in front of audiences around the world every day, and we get their feedback. We know that the strategies and ideas contained in the pages that follow have already changed lives for the better. We’ve heard about the people who have taken charge of their money, and their stories inspire us. We want you to be one of those success stories. If you choose to act, you can do it!
3. Protect and Grow
The basic tenet of our approach to taking charge of your money is to manage risk first and then build from there. We are not part of the hype that tells you that the stock market is your own personal lottery ticket. We’re not going to try to convince you that you can buy and sell houses the way kids trade baseball cards. We know that if something smells fishy, it’s probably because it contains a rotten fish. We’ll talk to you about the fact that every professional knows you can’t grow your money if you don’t take care to protect it. The next goal, then, is to learn key strategies to help you grow your wealth in small, steady steps. This book isn’t about spinning the roulette wheel and hoping you land the big payoff. We’re offering you real meat- and- potatoes ideas, not long shots. If you’ve been looking for a money book that you can use as a how- to manual rather than a wish- I- could book, then keep reading.
How Do You Use This Book?
We wanted this book to be practical and usable right from the start. Sometimes you have to labor all the way through a book before you can piece together the ideas and put them to work. Other times, the themes are so arcane or pie- in- the- sky that even after you’re done with the book, you’re left wondering how it could possibly apply to your situation. Our goal was to avoid both of these traps.
We have structured the book into four major sections. The first is all about markets. We start with the premise that you really need to understand whatever market you’re participating in. If you’re investing in the stock market, you need to know how stock markets work and how to avoid the traps and dangers. Along with that, each market has its own language and we talk about why it’s crucial that you learn to communicate in that specific language.
The second section deals with the players–what people and institutions make up your market? The first player, of course, is you.
We deal with some of the considerations that make you the best market player you can be. Beyond that, we talk about friends and foes within your market. This includes how to pick your friends, such as your financial advisor and broker. We also deal very strongly with your foes–those people and companies that are actively trying to harm you as a by-product of their own selfish interests. We make it a point to say, “If you’re not angry, you’re not paying attention!” The third section is concerned with your strategy. Now that you understand the markets and who the players are, how can you be most effective within that market? We introduce you to what you need for creating a financial plan and how to put your internal motivation to work for you.
Finally, we’ve included a section on special circumstances. It would be great if life followed a prescribed set of rules and you knew what was coming next. That’s not life; the unexpected is always lurking right around the corner. We’ve included many of the common special issues that you may encounter including divorce, foreclosure, and bankruptcy.
The chapters are designed as stand- alone nuggets. If you read only the first couple of chapters or you decide to jump ahead to the chapter on unexpected circumstances, you’ll be armed with useful information that you can use today. X
Our
Take Charge of Your Money Now! Workbook is designed to make sure that you know and understand the key ideas. Again, this isn’t a test that must be completed in sequence. Jump around, find the parts that interest you, and then come back to the rest of the book later. Even better, take copious notes on the section that applies to you, and create your own personal reference manual. Use your own notes to teach someone else–your kids or grandkids, for example–and you’ll find that you become a better student and teacher at the same time!
Why Now?
You might be thinking that all of this sounds good so far, but what’s the urgency? You agree that you need to take charge of your money, but maybe later, not now. As we complete the manuscript for this book at the end of 2008, the financial world is being rocked. We’re watching events and changes that haven’t been seen in generations, if ever. Consider some of the momentous events of 2008:
• Investor fraud worth $50 billion was perpetrated by a single money manager.
• Oil prices ran to an all- time high of over $140 a barrel, and then dropped $100 within six months.
• Christmas retail sales were the worst in forty years.
• The Consumer Confidence Index dropped to the lowest point since its 1967 inception.
• Unemployment reached a fifteen- year high and was expected to continue to rise.
• The Dow Jones Industrial Average lost almost 40 percent in 2008–the biggest one- year drop since the Great Depression. • Titans of the banking, insurance, and manufacturing industries failed at a record pace, setting the stage for massive government bailout packages.
We don’t want to frighten you with these statistics. In fact, you’re quite likely already aware of everything that we’ve mentioned. These events should awaken within you an urgency to act.
Now is not the time to be complacent or lazy. You have already taken the first step by purchasing this book. Now you need to learn the key principles for taking charge of your money. Turbulent times sort the winners from the losers. They are the winds that separate the wheat from the chaff. You can ignore these changes and take your chances on being a victim, or you can grab the reins and take charge now.
Be a winner!
Take charge of your money!
Do it now!
Chapter One
Know the Market
There are no professional traders. There are, however, professional gold traders, professional options traders, and professional futures traders. Every professional knows his market–you need to know yours.
Have you ever opened your 401(k) statement and felt sick to your stomach? Have you and your spouse had that hard conversation about whether or not you’ll ever be able to retire? Do you always buy at the top of the market and sell at the bottom? Are you concerned about the cost of college tuition and how you’ll pay for it with your savings? If these questions sound familiar, then you’re in good company with the vast majority of the population. You have every good intention of saving for a rainy day only to find out that it looks awfully wet outside today. That leads to the obvious question: Do you stand any chance of getting out from under the control of Wall Street and actually building your savings and investments on Main Street? The answer is a resounding “Yes!”
Lest you think that mere resolve will let you march down Wall Street and take control of your financial destiny, recognize that you need to prepare yourself to change your financial future. The first step in this process is understanding the game you’re playing. You might think that’s an impossible task as you watch the financial shows on TV. Just about the time you realize that they really are speaking English, you’re bombarded with terms like
liquidity, advancing issues, and
credit spread. And your best guess about the meaning of the last term is that you can’t pay cash for your peanut butter.
Chances are, you’ve probably never had the opportunity to walk onto the floor of the New York Stock Exchange. You probably do have a picture in your mind of the screaming traders running around, clutching phones in one hand and waving stacks of notes in the other. At the same time, you’re trying desperately to believe that this modern- day goat rodeo isn’t the foundation on which our economy has been built. Surely there are real traders in a room somewhere who really keep things together. And if not, then how in the world do you, the hardworking investor from Main Street, stand a chance in this circus? More to the point, if the players in this game have a somewhat less altruistic motive than making sure your money is handled with care, what do you need to do to win at this game?
The Market
Let’s start with the basics. When you take your money to the bank or to your broker, it eventually ends up in the market. Even if you don’t buy stocks, there are money markets that pay you interest every month. However, that retirement account, college savings account, or annuity most likely includes some stocks or mutual funds.
Mutual funds are nothing more than a collection of stocks and other investments that are bought and sold by the fund manager. Basically, you give the fund manager your money, and he or she decides what to buy and sell for you. When these stocks are bought and sold, the transactions are done through the stock market. The stock market is the gathering place (either real or electronic) where buyers go to find sellers and sellers go to find buyers–a sort of financial matchmaker. At the heart of the chaos that you see in the images of the trading floor is the constant pairing of buyers and sellers. Since nobody is forced to trade with anyone else, buyers and sellers have to adjust their prices to meet the demands of the other. When big news comes out, such as an announcement from the Federal Reserve (which sets interest rates), buyers and sellers scramble to adjust their prices and make their trades as quickly as possible. This creates the scenes of markets that are typically shown on news programs.
To better explain this, let’s tone the picture down a few notches. Even if you’ve never been to an art auction, you’re probably somewhat familiar with them. The auctioneer puts up an item for sale with the goal of maximizing the sale price. He watches as the buyers raise their paddles to bid on the item. At first, the paddles pop up frequently as buyers try to pick up a bargain. Throughout the proceedings, the auctioneer continues to step up the price to draw the buyers to bid as high as possible. Eventually, the number of paddles being raised ebbs with each successive rise in price, and the price increase slows down. Good auctioneers take it right up to the last buyer before dropping the gavel and declaring a sale.
The stock market is often referred to as an
auction market. On the floor of the stock exchange, traders are looking to get the highest price from the buyers. At the same time, buyers are searching for opportunities to trade at the lowest price. Sometimes there are many more buyers than sellers, and a bidding war starts. This is what happens when a fine piece of artwork is offered by the auctioneer and the paddles pop up all over the room. Occasionally, the buyers become so intent on buying the item that they apparently throw all reason out the window as the price reaches an inexplicably high level. If you were standing at the back of the room watching this unfold, you would be hard- pressed to explain why the buyers were driving the price to such an unreasonably high level. When this happens in the stock market, it is sometimes called
irrational exuberance.
But the wave can flow the other way, too. You’ve heard it said that fear and greed drive the stock market. Which of the two do you think is more powerful? Without question, fear is the more powerful emotion. Nobody wants to be left holding the bag when everyone else has made a beeline for the door. Let’s shift our auction analogy a bit by imagining that you have a piece of artwork to sell. Your money is tied up in this item, and the only way you can get the necessary cash is to sell it. So you walk into the auction hall and you’re met by a line of sellers, each of whom is holding his or her own item for sale. Worse yet, there are only a few buyers scattered about the hall with their paddles in hand. As you watch the sale begin, you start to get that hollow feeling in your stomach that comes with the realization that you’re not going to sell your item for anywhere near what you believe it’s worth. In fact, it is quite likely that you will have to practically give it away in order to extract any value. When the auctioneer finally places your item up for bid, no paddles are raised to meet the initial price. So he drops the price. And then he drops it again, hoping to entice just one buyer into the trade. You have the option of taking your item back and walking away without a sale, but you’re driven by the fear that you might never be able to sell it. So you take an exceptionally low price and leave with a mere fraction of what you had expected.
At this point, you may have already forgotten that we were talking about a hypothetical art sale as your mind wandered to your retirement savings account. You see, markets are collections of individuals representing either themselves or the institutions that employ them. The point to remember is that people drive the markets, and emotions drive the people. This is no different from the way things work at an art auction, at a weekend flea market, or with an eBay listing. If the buyers are motivated, prices will rise. If the sellers are fearful and aggressive, prices will collapse. And often reason goes out the window as buyers and sellers try to close a deal before, in their minds, it’s too late.
Many well- educated and informed traders and investors have tried to apply logic and programming to the markets in order to outsmart the masses. For a while they might meet with some success. You have most likely read or heard about some of the “can’t- miss” how- to systems that let you use the stock market as your own personal financial concierge. All you have to do is follow the plan, and you’ll be writing checks from the market, guaranteed! But these systems assume that you can accurately predict the behavior of the people who are buying and selling. Don’t kid yourself. You can no more predict the future in the stock market than you can know exactly what your five- year- old granddaughter will be doing later in the day. It all depends on how long she slept, what she ate for lunch, and whether she found your stash of chocolate in the pantry.
We once worked with a trader who carefully scoured stock price history and “discovered” a stock that went up in price at the same time every year. So he bought the stock and waited to harvest his profits. But this time the stock price dropped. So he did what most investors do when the price drops: He bought more. Then the price dropped again, and he took the cash he had left and bought even more. Eventually, the price dropped further, and fear gripped him as he watched the value of his savings dwindle. As a result of this fear, he sold everything. You see, he forgot the basics of the game he was playing. He was the only paddle in the room while the sellers were lined up with the auctioneer. After he bought the first time, the next seller stepped up, and he put his paddle up again, hoping this would make the sellers go away. Instead of retreating, the sellers kept selling until he no longer had the means to raise his paddle. Then he walked to the front of the room and joined the line of sellers. It doesn’t really make much sense when you look at it this way, does it?
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