I can’t tell you how to get rich quickly. I can only tell you how to get poor quickly by trying to get rich quickly.

Andre Kostolany.

Do you know how to research before investing, or do you just pick a company stock because you like how it was doing in the past? Most people don’t analyze their stock before they buy it; as a result, they generally match the returns observed in one study in which monkeys chose stocks in the S&P 500. Wait, say that again, Ted. Are you saying monkeys can’t choose as well as I can?

The short answer is yes: in a bull market, monkeys with their index figure, dipped in ink and given a copy of the S&P 500 stock list, select stocks, on average, did approximately as well in this study as the average investor. Now we’re talking averages. Some people will pick certain stocks, especially if they’re only picking one or two, and they may do very well and hit a home run. But on average, monkeys can do as well over the long term. Humans do better in the short term (three to five years) but not so much in the long term (nearer to ten years). 

When you buy stock in the company because you like its products, you are saying that its products have done well in the past. I speculate that the company will continue to do well in the future, but I have no independent research or information to support that assumption. In a rising market, you are usually correct that good companies will continue to produce and gain value. But what do you do when the market turns, and all your games are wiped out?

To improve your chances of making money in the stock market, you have to (1) first determine if you are in a bull or bear market, (2) choose good quality stocks unless you think you have specific information not available to the general company about a particular corporation, ‘(3) invest for the long-term, (4) seek good returns while protecting yourself from potential losses, and (5) never invest more than you can afford to lose, and (6) discipline yourself to ride with the market fluctuations, and (5) follow the principles of the diversification. Follow those rules, and you will have a much-improved chance of doing well in the stock market.

My information on investing is based on two sources. The first is Warren Buffett. If you don’t know Warren Buffett’s name, you can Google it for a barrel full of information. In summary, he is probably the best-known investor in the world, a philanthropist, and is estimated to be the seventh-richest man in the world (approximately $ 150 billion). How successful is his investing? According to Yahoo!Finance, “If you had invested $20,000 in Berkshire Hathaway 30 years ago, which was roughly the price of one Class A share, your single share would be worth about $682,000” on January 1, 2025. 

My second source for this newsletter summarizes the contents of The Intelligent Investor, Third Edition, by Benjamin Graham, who was Warren Buffett’s teacher. As Warren Buffett said, Graham’s book is “the best book on investing ever written.” So, I am basing this investment philosophy on one man, although two men made it famous. 

Watch Out for Severe Down Markets

When I was playing blackjack at the casinos in Lake Tahoe, I often had a stock of winning chips in front of me. It was so exciting, but I frequently walked away with nothing by the night’s end or lost a bundle. The measuring rod is not much, you are ahead at the mid-point, but how much you have at the end. The same applies to stocks. Newton’s law, which states that everything that goes up must eventually come down, applies in cycles on the stock market. Over decades, it climbs onward and upward, but it can fluctuate wildly during the cycle. Depending on when you buy and sell, your return will be impacted. Look at the devastation the last four rescessions caused:

Black Monday (1987). On October 19, 1987, for no apparent reason other than the market was overvalued, the Down Jone Industrial Average fell by 500 points. In a single day, the Dow Jones lost 22% of its value.

Dot-Com Bubble Burst (2000).  Thirteen years later, the rapid rise of dot-com stocks far exceeded their value, and the bubble burst in March 2000. The slide finally ended in October 2002, when the NASDAQ lost almost 80% of its value (nearly $5 trillion collars).

The Global Financial Crisis (2008). Six years later, arising from the subprime loan crisis, America experienced the worst depression since the Great Depression. On 9/29/08, the Subprime Mortgage Crisis, also known as the Great Recession, was so severe that Lehman Brothers went bankrupt, and ultimately Bear Sterns and AIG necessitated a government bailout. During the 18-month period, the S&P 500 lost more than 50% of its value. So if you invested $100,000 at the end of November 2007 and held it until June 2009, your portfolio would be only $50,000.

COVID-19 Pandemic Crash (2020). Twelve years later, in February 2020, COVID hit, and the stock market faced such uncertainty that the S&P 500 plunged 34%. What was unique about the collapse was how fast the market reacted. The rebound was finished by August of that year. 

Possible June Correction. As I write this article (April 10, 2025), the headlines in the Wall Street Journal read, “Stock Market Today: Nasdaq Slides Nearly 4% After Trump Doesn’t Rule Out Recession.” Jerome Powell, head of the Federal Reserve, “paused the Fed’s rate-cut plans after December’s reduction, but recession worry could force him to start cutting again, risking more inflation, even as tariffs kick in, which will likely cause inflation to climb, too.”

Don’t sit at the crap table rolling the dice without at least having diversificatiion that can tolerate and ride out the shifts in the market. Remember, it is not how much you make while sitting at the table (shown on paper) but how much you walk away with. As the old saying goes, “Those who do not remember the past are condemned to repeat it.”

Graham’s Four Guiding Principles

1.         Research Before Buying. “If you know nothing about a stock, except that its price has gone up or ‘everybody’ is buying it, you’re not investing; you’re speculating. The intelligent investor does thorough research and makes deliberate, consistent, measurable decisions.”

2.         Buying a Business. When you invest in the stock, you own a piece of the business. If the company is not well run, financially secure, and able to weather a bad market, you risk your future on a gut-level feeling.

3.         Undisciplined Investors Panic. The markets fluctuate over time, even though they may go up in the long term. Too many amateur investors freak out at a downturn in the market, sell at a loss, and don’t return to the market until it has recovered. True investors purchase for the long term. 

According to the MoneyWise website, Warren Buffett stated one of the secrets to success: People “just don’t realize that all you have to do is just buy a cross-section of America, and they never listen to people like me or read the papers or do anything subsequently. They think that because you can trade, you should trade.”

4.         Don’t Consider Loss. Most investors have stars in their eyes and only see the upside in the stock. You must assume history is correct and the market will fluctuate up and down. You’re not a good investor if you don’t consider how much you can lose in making your decisions.

Diversification

The way professionals protect against down markets and bad investments is by diversification. But, at the extreme, you would be wiped out if you had 100% of your assets in one company and that company went under. Similarly, you could be poor if you had 100% of your investments in stocks and the market tumbled. Therefore, genuinely wealthy people diversify, having a percentage in stock and bonds, sometimes in other assets. 

Bill Graham and Warren Buffett favor having 25% of your assets in stocks and 25% in bonds. The other 50% is allocated between stocks and bonds, with the allocation varying depending on whether the market is in a bull or bear market and on the interest rate paid on bonds. The traditional long-term allocation was 60% in stocks and 40% in bonds, but this now depends on current economic conditions. 

Since WWII, there have been times when the market was up almost 20% in a year, but also less frequent times when the market was down almost as much. On average, the market produced over the last three decades has produced a 10% annual return (six to seven percent if adjusted for inflation). In March 2025 (as I write this article), the 10-year bond yield is almost four percent; newspapers speculate there might be a recession because of trade wars. Are you willing to risk a 6% (and much higher) return vs. a guaranteed safe 4% in the bond market, regardless of the economy? You must balance all these factors in your diversified investments. 

Instead of investing in stocks and bonds, you can invest in mutual funds in a diversified portfolio. There are both managed funds, where managers use their skills and computer programs to select what they think are the best stocks in which to invest. Alternatively, low-cost index funds select all or a portion of the stocks in an index, thereby incurring only administrative fees. (The last paragraph in this newsletter discusses this issue in more detail.)

Are You in a Bull or Bear Market

Suppose you are lucky enough to invest at the beginning of a long bull market. In that case, almost any good companies you pick will increase value with the general market. Nobody has ever been able to time the market, no matter how good of a professional they think they are. So, you likely can’t do better.

How do you know if you are in a bull or a bear market and if the end is near? You don’t. However, some warning signs may provide general guidelines.

1.         P/E Ratios. The price of a stock divided by its earnings gives the price-to-earnings ratio, typically called the “PE.” Historically, the average P/E ratio is around 20 to 25. Anything below that amount would be considered a good investing ratio, but anything above that amount would be riskier. When using such a broad brush, it is important to recognize that PE ratios vary across industries.

In March 2025, Tesla stock’s PE was 117 but was as high as 940 for a short time. The issue becomes whether the company’s value warrants such sums or whether investors are speculating on future earnings without regard to value.

2.         Buffett Ratio. Warren Buffett uses a broader gauge: the total US stock values divided by the gross domestic product (GDP). If the ratios get too high, Buffett expects a paltry return (and many speculate that is why he is now (2025) sitting on 1/3 of a trillion dollars in cash in his fund.) 

There are many prudent ways to invest in the market. One method is called The Ladder, where instead of investing your whole $1000,000 in one stock, you invest, say, $10,000 a month for 10 months in the same stock. 

Pick Quality Stocks

If you want to speculate, put aside money you can afford to lose and gamble. You can buy initial public offerings, penny stocks, or whatever since you know you are wagering against the odds. However, if you want to invest, do some research first.

In the old days (not quite back in the horse and buggy era, but before desktop computers), you had to read company annual reports and use a calculator to make reliable evaluations. Now, with the internet, it is easy. The experts research for you, and it’s free. Google the company’s performance and assessment from four or six websites, and if they are all saying the same thing, then they are probably correct. 

You should be in good shape if you have picked quality stocks and diversified your investments over the long term. Don’t panic over market fluctuations; your stocks will rebound when the market rebounds. 

Neither you nor I have the skills, resources, and time to thoroughly analyze our stock decisions like the professionals. Still, it helps to look at the “big boys” with $1 billion budget and know how they analyze stocks. While we can’t do the same, it does tell use the kind of research that is done before major purchases. It is far from the old game, of, “Well, that stock sounded good today, maybe I should buy some.”

According to the Wall Street Journal article (5-4-25), when Warren Buffett bought Apple in 2016, he had his managers look for a stock that met three criteria. 

1.         The stock has to be reasonably priced (P/E ratio of 16 or less).

2.         Be 90% sure the stock would generate higher earnings over the next five years.

3.         Be 50% sure the company would grow by at least 7% per annum for the next five years. 

When in Doubt

When Warren Buffett dies, he is leaving a small portion to his children and the bulk of his assets to a charitable trust. Warrant Buffet told his children that it is tough today to compete with mutual funds and that they should invest all their money in the S&P 500. The world’s greatest investor passes this advice on to his children, and I suggest there is a great deal of wisdom therein.

If you are leery of investing in the S&P 500 because of its unpredictable returns in the last four years, there are alternative S&P 500s available. One solution is the “Equal-Weighted S&P 500,” where each company has equal weight as opposed to regular S&P 500, where companies are waited according to market capitalization. This equal weighting gives more emphasis to mid-size the smaller cap stocks. Another example is the “Revenue-Weighted S&P 500,” which way is stocks by the highest annual revenue as opposed to market capitalization. There are other possibilities, and the sole purpose this just paragraph is advising you of options.

                                 Don’t Investigate Like a Professional

If you think you’d like to invest like the big boys, you really don’t. It takes too much time, energy, and discipline for the average person, me included, so I’d rather go on fundamental economic analysis and gut feeling. The two quotes below are from Poor Charlie’s Almanac, 3^rd Edition.

Charlie Munger, Warren Buffett’s number two man, said that the philosophy they use is “The number one idea is to view a stock as an ownership of a business, and to judge the staying quality of the business in terms of competitive advantage. Look for more value in terms of discounted future cash flow than you were paying for.”

Charlie goes on to say that, “The list of additional factors… is seemingly endless and includes such things as the current and perspective regulatory climate; state of labor, supplies, and customer relations; potential impact of changes in technology; competitive strength and vulnerabilities; pricing power; stability; environmental issues; and, notably, the presence of hidden exposure.”

That type of detailed analysis and investigation they use takes countless hours, strict study of profit and loss statements/balance sheets, and analysis, all of which is far beyond the average investor who is only putting a modest amount into the stock market.

Conclusion

Mr. Buffett made his decision based on three factors. First, he believes in the quality and performance of the American economy, so investing through diversification is investing in that economy. Second, Buffett says that low-cost index funds have such a low fee that managed funds almost can’t compete. If your managed fund earns a 7% annual return, but yearly costs eat up 2% of that amount, your return is only 5%. However, if that amount was the indexed SP500 fund with only a ¾% management fee and earning 7%, you are far ahead. (1.5% richer each year–compounded). Lastly, Mr. Buffett believes that too few managers lack the skills today to outperform the S&P 500. If you do pick individual stocks, do so for the long run.

I want to finish with two quotes from famed German-Frenc stockbroker André Kostolany. “I can’t tell you how to get rich quickly; I can only tell you how to get poor quickly: by trying to get rich quickly.” He also said that poor investor have “shaky hands,” and sell in a panic when the market sinks, then having to watch “firm hands” buy the stock at the discounted fallen price.

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Ted is a retired attorney, so he is writing only as a layperson. This article provides general information only and should not be considered as specific advice for any particular situation. It is provided without express or implied warranties of any kind, including but not limited to implied warranties of merchantability or fitness for a particular purpose. If you have a specific problem, consult a CPA, attorney, or doctor for advice. Sorry, my attorneys made me say all that!