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A $hort $ermon on the $emantics of investing

So you want to retire on your stock market profits? OK, it can be done, but you’d better pick those stocks carefully. If you had relied on the rising tide of the Dow 30 Industrials to lift your boat for the past 97 years, you would have gained a pathetic 0.8 percent per year after deducting for inflation and capital gains taxes.

The main problem, see, is those darned dips. Like, if you’d owned an average portfolio of mutual funds in 1929, you’d have waited till 1953 to recoup your losses, even in nominal dollars. Today, buy-and-hold is for complete idiots. And I suspect it would work equally well for incomplete idiots.

Don’t listen to those exuberant shouts about the Dow (13,649 today) being at record highs. It’s not. If you’d bought 10 shares each of all the 30 industrials in 2001, you’d have lost over half your hard-earned money by now. Moral: Never invest in a statistical mirage. Remember, DJIA stands for “Doesn’t Jibe with Inflation-Adjusted.”

And a word about those 30 Dow biggies: They are selected on the basis of being truly representative of industrials. But if they falter over time, they are replaced by some stock that the marketmeisters consider more representative.

Yes, “more representative.” For extra credit, do your own translation. Keep reading this column, and you’ll eventually earn a doctorate in semantics. (You won’t get one, but you will have earned it.)

So now what?

Sorry if I’m eroding your faith in investing, but stock markets (and even bond markets) have more booby traps than the universe has black holes. Playing the markets is a horrible way to learn about investing. Don’t “play.” If you’re going into the markets, do it right. Get top advice (see below).

Also, heeding the pop recos of glossy newsstand magazines is a great way to ruin the rest of your life. Contrarian analysts have demonstrated, year after year, that the general recommendations of the glossies are reliable counter-indicators; that is, do the opposite of what they tell you, and you’ll usually come out ahead of the pack. For instance, when you see the ad-fat money mags filling the stands with covers screaming about the hottest bull market of our time, hit the silk. Run to the phone at Olympic speed and bail out of everything except your shorts. (That means, get out of everything but stocks you’ve sold short.)

Books on investing are no better than mags, and they bear the added disadvantage of going quietly out of date.

But before you start any investing at all, clean up your act. Get your ducks in a row. Consider the timeless advice of Sun-Sentinel columnist Humberto Cruz:

“Keep track of your income and expenses; live within your means and handle credit wisely; pay yourself first; build an emergency reserve and get adequate insurance; set specific financial goals, with a price tag and deadline for each; and build a diversified portfolio that’s suitable to your goals and risk tolerance. Invest for the long term; minimize your taxes, but focus not on lowering taxes per se, but on getting the most after-tax return or income. …”

Invest according to your DNA

There is no ideal investment for everyone.

But what if you just never seem to have any capital?

Stop whining, get a better job (even if you have to retrain), cut way back on expenses and start saving now.

If necessary, get tough with yourself. Stop eating out. Sell your big toys. Move to a poorer area where you may have to put up with peeling paint, crummy schools and a higher risk of petty crime. Whatever it takes.

I once visited a surgeon at her nice home in the hills above Whittier, Calif. I found she didn’t have rich parents to get her started. In fact, she was orphaned at six – with a 4-year-old brother to feed and care for. To stay alive, she gathered sticks and sold them as firewood in her native village in the Peruvian Andes. But if she was able to earn three centavos in a day, she and her brother would somehow get by on two … and save the third for her future education.

If she could make it, you can too.

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