By Michael Masterson

Dear Reader,

My friend Marty is a very typical investor.

He got into stocks in 1986 and sold out after the market crashed in 1987.  He stayed out for several years and then got in for a big ride as the tech boom accelerated.  When stocks were trading at 50+ times earnings, I urged him to get out.  He waited until after the crash.  His total result: down almost half his original investment.  He has been in and out of the market ever since, jumping from one investment advisor to another.

“I am embarrassed by my performance,” he admitted the other day over breakfast.  “I am afraid to tell my wife how little we have left in our stock account.”

“What are you doing, stock wise?” he asked me.

“I got out a few months ago,” I told him. “I wrote about it in ETR.”

“Why didn’t you tell me?” he said.

“Two reasons,” I said.  “First, I don’t know anything about investing.  And second, you don’t listen to me anyway.”

He mulled that over.

“So do you think I should sell now?”

“I really don’t know,” I told him.  “But I do have a suggestion for you.”

He was interested.

“I suggest you read a new book that’s just been published by Regnery Press.  It’s written by a friend of mine.  His name is Mark Skousen.  He’s an economist and an investment advisor.”

“Sounds heavy,” he complained.

“It’s not.  It’s actually a very easy read.  And I think you’ll like the title.  It’s called Investing in One Lesson.”

In the first chapter, Skousen recalls a comment made about the investing public by Peter Lynch, who ran the Fidelity Magellan Fund, the most successful mutual fund in the 1970s and 1980s.  Lynch said that despite the fund’s great success, the majority of its shareholders had lost money.

Why?  “Because they tried to time the market and never stayed fully invested throughout the period Lynch ran the fund.  Whenever the market fell, they would panic, get out and then try to get back in after the price turned around.  They were always chasing the price and it never worked out.”

Recent studies, Skousen points out, confirm Lynch’s story.  Since 1987, the average stock-market mutual fund gained 13 percent a year compounded.  Yet the average fund investor earned only 3.5 percent!

The reason was the same.  Individual investors can’t seem to stick with winning programs or funds.  They get confused and flustered by the financial news and bail out too soon and then come back in too late.  And then they do it again.

The problem, Skousen says, is that investors misunderstand a very fundamental truth about the stock market: “The business of investing is not the same as investing in a business.”

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In Automatic Wealth, I made the same point.  The stock market, I pointed out, is not just an agglomeration of financial spreadsheets of profits and losses.  It is a global, computerized casino where huge institutions (pension funds, mutual funds, managed accounts, etc.) respond instantly and automatically to hundreds (even thousands) of different matrices.  And where millions of individual investors respond to financial news stories that report on these institutional activities and on what other investors are doing.

It is very complicated.  No wonder, Skousen says, that if you look at the Forbes Richest 400, very few made their money from the stock market.  Most, he points out, “made their fortunes through creating and expanding their own businesses.”

You have to respect an investment expert that gives its due to entrepreneurship.

It shouldn’t be a surprise, Skousen says, that stockbrokers often do better than their customers.  Or that managers of mutual funds do better in their individual portfolios.  “That’s because investing is their business.”

If you want to invest like the best fund managers (or beat the averages), Skousen has an answer.  It is a “very simple strategy — a short cut, if you will – that will keep you out of trouble and help your portfolio grow without devoting your life to investing.”

As a businessman who doesn’t have time to become an expert in the stock market, I was very interested to discover Skousen’s strategy.  Up till now, I’ve been investing in no-load index funds, happy to earn a long-term average that is equal to the market’s average.  “When you have your own businesses growing at double-digit rates and a real estate portfolio too, you can be satisfied with an average investment return of 9%,” I argued.  And I have been happy with that.

But Skousen’s strategy is better.  He spends several chapters explaining exactly why investing in a stock is not the same thing as investing in a business and why technical investing is fatally flawed for most investors.  He then provides a very persuasive case for a particular type of investing that has consistently beaten the averages.

It has elements of contrarianism in it, which I like because contrarian investing lets you play the market against the mass of misguided, uniformed individual investors.  It also has a good dose of fundamentalism in it, which I like because studies prove that over the long run the market does regress to the mean.  So price earnings ratios, for example, eventually affect the long-term pricing of the market.

Skousen’s strategy is to focus on a certain class of stocks that are usually immune from fads and therefore sell at reasonable multiples.  These stocks, he points out, represent less than 20 percent of all stocks that trade on the various exchanges.  They are so neglected that they are not terribly affected by institutional moves and individual hysteria.  They are a class of shares where price seldom moves away from value.

Can you guess what kind of stocks Skousen is talking about?

If not, you should buy the book immediately and see if you aren’t persuaded, as I was, that Skousen has found a good formula.  If you can guess the stock class, you should read the book anyway, because it will confirm your confidence in this stock class and expand your understanding of the market.

I won’t give away Skousen’s strategy here because I want you to feel the effect of the argument he puts forth in this good book.  It is a fast read – like a John Grisham novel – but full of solid sense and helpful facts that will give you the confidence you need to follow his program.

I bought a dozen copies for friends of mine who invest.  It will be in their stockings this Christmas.

Sincerely,

Michael Masterson

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