Great Depression Online Archive Issue:

Two Critical Rules of Investing

Great Depression Online
Long Beach, CA
October 14, 2008

Inside This Issue You Will Discover…

*** AIG Bailout Now Up To $123 Billion
*** Another Life Lesson in Humility
*** Two Rules of Investing
*** And More

AIG Bailout Now Up To $123 Billion

Last week, in the midst of the market meltdown, it was revealed that the $85 billion taxpayer bailout of AIG will now cost $123 billion…AIG was granted a $38 billion loan from the Federal Reserve.

It was also revealed that just after the initial $85 billion was handed out, top AIG executives spent $440,000 celebrating their victorious ruse with massages, golf games, and banquet dinners at the exclusive St. Regis in Dana Point.

“Less than a week after the federal government had to bail out American International Group Inc.,” reported AP, “the company sent executives on a $440,000 retreat to a posh California resort, lawmakers investigating the company’s meltdown said Tuesday.

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~~~~~~~~~~~~~~~~~~~~~~~~~

“The tab included $23,380 worth of spa treatments for AIG employees at the coastal St. Regis resort south of Los Angeles even as the company tapped into an $85 billion loan from the government it needed to stave off bankruptcy.”

If we took this stuff too seriously, we’d be outraged and insulted.  Instead we gawk and giggle at the cheaters caught with their hand in the cookie jar…then we turn our attention from one fraud to the next.

Soon our head’s spinning like a Las Vegas roulette wheel…and we long for an honest diversion…

Another Life Lesson in Humility

We spent the day last Friday shoveling dirt and dumping rocks in front of our house.  We filled up five trash cans full of dirt and moved them to the side yard.  Next weekend we’ll use the dirt to fill in one of the foundation supports the previous owner had dug out when installing a bathroom.

We imagine he was planning on filling it back in one day.  But perhaps by the time he was done with the bathroom he couldn’t bear to crawl under the house with the spiders and whatever else to finish the job.  Instead he must have grabbed a cold beer and headed down the hill to the beach.

Yet, we can’t fault the guy for his disregard.  It can happen to all of us.  In fact, we missed the mark on our little project too.  We’d thought 10 bags of decorative stones would do the trick… 

Sixty bags later we found ourselves with a sore back, a sore wallet, and another life lesson in humility…our wife was kind enough to not offer any advice.

Two Critical Rules of Investing

And thankfully we’re not the guy that had to explain to his wife how he’s lost 40% of their retirement savings in the stock market over the last year.  Perhaps, too, it wasn’t that guy’s fault…he was just following the advice of his broker who told him that ‘buy and hold’ was the best way to save for retirement. 

Now, thanks to his broker, he’s going broke.  And thanks to his broker he’ll have to work long after the day he must don a protective diaper before leaving the house.

The advice to ‘buy and hold’ always seemed so stupid and mindless…we never bothered to listen to such idiotic nonsense.

Instead, we listened to Warren Buffett and his two critical rules of investing.  They’re very simple and logical…

“Rule No. 1: Never lose money.

“Rule No. 2: Never forget rule No. 1.”

Yet, while these rules are very simple, applying them perfectly isn’t easy.  But occasionally we get them right.

Because it’s so very rare that we get the opportunity to toot our own horn, we’ll quote from the September 05, 2008, GDO Issue titled Learning To Fall.

At the time we wrote this the DOW was already 20% off its high and many market pundits were heralding what a great buying opportunity it was.  We weren’t so sure…

“Could we really be in for further stock market losses?

“We don’t know.  But we believe the fundamental risks to investing in the stock market outweigh the rewards.  In other words, over the next several years, return of principal, we believe, will be more important than return on principal.

“Looking back at the last 8 ½ years, we see several practical lessons for learning to fall. 

“The first lesson is that stocks don’t always go up…they often go sideways for extended periods of time…and sometimes they even go down – a lot.

“The second lesson is that during such periods, buy and hold investing can be disastrous to your portfolio.

“The third lesson is that sitting on the sidelines can sometimes be the most shrewd investment strategy there is.  At a minimum it’ll preserve your dignity; anything more will preserve your capital.”

Since then the DOW dropped another 20%.  And while it bounced 11% yesterday, we suppose that once the euphoria over the latest plan to get banks to lend money disappears, the stock market will be confronted with several distressing realities…

1.  The quick fixes aren’t working.

2.  Credit markets aren’t functioning.

3.  The world economies are slowing.

4.  Unemployment’s rising.

5.  And corporate earnings are suffering.

These fundamentals aren’t the stuff of sound stock market investing.

Sure there could be some strong market rallies over the next several months.  But we consider such opportunities to be equal to those found on a river boat casino…

What you make, you’ll likely give back…plus more.

Patience at this time, we believe, will be rewarded for many years to come.

Sincerely,

M.N. Gordon
Great Depression Online

P.S.  Our friend Bob Prechter over at Elliot Wave International has released a must have issue of his Elliot Wave Theorist free.  Many of our readers have already claimed their copy and, after last week’s events, are glad they did.  If you want the truth about what’s unfolding right now in the U.S. financial markets, in Congress and at your very own bank, get your hands on a copy – posthaste.  Plus it’s free.  Learn all about this special offer here:  Free Elliot Wave Theorist.

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