Excerpted from The Single Best Investment
Introduction Part 1: A Typical Situation
Not long ago a friend came into my office, looking kind of glum and depressed. I couldn’t really imagine why he’d be feeling so down; after all, he’s the founder and sole owner of a fantastic business that dominates its field nationally and grows by more than 40% per year. He was making a mint, and had a lovely new wife. The two of them were almost finished moving into a perfect estate, and were happy as lovebirds. The picture was mostly flawless, but K. was bothered about his savings and investment.

“I simply feel lost with it,” he said, a most remarkable and unusual look of defeat in his eyes, “I don’t feel like I can count on the advice I get, and it seems like every time I buy a fund it comes in running last. Then I watch some guy on TV and I’m off in a different direction all over again. I think I must be too busy with my work to really get this right.”

He took out a fistful of brokerage and mutual fund company statements to show me his array of holdings. I was reminded of Miller’s Law of Investment, which goes something like this: if you give people the opportunity to invest their money by merely making a phone call, they will.

There was no rhyme or reason or philosophy in his holdings; each item had its own justification. A newspaper article. A money manager on Wall Street Week. The maker of a hot product selling well in the local grocery store. A newsletter tip. Cocktail guidance from a friend whose cousin’s father’s uncle is in the financial business in the next town over from Silicon Valley.

What did he imagine? That because he was good in a business of making and selling things that he would also be a good (or lucky) securities analyst and investor? Would he next try to pull his own teeth, or write his own brief in court?

I don’t think K. is unique, except perhaps in his ability to recognize, finally, his own limitations. As investment possibilities have proliferated—there are 9,000 mutual funds today compared with less than 1,000 in 1975, and over 20,000 investable domestic stocks compared with 6,000 just 20 years ago—so have the media that hope to attract the advertising dollars that push those new products.

Where investment was in the past the province of the rich and an afterthought for the middle class, now it is everyone’s hobby. Business fandom is as large as the crowd for sports results, the weather, or news of the latest presidential scandal. Now, on break, factory workers talk more about their 401(k)s than about the opening of fishing season.

Introduction Part 2: Information Everywhere
And the Information Age has made it possible for investors to quickly and easily learn about their investments, follow the short-term price movements of their investments, research new investments. There is so much information floating about in the air waves that it seems to permeate one’s dental fillings. In recent years the press, radio, TV, the Internet, brokers, and mutual fund companies have simply flooded the public with information about business and investing. There are experts behind every tree today, pros lurking in doorways, wise men selling shares and annuities.

Every day you’re told about some great new idea that a mutual fund manager is buying, some undiscovered concept this brokerage firm thinks will outshine the moon. Magazines regularly list the hottest mutual funds and stockpickers, tormenting you if you’re not “in” these things, tempting you to jump on board. Every day, the Dow is up so much, the Dow is down so much, you get daily small pleasures, daily small pains. It’s another new record high, it’s a new record high, a new record high! What a great country!

You’ve got your young guys running racy small-cap growth funds, your middle-aged managers running seasoned large-cap growth, your fuddy-duddies in old-fashioned clothes advocating the value of “value,” your number-crunching consultant and financial planners extolling the holy salvation of asset allocation. Someone does a study that says you’ll do well buying last year’s winners. Someone else does a study clearly proving that if you buy last year’s winners you’ll end up in the poorhouse. A man with a bow tie asserts the coming threat of inflation…and keeps sounding his alarm for years and years. Alan Greenspan warns of “irrational exuberance” but you don’t know what to make of that since everything else he says is totally indecipherable.

And in your junk mail: Sell Everything Now. The Mother Of All Crashes May Have Already Begun. Just $20 For A Three-Month Trial!

The barrage of information aimed at investors like so many stinger missiles jangles the nerves, and produces more confusion than illumination. The proliferation of possibilities may be fantastic, but at the same time it’s disheartening. How can an investor—someone who’s typically not a professional but who has important funds that must be properly invested—possibly keep up with the flow of news, the flow of ideas, the flow of advice that so often contradicts even the most recent piece of advice that had flowed past only days or hours ago? It’s enough to make you want to bury yourself up to your neck in T-bills! This is pretty much the state my friend K. was in when he came to see me.

Whom to believe? What to believe? Where’s the best place to put your money? Does the answer vary with each investor’s situation? By a lot? By a little? Do you have to change where you put your money all the time, depending on conditions in the market? Do you have to be able to guess where interest rates are going in order to succeed in the markets?

Should you be in Growth Stocks? Value Stocks? Small Stocks? Mid-Caps? International? Emerging Markets? IPOs? Vulture Funds? REITs? High Tech? Low Tech? No Tech? Bonds? Mutual Funds? Managed Accounts? The question comes up again and again: What to do? What to do?

There should be some way to have a simple investment program that makes sense, that’s easy to implement, and that has a high chance of succeeding in meeting your long-term investment goals at the end of the road.

There is, if you’re a long-term investor; and that’s what this book is about—a single simple approach that can serve as the primary investment vehicle for nearly every reader. If you want to try to guess the hot sector for next year, or which of the 8,000 mutual funds will outperform this quarter, or which tech company will win the networking wars—you’ve picked up the wrong guide. There’s nothing in it for you. This book is for savers and builders, for people who understand (or who want to understand) that the forces of time, modest and reliable growth, and compounding are on their side. Investing isn’t some athletic event where agility and flashes of virtuosity are the secrets of success. Rather, investing really is investing—the methodical accumulation of capital through a sensible and disciplined plan that recognizes that “shares” are not little numbers that jump around in the paper every day. They represent a partnership interest in a real and going business. Your plan, very simply, must recognize that you will manage your investments by actually being an investor—a passive partner in a real and going business.