The key to effectively build wealth

Sep 23, 2015

- By Bill Bonner

Bill Bonner
Paris, France

Dear Diary,

We read the mail from readers every day. We can't respond to so many...but we think about them.

Recently, we got two interesting letters. One was from a woman who felt she had been badly handled in a divorce and now struggles to stay afloat financially. Another came from a man on the opposite side of a divorce transaction. He struggled for years with alimony, child support and living expenses...and eventually gave up the struggle, declared bankruptcy, and sank beneath the water.

More on this in a minute. First, let's go back to the money, where the stakes are lower. The worst that can happen is that you lose your money. And the game is much simpler.

Yesterday, stocks dropped 180 points on the Dow. "Global growth concerns," were said to be behind it. Of course, nobody knows exactly why investors buy or why they sell. And it hardly matters. When stocks reach their high, investors always find a reason to sell - always. And if they are looking for a reason now, they don't have to look very far. US stocks are priced near record highs. At these levels things have to go right - with growth, stability, and prosperity.

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Not impossible. But it doesn't seem like a good bet. Debt levels are also at record highs. When debt is so high things tend to go wrong. Many investments and speculations - financed with debt - don't work out as planned. Debtors can't pay. Creditors panic. And investors - whose assets were priced for perfection - head for the exits.

Don't expect Wall Street to share this view. Jim Cramer was on TV yesterday urging investors to "snatch up these money making opportunities." And a report on Bloomberg told investors to beware of bearish sentiment

    Investors hate stocks-- again.

    Amid a six-year bull market that's notable mainly for how little conviction there is in it, equity sentiment is plunging at a historic rate, falling by some measures at the fastest pace since Federal Reserve Chairman Paul Volcker had just finished pushing up interest rates in the 1980s. The cost to hedge against stock losses is soaring, valuations are contracting, and bearishness among professional stock handicappers is rising the most in three decades.

    Fret not. All of this is good news for bulls, if history is any guide. Since 1963, the Standard & Poor's 500 Index has advanced an average 11 percent in the year after newsletter writers surveyed by Investors Intelligence were as pessimistic as they are now, data compiled by Bloomberg show. That compares with an annualized return of 8.3 percent.

Our advice to investors -- fret.

Newsletter editors are just like everyone else. Sometimes right. Sometimes wrong. They tend to be much more bearish than Wall Street, because they aren't selling stocks and bonds. They are selling advice. And they know that stocks go down as well as up. They also know that, dollar for dollar, losses are more painful than gains are pleasurable.

But in the 1963-2015 few people realized what was going on. In effect, a huge tailwind - coming from the Fed and other central banks - was behind the stock market. The feds changed the money system in 1968/71. Few newsletter editors, or anyone else, understood what it would mean; this time it WAS different. Stocks stopped going up and down as they had before. They mostly went up - especially after 1982.

But past performance is no guarantee of future performance, as the SEC reminds us. This time, the grumpy, gloomy, out-of-step, often nearly broke newsletter editors could be right!

Back to our mail...

Family issues are usually far more important to your well-being, happiness, and even your financial security, than purely ‘money issues' themselves. They are similar, however. In both cases, success depends on habits, personalities and luck. Virtue pays off...not always, but often. Fidelity. Humility. Generosity. Steadfastness. Hard work.

Even if it doesn't work this way, you are probably better off if you believe it does. At least then, when things don't work out, it's not your fault.

When we read letters from someone with little money, we want to help. Of course, we can't give personal advice. But we have some general advice for everyone in that situation:

If you are just beginning to accumulate money, we have some million-dollar advice that we will give to you for nothing: keep it simple; keep it cheap. And keep at it.

We sell investment research, analysis and advice. And our marketers work hard to make them sound as attractive as possible. But when you don't have much money to invest, an expensive trading service will probably not help you.

Yes, we hope that our modest insights and humble thoughts - available at deep discount for $xx in the Bill Bonner Letter - are worth the money. But please don't spend any more...unless you have the money to make the advice worthwhile.

And no, we are not saying that sophisticated, alpha-hunting systems won't work. In the right hands, at the right time, they can work spectacularly well. But finding them takes time and knowledge. The amateur will almost certainly run out of money before he runs into an expensive trading program that makes him rich.

The basic skills for building wealth are so simple they barely deserve mention. But like building a family, they take time...often a whole lifetime. Spend less than you earn. Save your money. Invest it carefully in the surest, safest things you can find. As you get more money, then...and only then...can you afford to splash out on lifestyle enhancements and more sophisticated investment tools.

Do this for 20...30...40 years... Then, let us know how it works out.

Don't have 40 years? Not even 20?

Hmmm....more to come!

Publisher's Note: Vivek Kaul, the India Editor of the Daily Reckoning, just made a bold call - Real Estate prices are headed for a fall. Well, if you are someone who is looking to buy real estate, or is just interested in the space, I recommend you read Vivek's detailed views in his just published report "The (In)Complete Guide To Real Estate". To claim your copy of this Free Report, just reconfirm your Free subscription to the Daily Reckoning...

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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