Notes From My Journal 

The Economy Is Looking Good: Don’t Get Giddy… or Scared

Delray Beach, FL– There are lots of reasons why many people today are excited about the investment markets.

For the first time in 10 years, for example, the GDP growth rate is higher than the unemployment rate.

We are seeing the strongest expansion of manufacturing activity since May 2004, according to the WSJ.

Wages are rising. Not much in real terms, but more than we’ve seen since the last recession.

And according to several sources, consumer confidence has rarely been higher.

For some investors, Len Zachs (of Zachs Investment Research) argues in a recent report to his clients, this sort of economic environment creates a perilous paradox.

Some will see data like this as a signal to go all in – i.e., to put all of their spare change into the investment markets. Many, feeling emboldened by the “good” news, will take more risk, getting into speculative investments like low-cap stocks, mining stocks, hedge funds, start-ups, etc. And a smaller number will see it as scary. Fearing that we may be at the top of an investment cycle, they will sell their stocks and other holdings and retreat to cash.

None of these reactions is smart, says Zachs. “Investors should not see the current strength in the economy as a rationale for doubling down on risky ventures, and they should not see the market at all-time highs as a rationale for staying on the sidelines.”

“Instead of focusing on big returns in short periods of time, or trying to time your entries and exits into the market,” he says, “focus on the long-term and on key economic indicators that can help you stay level-headed.”

This has been my approach since I began to write about wealth building 20 years ago. After losing good money a few times by following my gut, I began to question the wisdom of trying to beat the market. I was pretty sure I couldn’t do it. Could anyone?

The answer was yes, but only for a given period of time. And since you can’t know when an analyst that’s been hot for years will suddenly go cold, I decided to step out of the “market timing” game.

The foundation of my current stock strategy is very safe and very long term. (And yet it’s done remarkably well over the short term as well.) I call it Legacy Investing.

 

From My “Work-in-Progress” Basket

That Was Then, This Is Now (but It’s Still About Then)

South Side High School’s Class of 1968 had its 50th-year reunion last weekend. About 75 of the 300 students in our class attended.

I wasn’t going to go. Then I decided to do it, but feared it would be an emotional disaster.

South Side High had a very stratified social order. At the top were the Chosen – affluent kids that arrived at school well dressed and confident. They came from good families, lived in beautiful homes, and dominated the school’s academic and social functions.

Below them were the Disposables – kids that came to school rudely dressed, emotionally unpredictable, and financially embarrassed. They (we) came from good to not-so-good families, lived in modest homes, and starred in sports but played secondary roles in every other school activity.

Finally, there were the Invisibles, representing perhaps 50 of the 300. Mostly minorities, they dressed better than the Disposables, lived in the projects, and, like the Disposables, had little interaction with school activities. (Except for sports.)

These three social “classes” were not entirely homogeneous. Within each group there were outliers – kids whose backgrounds or behaviors didn’t match with the rest of their group. But they were very few.

More importantly, each of the three social classes was subdivided into three groups: frontrunners, muddlers, and laggards. (I talked about this kind of self-organization in my September 24 essay).Because I had the good fortune to be born into an academic family, I was a frontrunner within the Disposables. I had the confidence to assimilate into this group almost as soon as I arrived as a new student in 10th grade and went on to achieve leadership status within the year. That allowed me to cross paths occasionally with members of the Chosen – just enough to confirm what I had sensed from afar: that they felt themselves to be better than us.

This opinion was not universal. And I don’t even believe it was a conscious one in the minds of many of the Chosen. (It was rarely expressed in public because in those days such rudeness could be rectified in the parking lot after school.) But as a kid who was ashamed of his ramshackle house and hand-me-down clothes, I could feel the condescension.

For the Invisibles, the only evident avenue to self-esteem was through sports. Some of them became star athletes. Others remained invisible. How that felt I simply don’t know.

Such was the order of things in that little corner of the world from 1966 to 1968.

This feeling I had back then – this sense of being second-class – resurfaced when I received the invitation for the reunion. But when a current friend who was then a leader among the Chosen emailed me, urging me to attend, I felt included. And that chip I had carried unwittingly on my shoulder fell off. At least for a while.

I think I had the furtive hope that during the reunion word would get out that I had built all these businesses and written all these books and made all this money and helped all these people. That I would be Chosen… and healed.

But then someone got the idea to publish a booklet of biographical sketches – 300- to 400-word summaries of “what we’ve been doing” since graduating South Side High.

I was blown away.

The Chosen had virtually all gone on to get degrees from the country’s most prestigious universities and then had careers not just as doctors and lawyers and psychologists but as chief surgeons and partners and leaders in their fields. And if that wasn’t impressive enough, they had married well and had great kids that were repeating their success and they were now spending their retirements working on some good cause in between babysitting the grandkids.

Reading these little stories, I had several consecutive reactions:

First, I was upset because my unspoken hope of impressing them with my own accomplishments was dashed. After 50 years of working like a maniac, I was at best another South Side alumnus who had “done well.”

Second, I realized that I could no longer argue that social class doesn’t matter. Though individual achievement is possible no matter where you come from, the advantages of growing up among the Chosen are big. They put you way ahead of the pack.

Third, I realized that my own children had grown up as Chosen. Was that good? I didn’t know.

So I went to the reunion with that chip solidly back on my shoulder. But I promised myself that I would not let it weigh me down… and that I would verbalize none of what I was feeling to anyone while I was there.

I was partially successful.

I have so much to tell you about the reunion – amazing and even shocking things that happened and things I learned and failed to learn from the experience.

I’m going to write them all out until I can make that chip fall away again – maybe even break into dust and blow away.

 

Today’s Word: boondoggle (noun, verb): A boondoggle (BOON-dahg’l) is an activity that is wasteful or pointless yet often continued for extraneous political reasons. To boondoggle (verb) is to waste money or time on unnecessary or questionable projects. As used by Franklin Delano Roosevelt: “If we can ‘boondoggle’ ourselves out of this depression, that word is going to be enshrined in the hearts of the American people for years to come.”

 

Did You Know?: The earth experiences earthquakes 50,000 times a year, and is struck by lightning 100 times a second.

 

Worth Quoting: “One may not reach the dawn except by going through the night.” – Khalil Gibran