Stocks are likely to be the best investment you’ll ever make, outside of a house.

You don’t have to

feed a stock, the way you do if you invest in horses or prize cats. It doesn’t break down the way a car
does, nor does it leak the way a house can. You don’t have to keep it mowed, the way you do with
real estate. You can lose a baseball card collection to fire, theft, or flood, but you can’t lose a stock.
The certificate that proves you own a stock might be stolen or burned up, but if that happens, the
company will send you another one.
When you buy a bond, you’re only making a loan, but when you invest in a stock, you’re buying a
piece of a company. If the company prospers, you share in the prosperity. If it pays a dividend, you’ll
receive it, and if it raises the dividend, you’ll reap the benefit. Hundreds of successful companies
have a habit of raising their dividends year after year. This is a bonus for owning stocks that makes
them all the more valuable. They never raise the interest rate on a bond!
You can see from the chart below that stocks have outdone other investments going back as far as
anybody can remember. Maybe they won’t prove themselves in a week or a year, but they’ve always
come through for the people who own them.

Annual Rates of Return (%) of Selected Investments

1945–1994 1984–1994 1989–1994
S&P 500* 11.9 14.4 8.7
Small Stocks 14.4 10.0 11.8
U.S. Treasury Bills 4.7 5.8 4.7
Inflation 4.4 3.6 3.5
U.S. Govt Bond 5.0 11.9 8.3
Intermediate Term Govt Bond 5.6 9.4 7.5
Corporate Bond 5.3 11.6 8.4
Residential Housing N/A 4.3 2.9
Gold (from 1977) 6.4 0.7 0.1
Silver (from 1950) 4.6 (4.2) (0.8)
Japanese Stocks (Tokyo Stock Exch, from 1973) 14.6 16.6 (4.2)
Foreign Bonds (J.P. Morgan Global Govt Bond) N/A N/A 9.1
Emerging Market Stocks (Morgan Stanley Emerging Market Fund) N/A N/A 22.7

* The Standard & Poor’s 500 is a well-known index of 500 stocks that is often used as a barometer of the stock market in general.
Sources: Haver, Ibbotson Annual Yearbook, Datastream, The Economist Created by: Equity Research Infocenter—JL

More than 50 million Americans have discovered the fun and profit in owning stocks. That’s one
out of five. These aren’t all whizbangs who drive Rolls-Royces like the people you see on Lifestyles
of the Rich and Famous. Most of these shareholders are regular folks with regular jobs: teachers, bus
drivers, doctors, carpenters, students, your friends and relatives, the neighbors in the next apartment
or down the block.
You don’t have to be a millionaire, or even a thousandaire, to get started investing in stocks. Even
if you have no money to invest, because you’re out of a job or you’re too young to have a job, or
there’s nothing left over after you pay the bills, you can make a game out of picking stocks. This can
be excellent training at no risk.
People who train to be pilots are put into flight simulators, where they can learn from their
mistakes without crashing a real plane. You can create your own investment simulator and learn from
your mistakes without losing real money. A lot of investors who might have benefited from this sort of
training had to learn the hard way, instead.
Friends or relatives may have warned you to stay away from stocks. They may have told you that if
you buy a stock you’re throwing your money away, because the stock market is no more reliable than
a casino. They may even have the losses to prove it. The chart on page 110 refutes their argument. If
stocks are such a gamble, why have they paid off so handsomely over so many decades?
When people consistently lose money in stocks, it’s not the fault of the stocks. Stocks in general go
up in value over time. In ninety-nine cases out of one hundred where investors are chronic losers, it’s
because they don’t have a plan. They buy at a high price, then they get impatient or they panic, and
they sell at a lower price during one of those inevitable periods when stocks are taking a dive. Their
motto is “Buy high and sell low,” but you don’t have to follow it. Instead, you need a plan.
The rest of this book is devoted to understanding stocks and the companies that issue them. This is
introductory material, which we hope will lay the groundwork for a lifetime of investing.

Invest for the Long Term

You don’t have to be a math whiz to be a successful investor in stocks. You don’t have to be an
accountant, although learning the basics of accounting may help. You don’t have to be a Phi Beta
Kappa or a member of the National Honor Society or Mensa. If you can read and do fifth-grade
arithmetic, you have the basic skills. The next thing you need is a plan.
The stock market is one place where being young gives you a big advantage over the old folks.
Your parents or your grandparents may know more about stocks than you do—most likely, they’ve
learned the hard way, by making mistakes. Surely, they’ve got more money to invest than you do, but
you’ve got the most valuable asset of all—time.
The following illustration shows how time can do wonders for your pocketbook. The earlier you
start investing, the better. In fact, a small amount of money invested early is worth more in the long
run than a larger amount invested later.