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I would like to share with you what I told my twins.

To My Twins,

As you become young adults and have a few dollars in your pockets, investing in the market may be of interest to you. When investing in the market, keep in mind a few things:

Remember, thereís more to life than making money. The college you attend follows you forever. Your major and profession guide you down a certain path. Your spouse and where you live are important influences as to your friends and your happiness. While I donít think counting cards and keeping up with the Jones is the way to live, if you are into counting, wait until youíre retired before adding up the final score.

The way the rules are set up, the game is stacked in favor of the house. Everyone wants to get their hands on your money. Try to keep everyoneís fingers out of your pockets. Why play the game if the odds are against you?  ďBecause the stock market is one of the few places where with $10,000 and two back-to-back ďten baggersĒ you can become a millionaire!Ē  

I suggest that you stay with the basics. Forget the CMA account; keep your investment, trading, insurance, mortgage and checking accounts separate. Donít put all your eggs in one basket. Go with the regular account; donít attach credit cards or checks to your investments. Make it difficult to spend your investments. With a regular account, you need to call your broker for funds. Sometimes, that extra step is a wake up call, to prevent you from closing out a potentially good investment. Also, never allow any direct withdrawals from your investment account. It is very tempting when opening an account to go with all of the bells, whistles, and extras. Security brokerages and banks have mastered the use of technology and some of their products are truly beneficial.  Nonetheless, keep your investment, trading, insurance, mortgage and checking accounts separate. Use separate companies, and always keep an emergency fund (cash) at your local bank. Using the online features and all the extras are fine for your trading account, but for your investment account, ďkeep it simpleĒ. Make it inconvenient to spend your investments.

Read the fine print on the application when you open your brokerage account, to learn the rules of the game. If you donít, you may sign away many of your rights from day one.

When dealing with your stockbroker, remember that heís first a commissioned salesperson. The brokers are backed by the advertising, marketing, and research departments of their firm. The show is impressive, lots of credentials, stock research, free dinners and excellent commercials. Nowadays, the game is to manage your account for a fee. The truth is they know how to bring in accounts and process orders. Use their research, but remember that itís your money and your responsibility to invest it wisely, not theirs.  

The way the rules are set up, the research analyst is in a peculiar relationship with his firm. Companies pay large underwriting fees to brokerages firms; those same firms supply research reports regarding the companies that are paying them. While the research is normally excellent, read it with a skeptical mind. In the past, there have been abuses and a breakdown in the firewalls established in the industry.  Always keep your eyes open for a good business that also can become a good investment. The so- called professionals usually donít discover a good investment until the real money has already been made. Regarding earning estimates, itís impossible to project out to the penny; if it happens, something is wrong. 

Remember, the companies that you invest in are controlled by people you donít know. Many critics believe that thereís a layer of power and money that is kept out of the public view, and that the Board of Directors reports to them, not the shareholders. Many critics also believe that there is no such thing as someone having a fiduciary duty to protect your money, and that itís an unnatural concept that does not exist. Most people are basically honest; however, for the Board Member, CEO, CFO, etc., itís only a job. When you see the big name colleges in the bios of the management team, keep in mind that it only confirms that they excelled in academics. Making money and building a business are more involved than formal schooling alone.

Companies donít grow in straight lines. When a company has steady exact growth rates, be careful.

When investing in the stock market, think of a four year time frame: from the current presidential election year to the next. Usually, the political powers try their best to have the economy running the smoothest at election time. 

Regarding the business writers and their recommendations, remember that many majored in English and Journalism in college. In some cases, they have not worked in a non-publishing or teaching capacity.

Diversification is essential for successful investing. Iím from the school of picking a few stocks and making your own decisions. I donít believe in over diversification. Having between 8 to 12 or so stocks, in mostly different industries, should suffice. Picking mutual funds to have a balanced portfolio, means that your stocks will be spread so thin, and in so many different investments, that it will be almost impossible to beat the averages. If there is a winner in the group, it will be so diluted that your gain will be very small. Donít be afraid of investing!

Tax deferred IRAs and other pension accounts have their place in the investment world. I always recommend maximizing a companyís pension and 401K contributions. Never leave money on the table. However, if you need your funds before retirement, the taxes and fines are prohibitive.

Try to have a combination of after-tax and pretax investments. Short-term savings for a down payment for a house and yearly events like vacations should always be done with after-tax dollars. This way, you know itís all yours. 

Stay with the basic investments (stocks and bonds), until you are an expert. Options, puts, calls, shorting and margin are all very risky. Many investors lose money on them. Some hedge funds can be wild; if investing in them, think of it as Atlantic City money.  Day trading is a full time profession; if you participate in it, treat it as such.

There is nothing wrong with having your money invested in a saving account at your local bank. Preservation of capital is a very good strategy.

While going for the long shot every now and then is fine, be prepared in case you lose money.

Your house is also a big investment; protect it. Pay the mortgage off as quickly as possible. Donít roll over credit card and medical expenses into your mortgage. When your investments are up, sell a little to pay down your mortgage.

I forgot the most important points: you need to establish a habit of regular savings, and donít forget to reinvest the dividends; they really add up.

Best of luck in your endeavors.


                              Ė Dad


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