In the preface, here's a telling commentary on the environment at the time the book was written:

"New types of financial instruments were created by the score while others, such as junk bonds, lost favor.  In the United States, a declining real estate market and regulatory failures combined to undermine the entire financial services sector.  The savings and loan industry was the first casualty, and banks and insurance companies threatened to follow.  As we write this (1993), the general economic recession has entered its second year."

Are we in a time machine?

"What has been will be again, what has been done will be done again.  There is nothing new under the sun."

-- Ecclesiastes 1:9

Two Yale professors have recently decided to write a book advocating "Why young people should buy stocks on margin."

 

File it under the worst idea in the history of bad ideas.

 

Let's suppose for a moment that it weren't such a bad idea.  There are some fairly large obstacles to its implementation.

 

Number one, company retirement plans and IRAs don't allow borrowing on margin (sound legislation since the rest of the world knows its not a good idea to leverage up with one's retirement funds).

 

Number two, the few investment vehicles that employ a leveraged strategy are fatally flawed.  Leveraged ETFs as an example, because they are based on tracking a multiple of an index on a daily basis, often produce wildly distorted returns from what one would expect (for a good piece on the danger of such funds, read John Waggoner's "When leveraged funds are bad, they're very, very bad.")

 

Even if you could pull it off, there's a huge danger involved:  leverage (borrowing to invest) creates a situation where you can potentially lose more than you invest.

 

Imagine a 20-something investor (who by definition has zero investment experience) leverages up and invests all of his money and then some in the stock market in October of 2008.

 

The market plummets 50% in less than six months and during the fall he repeatedly has to pull money that he probably doesn't have out of his pocket to cover the margin calls on his disappearing nest egg.

 

A 50% loss takes a 100% gain to recoup.  At two to one leverage the required gain is substantially greater and that assumes he has the emotional maturity and the additional capital to weather the storm.

 

It doesn't matter how long your time horizon is, to quote Warren Buffett, "In order to succeed, you must first survive."

 

Ironically, this brings to mind the late Yale Professor Irving Fisher who lost most of his personal money in the stock market despite his correct forecast of the 1929 stock market crash.  In an interesting twist, Yale bailed him out by purchasing his home and renting it back to him.

 

 Perhaps Yale professors are "too big to fail."

 

  

"Just as the rich rule the poor, so the borrower is servant to the lender."

Proverbs 22:7

 

"... he who gathers money little by little makes it grow."

Proverbs 13:11

 

"People who want to get rich fall into temptation and a trap and into many foolish and harmful desires that plunge men into ruin and destruction."

1 Timothy 6:9

 

These complaints are probably being lodged by investment portfolio managers who swear that stock prices aren't random.

Ipod song order and stock price behavior are both random (in the latter case I use the word random to mean "not predictable", not necessarily "without cause.")

 

Our brains are hard-wired to see patterns where none exist.

 

Take this real-world example:  If 23 people are in a room, what is the likelihood that at least one pair has the same birthday?  What about 57 people?

 

For the answer, go here.

 

I almost hesitate to bring this to anyone's attention, except that it's total brazenness and the ridiculous fortune-telling nature of it's message should serve as a reminder that most financial media,

particularly CNBC, offer absolutely no value to anyone except lottery ticket buyers.

The British accent is a nice touch, although I would have had him wear a lab coat for added credibility.

Do not panic.  Close your ears and slowly approach your television.  Turn it off, unplug it, and put it in a closet for the remainder of your investing lifetime.