So you wanna make money, eh?

Start early, save lots, and invest smart.

This book is designed to help you do all three, but most especially, invest smart. We have nothing to sell you here, nor any ax to grind. Just good common sense. Inside, you will learn ten of the most important rules in investing. Things like:

• • Along With Higher Returns Come Higher Risks

  • Time Is Your Friend: Make It Work For You

  • Buy With Care And Trade As Little As Possible

  • Pay For Advice When You Need It; Don't When You Don't

• There Is No Such Thing As A Sure Bet

So, if you're ready, let's get started. Oh, and one more thing: Happy Investing!

ABOUT THE AUTHOR

Mr. Burgauer is a former Certified Financial Planner. For twenty years he was a stockbroker with a major New York investment house, and for seven years, a mutual fund manager. He has run for the United States Senate in Illinois and was once a Professor of Economics at Eureka College in Illinois. He has also written a series of science fiction adventure books.

WHEN THE NUMBERS DON'T ADD UP

A nurse believes that more babies are born during the full moon than at any other time of the year. An experienced traveler cancels an overseas trip for fear of a terrorist hijacking, yet continues to commute to work by car every day. A long-time investor swears by a certain mutual fund, claiming that any money manager who can outperform the market eight years in a row is sure to get his money.

In all these examples, the numbers don't add up. These examples illustrate various forms of what I call "Math Abuse," an inability or unwillingness to apply simple logical analysis to everyday situations.

Math Abuse includes errors that are not strictly numerical, but also those that have a moral dimension. None of us want to be duped, of course, but we are fooled on a regular basis by politicians, the media, even our friends.

What is wrong with the notion that more babies are born during the full moon? The idea has charm, but it isn't factually true. Why would a veteran nurse claim it to be so?

Let's analyze her thinking. Suppose that after watching the delivery of 15 babies in a single day, the nurse happens to look out the window and see a full moon. A month later, when the maternity ward is relatively quiet, the nurse doesn't think to check the phase of the moon. Somehow, though, that busy day remains fixed in her mind. She might even comment upon it to her friends. The point is this: if a person watches out only for events that reinforce their beliefs, they can intentionally screen out events that falsify it. I call this phenomenon "filtering."

Filters can be found everywhere. Casinos contain dozens of slot machines. They constantly ring with the sound of winning. Every time enough cherries line up, a machine disgorges a bunch of quarters that clatter into a tray.

On the other hand, losing money is completely silent. It makes no sound. For someone entering a casino, they may be overwhelmed by the impression that everyone in the place is winning. Only the sounds of winning filter through to his brain.

A similar filtering phenomenon can misguide our investment strategies. Is that long-time investor I described at the beginning of this piece smart to place such confidence in a mutual fund that beats the odds eight years in a row? Or is he somehow being fooled?

Think about it this way. Let's assume that the success of a given fund depends upon just blind, dumb luck, say, the flip of a coin. If the coin comes up heads, the fund in question will outperform the market that particular year. If it comes up tails, the fund will underperform the market that year.

Let's say that 1024 funds are operating in the year we begin measurement. Let's now consider their performance over the ensuing eight years, with just blind, dumb luck at work.

By year two, half the funds — 512 — will have outperformed the index. By year three, half of those — 256 — will have again beaten the index. Each subsequent year the number of funds that continue to show superior returns would be halved: 128, 64, 32, 16, 8, 4. The last number represents the "hot funds," those that produced unusually good returns each and every year from Year One to the present.

Now don't misunderstand me. I'm not suggesting that good performance is solely the result of good luck, to the exclusion of everything else. But with fairly efficient markets in the U.S., and with good information easy and inexpensive to come by, consistently superior returns do in fact include an element of luck.

Deliberate Math Abuse is also pervasive in published charts, the kind you see in the newspaper or in a magazine. There are no less than two forms of what I call Chart Abuse: "Compressive Calming" and "Stretch Extortion."

In Compressive Calming, the vertical scale is "compressed" so as to tame the ups and downs of whatever is being measured on the vertical scale. For example, to make a drop in sales seem less precipitous, a company might plot its annual sales on a graph that compresses the decline by a factor larger than 1. To accomplish this, the company can simply choose to plot its current sales on a scale of $0 to $60 million, even though the company's sales during the past 10 years have typically ranged from $20 to $25 million.

Conversely, a company whose sales are growing moderately could use Stretch Extortion to make things look extraordinarily good. They can do this simply by having the scale NOT begin at zero. If the bottom of the scale is set at $20 million and the top of the scale is set at $25 million, an increase from $22 million to $23 million will look huge on such a chart.

Yet another common form of Math Abuse is what I call "Big Number Numbness." For someone to truly appreciate a very tiny number (or an extremely large one), they must first be able to compare it with another number that is somehow more meaningful.

We encounter large numbers every day, but we frequently forget our sense of scale. How about the national debt? How much is 3 trillion dollars really? We have no convenient way to grasp such a big number, not when a pizza costs $15 and a house payment runs $600 a month.

The only way to appreciate a figure as large as the national debt is to put it on a basis we can all understand. One way might be to quote it as if the debt were distributed equally among all wage earners, of which there are perhaps 150 million in the U.S. A debt of $3 MILLION spread out over this-sized group would come to just 2 cents per person. But a debt of $3 TRILLION comes to $20,000 owed by every working man, woman, and child in America. Or, to take the analysis further, paying that $20,000 at 7 per cent interest would require payments of some $3000 a year for each of the next 10 years.

How about "Math Terrorism"? An anti-pollution group predicts a 100-fold increase in cancer risk in a neighborhood where some fool has dumped dioxins. On the face of it, the prospects sound terrible and you wonder whether or not to sell your house and move out of the neighborhood. Even if the prediction is correct, what is the actual risk?

If the probability of contracting cancer because of dioxin ingestion in a "clean" area is .00001, the 100-fold increase now raises that probability to .001. But, if the probability of contracting and dying from cancer from ALL sources is already .200 for the general population, is the difference between .200 and .201 worth selling one's home? Or are you just being terrorized by some larger fool, perhaps a lawyer looking to get rich?

By now some people reading this will be asking themselves, "Gee, Steve, nice essay, but what does this have to do with investing?"

My answers are several. In the first place, as in the casino example, sometimes only the sounds of winning filter through to our brain. The guy across the street tells you how much he just made in the market. So does your brother-in-law and your partner at work. Being confused by the sounds of winning can be fatal, for successful investing requires many things: an acceptance of risk, a full grasp of the awesome potential for loss, and most of all, patience.

By most measures, stocks handily outperform all other investment media, whether real estate, bonds, or gold. But after a long bull market in which the sounds of winning have been ringing loudly in our ears, it is easy to lose perspective and throw caution to the wind.

Secondly, good performance does indeed have an element of luck attached to it, and we should not blindly follow the latest, hottest investment fad, no matter how good the salesman makes it sound.

Thirdly, we must struggle to avoid Big Number Numbness. If a company has a 10 million dollar write-off, is that big? Relative to what? Ten million dollars to Exxon is not the same as $10 million to a small, fast-food chain.

Finally, in your personal and business life, avoid and ignore Math Terrorists. These psuedo-mathematicians make a life of scaring the public. They can also affect your choice of investments. Alar on your apples, radon gas in your basement, too much sun on your skin, the wrong chemical cooling your refrigerator.

Try to see through this haze for a happier and wealthier existence.