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2/10/2003

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The $100,000,000,000-a-Year Scam
    Tonight, there was a Merrill lynch ad on TV. You've probably seen it. It's written in invisible ink that he's making money in the stock market, thanks to Merrill Lynch, and that she's providing the homey, feminine touches as a smiling response to his stock market returns. It's a compelling ad.
    I remembered that a few months ago, Merrill Lynch was fined some millions of dollars for leading their clients over the edge of a cliff during the dot.com boom. Like B'rer Rabbit in the briar patch, Merrill Lynch probably didn't feel such a small pinch. They must have made billions off us suckers during the latter nineties.
   Last month, I took Taylor to Target, and while I was waiting for him, I entered into a conversation with an online broker in the store. I mentioned to him that the stock market only rises by about 1% a year, and that most of the returns derive from dividends, which, during the dot.com boom, shriveled to a little more than 1%.  He said he realized that, and that it was for that reason he liked Philip Morris, which is now yielding a 10% dividend yield.
    I'm shocked by the fact that he's aware of this situation in the stock market, and I'm wondering where he found out about it. It certainly isn't in any financial literature I've ever read.
    I can see why Warren Buffett considers the financial services industry to be a $100,000,000,000-a-year con!
   
    The Dow Industrials in September, 1929 hit a high of 386 The consumer price index in 1929 stood at 17.1; today it measures 184; or a factor of 10.76 above what it registered in 1929. Correcting the 1929 Dow Industrials peak for inflation, the DJIA becomes 4,153 in 2003 dollars.

    The Dow Jones Industrial Average closed today at 7,920. That means that the Dow index has less than doubled over the last 73+ years! That's a capital gains growth rate of about 0.9% per year. And yet, in early 2000, it hit 11,8005. And it was a glorious roller coaster ride all the way up! But what goes up must come down, and down it has come, back to its historical trend line. And most us haven't done as well as the DJIA.
    The other, and only significant source of investment returns is dividend yields. Over the years, they've averaged 3.5% to 4% but lately, they've been abysmal!
    So how can you make money in the stock market?
    You can't make money by timing the market.
    You can't make money by out-guessing the experts.
    You can't make it by thinking that you're somehow smarter or savvier or more insightful than the crowd. The crowd is smarter than you think. You are the crowd.
    You can try to identify promising local companies that lie below the radar screens of funds and stock brokers, and play venture capitalist. 
    You can invest in high-dividend companies when the market is down, and then plan to hold them.
    You can invest in stocks when interest rates are low (as they are now), and in bonds when interest rates are high.
    What do you do when everybody else is cleaning up in the market and you're sitting there clipping dividend coupons?
    You can rest assured that what goes up must come down, and there's very little chance they'll cash in their chips at the right time to make money.
    Or so I suppose. The fact is that I haven't followed this advice myself. If I had, I might be richer than I am.

    How do we convey this knowledge to the public?