As an eighth generation descendant of Benjamin Franklin, and as two men who carry much of the same philosophies of freedom, intellectualism, money and practicality, it shouldn’t be surprising that Mark Skousen appears at this American Investors Symposium luncheon as Old Ben himself.

Conducing an experiment equally as memorable as the “kite-and-key” experiment tried by Ben some 200 years before, Mark Skousen gets the crowd into a little “foolery,” just along the lines of his great-grandfather’s sayings.

Check back soon to view a short video clip!

HOW THE RICH BECOME SUCCESSFUL

Becoming financially independent by investing in the stock market, mutual funds or real estate is not an easy task. Indeed, it is an uphill battle for most investors who are not suited to the rigors of market discipline.

You are probably familiar with Forbes magazine’s annual survey of “The Richest People in America,” known as the Forbes 400. Many analysts have misinterpreted the findings of the Forbes 400, often stating that the majority of rich people made their fortunes in real estate. But this is not the case. The majority of the Forbes wealthy did not get there by investing in real estate, or by investing in the stock market, for that matter. According to the most recent survey, only 72 out of the 400 on the list were real estate investors, and even that can be misleading. Many of them made their original fortunes in other areas, and then diversified into investment properties. Others inherited their real estate.

The fact is that the single most popular way to riches was not real estate, not the stock market, not mutual funds – in fact, it was not “investing” at all. The most common path to financial independence was through one’s own business! Whether it was manufacturing, automobiles, department stores, commercial banks, shipping, insurance, computers or one’s own profession, the Forbes 400 made it primarily through creating and developing their own businesses.

Moreover, according to several recent Wall Street Journal articles, numerous retirees actually lose their fortunes after they sell their lifetime businesses and become investors.

How should these facts affect your attitude toward investing? Let’s look at several modern-day examples.

How do you make a million dollars in today’s financial world?

THE REAL WINNERS IN THE STOCK MARKET

Well, you don’t become a millionaire by investing in the stock market. You make it by being a stockbroker, or better yet, by starting your own brokerage house. That way you earn a commission on every trade whether your customers are buying or selling, whether they are making a profit or a loss.

You don’t make a million dollars by buying penny stocks. You make a million by selling penny stocks, not as an investor, but as a penny-stock broker. The penny brokers are the principal ones making a killing in the penny stock business, not the naive investor. The commissions are huge in the penny stock business.

Buying new issues is not a secure way to make a fortune. But “going public” is an excellent way for a businessman to increase his net worth by a million or two, letting other investors share in his risks. Selling new public stock can be extremely profitable for the corporate president, company directors, the underwriters and other founders who are given the opportunity to buy “insiders’ stock” at 30 cents on the dollar of the new issue price. There are risks, of course, but the risks are lower than those taken by the retail customer who pays the full new-issue price. And if the stock is “hot,” the premium price can sometimes jump to two or three times the official new-issue price before the average investor gets in. The retail customer is usually the last man on the totem pole to make any money.

You don’t become a millionaire by investing in a mutual fund. You make a million by starting your own mutual fund, which is probably the fastest growing area of investing today. In the early 1980s, there were only 400 mutual funds. Today there are over 1,400. Why the rush? Passive investors want an easy way to participate in a bull market and want to rely on expert, professional advice. The management fees on these funds can be very lucrative. Many mutual fund managers make half a million a year, or more. And, remember, the money manager makes that kind of money whether the fund is performing well or not. (Granted, the money manager makes more money if the fund is a superior performer, but still the fees can be substantial, even in a down market.)

Very few investors make a fortune trading commodities. But commissions mount up for the floor trader in Chicago, the commodity broker in New York, or the commodity pool manager in Dallas. Trading commodities is high risk, but selling commodity contracts (short or long) is the low-risk way to make a million.

RARE PROFITS IN RARE COINS

How many private investors really maize a million buying and selling rare coins? Not many, unless they are rare coin dealers! The average markup on numismatic gold and silver coins is 22%. That’s quite an incentive for the casual businessman to get into numismatics. It also means that a coin buyer has to recoup 22% just to break even. So, even in a bull market, it may take a year to make a profit. And that’s assuming the grading of the coin is accurate. The chances of getting an over-graded coin are increasing, because in any market where there’s greed and lack of information, the fraud peddlers enter. Many coin dealers are going to be reluctant to buy your “MS 65″ gold coin when an “MS 60″ (also uncirculated) sells for one-third the price. The industry is already distinguishing between “technical grade” (trade standards) and “commercial grade” (retail standards), so you know trouble is brewing. Once again, my feeling is that the low-risk, big money is being made by the coin dealers, not the investors.

The classic example of malting consistently high profits has been in the insurance industry. You don’t become a millionaire by purchasing a whole life policy (unless the person you insured dies!), but you can make a million as an aggressive insurance salesman. The old traditional life returned on average 3% on a customer’s cash-value investment, while the insurance broker received 100% commissions on first-year premiums, with additional payments down the road. Today, of course, insurance products have become a much better deal for consumers, especially single-premium whole-life policies.

IS REAL ESTATE THE ANSWER?

Surely, you say, if there’s one area where the individual investor can make a million, it’s in real estate. It’s ideal for the “cash poor” investor, right? Admittedly, one can point to many success stories in real estate investing. I’ve met quite a number of successful real estate investors. But, looking at the overall picture, I can only conclude that it’s a small minority of real estate seminar graduates who become financially independent through real estate. You want to make a lot of money in real estate? The best way is to become a real estate agent, financier or developer! The real estate agent gets his commission, whether buying or selling, and he is sure to be one of the first to hear about the bargains (distressed deals).

The commercial banks, savings and loans, and financial lenders make the real money in real estate by collecting 2-3 points on every mortgage or refinancing, plus high interest rates on 30-year mortgages (the longer the term, the greater their profit). The vast majority of homeowners pay regularly like clockwork. The banks and financial institutions are the real money machines. Want to make money in real estate? Become a banker or financial lender.

Real estate developers take a chance, and many struggle to find buyers. But they also reap high profits. Recently an associate of mine bought a beach condo on the West Coast of Florida. He paid $140,000, and expects it to be worth $250,000 in a few years. But in my opinion the real winner was the condo developer and broker who sold him the condo. He probably doubled or tripled his investment, and his profits are secure, whether the value of the condo rises or falls a year from now.

The ultimate money-maker for the real estate developer has been time shares, where individual units are sold at huge premiums compared to the total cost of the units. Time shares are often touted as an investment, but they have yet to develop a secondary market, and customers are frequently disillusioned with the time-share concept after it’s too late.

Many investors are interested in the profit potential of foreign investments. But if you want to make a million dollars investing overseas, a better alternative would be to own a foreign bank or brokerage firm, or to become a financial intermediary for interested investors. In the 1970s, during the bull market for gold, silver and Swiss francs, a financial firm in British Columbia used to advertise its services, complete with an 800 number, to American investors who wanted to open Swiss accounts. The financial company received a commission from the Swiss bank and also received a percentage of future paper profits from the investor (but wisely did not participate in losses). The firm took in several million dollars during the 1970s, even though investors could have gone to the Swiss bank directly without having to pay any fees or profit-sharing. Many Swiss accounts were never really managed – they amounted to a simple silver bullion account.

WHAT IS THE LESSON?

What am I suggesting? Am I saying that you should go out and become a stockbroker, a coin dealer or real estate developer? Certainly, that is one alternative which could make you financially successful.

But that’s not really what I’m saying. What I mean by this exercise is this: if you want to be a successful investor, you have to give it the attention of your fu11-time business!

You can’t be a passive investor and expect to make consistent profits. Why have you been successful in your full-time business, and able to accumulate surplus funds? Because you concentrated on doing things right. You took the necessary time to educate yourself, to research ways to become more proficient in your job or business. You got involved. You relied on the expertise of’ others, but you didn’t let them do your job. They helped you, but they didn’t take over your work. You spent hours, often overtime, to make sure that you understood everything and that you accomplished your tasks.

That’s the same attitude you need when it comes to investing. You can make money in the stock market, penny stocks and rare coins, but only if you take the time and money necessary to learn what it’s all about. Learn all about the fundamentals of a public company – earnings, profits and potential for growth. Check the technical chart patterns. Establish “stop loss” positions when you invest. You’ll undoubtedly make mistakes, but you will learn from those mistakes and become better at it, just as you did in your business. You can make money buying and selling rare coins, for example, but only if you learn all you can about grading, scarcity, auctions, coin shows and supply and demand factors. You can make millions investing in real estate, but only if you know as much as possible about real estate in your area, where to look for bargains, how to negotiate to your advantage, when to sell, what the tax breaks are, and so on.

In every investment area, you must recognize how to tell whether the deal is good for you and not just for the salesman. That is the key. Most importantly, get a grasp of local, national and world economic trends in the investment markets you’re interested in. Follow the trends for inflation, interest rates, and economic policy – they will have an impact on your investment decisions.

You might say, “You’re right, Mr. Skousen, but I’m too busy in my own business to take on another full-time business of investing. I’d rather rely on a professional money manager.” In that case, my response is this: If you feel you can’t take the time in investigate an investment area thoroughly, don’t get involved. Stay only with areas you are familiar with or are willing to learn about. If that means bank CDs, money market funds, and a few pieces of real estate, so be it. I would hope, of course, that you would be willing to learn about some of the exciting investment alternatives on the market today. Certainly there are plenty to choose from! Select the ones you are interested in, the ones you sense an ability to profit in, and get going. Subscribe to newsletters, read books, attend conferences, seek advice and start trading. Believe me, you’ll be better off.

Remember the lesson: Invest as though it were your full-time business, or don’t invest at all!

– Mark Skousen

Mark Skousen’s
“CRATER LAKE” SPEECH:
UNCENSORED, OFF-THE-RECORD REMARKS
STUN INVESTMENT AUDIENCE

Good afternoon, fellow investors. I have a special request today. Please take it seriously!

I’m asking the sponsors of this conference and all of you in the audience to turn off your tape recorders, so I can speak freely and openly about some very sensitive issues. I want to expose some very bad advice being given these days, and more importantly, to warn you to stay away from some bad investment deals currently being promoted. I also want to warn you about some very disturbing activities that are going on in Washington. And I don’t want to have to temper my remarks, so please, no tape recordings!

A few days ago, as I was preparing for this conference, I was several thousand feet above sea level overlooking one of the most spectacular wonders of the world, Crater Lake. There, in beautiful southern Oregon, the air is crisp, the water is pure and the population is sparse. One gets a better perspective on life. Crater Lake inspired me to come down from the mountain and deliver this speech – a financial volcano, if you will. What is the Greatest Threat to Your Money?

The topic I was assigned at this conference was, “The Greatest Threat to Your Private Wealth Today.” Normally, I talk about the government as the greatest threat.

Indeed, it is a serious threat, but I’m afraid that there is a greater threat today. The biggest threat to your wealth isn’t the federal government, it’s this conference!

The government can take up to half your income, but as a result of attending this seminar, you could end up losing all of your money – 100% – and sometimes more, if you borrowed funds to invest. How can this happen? By following the advice of some hot-shot high-pressure salesman who is disguised as a respectable speaker up here on the podium! You get talked into some crazy unorthodox investment scheme that promises big profits but only delivers margin calls and tax losses. And don’t think it can’t happen to you, folks! I’m speaking of a very unfortunate new trend in the investment seminar business. It used to be that the podium was reserved for independent investment writers, security analysts or investment bankers – experts who didn’t have a vested interest in what they were saying. The exhibit hall was reserved for salesmen or brokers who sold the investment products that may or may not be recommended at the podium. But today a lot of charlatans are up here on the dais pretending to give you independent information and unbiased advice, when they are actually pushing their own pet investment programs.

LADIES AND GENTLEMEN, YOU’RE PAYING $495 TO HEAR A SALES PITCH.

Before delivering this speech today, I went through the conference brochure and the biographies of the so-called “speakers.” I was shocked to find that 60 out of the 80 on the program were nothing more than merchandisers, wolves in sheep’s clothing, who don’t have any broad background at all in the general field of investing. Some, I happen to know, have highly questionable backgrounds and have been involved in fraudulent deals in the past.

Now there’s probably an economic reason for this sudden shift. The “high interest, low inflation” economy has not been good for the seminar business, and some seminar promoters (fortunately not all – I certainly don’t include Jim Blanchard, Howard Buff or Bob Kephart in this category) are making it up by having shady salesmen come to the stand, because they are willing to speak for free. In fact, I’m sure most of you are unaware that many of these exhibitors actually paid the sponsor of this seminar for the opportunity to speak! They must have high hopes for your money.

When I learned this, I began to wonder if those of us who are independent investment writers aren’t giving tacit approval and endorsement to a bunch of questionable characters in the business by sharing the same platform.

I suggested to the sponsor that in the future, speakers be identified by three categories:
(1) those traditional speakers who are paid a fee;
(2) those who pay their own way; and
(3) those who pay to speak. Then attendees can know what each speaker really represents.

Now don’t get me wrong. I’m not speaking out against using brokers and salesmen in general as speakers. I’ve held conferences myself where I’ve had them as speakers because they were the only ones who had expertise on a particular subject. No, I’m not talking about honest businessmen who have a good product to sell – I have the highest regard for many of them, and they are doing a service for the investor. I’m talking about hucksters, masquerading as legitimate speakers, who will sell you a bill of goods. And, unfortunately, for monetary reward, some conference sponsors are giving them legitimacy by making them bona fide speakers.

BEWARE THE FINANCIAL PLANNER’S VESTED INTERESTS

Another trend that deeply concerns me is that so-called “financial planners” are starting to take commissions or enter into joint businesses with dealers to sell investments. It’s probably inevitable, but it’s not without pitfalls. When an independent counselor knows he gets a commission for recommending an investment, it can distort or cloud his vision, often without his even knowing it. It causes him to lose his objectivity, to subconsciously push a more expensive product sometimes, or even the wrong investment, because of the monetary reward. Many financial planners disclose their business connections, and that’s honorable. But even disclosed business interests can lead to biased advice.

LONGT-TERM INVESTMENTS ARE HIGH RISK IN THIS HIGH INTEREST RATE CLIMATE!

But why invest at all in the investment programs that these promoters will be touting over the next few days? Most salesmen and brokers want you to make a long-term commitment. But, in this Age of the Dollar Boom, where interest rates are high and inflation is low, it’s a mistake to make a long-term investment in anything – stocks, bonds or gold. Beware of anyone who says, “This is a great long-term investment, but be prepared to hold on for several years before profits are realized.” If you read between the lines, it usually means that the promoter is getting big commissions, or that there’s no secondary market if you needed to sell quickly. (And no secondary market means you’re forced to hold long-term whether you like it or not!)

There is no sound long-term investment in today’s volatile, uncertain economic climate.

Not stocks! Not bonds! Not gold! Not silver! Not Swiss francs! Not real estate!

There are no permanent investments anymore, except maybe a money market fund. Stocks, bonds and hard assets are short-term, trading vehicles. Don’t make the mistake of blindly investing long-term with an individual stock, bond, mutual fund or gold coin, expecting inflation or recovery to make your profits for you. They all need to be monitored constantly, and sold if the investment climate changes.

I think the worst advice given by investment counselors today is to invest for the “long term,” to buy X investment and “forget about it.” More money has been lost in “forgotten” coins, penny stocks and Swiss bank accounts by following this unsound principle than in anything else. It does matter when you buy, it always pays to watch the value of your investments, and it’s important to sell when necessary.

The only exception is a highly liquid, short-term money market instrument, like a money market fund or Treasury bills. You have instant access to your funds, and can move them in or out of a short-term speculation without any problems or delays. In this “high interest, low inflation” environment, there’s nothing wrong with having a majority of your funds in a money market-fund, or even an insured bank certificate of deposit six months or less if you can’t control your spending. It may not be the most exciting investment in the world, but it will preserve your capital, and keep you from losing your shirt in other speculations. In fact, I recommend this approach for most traditional savers and conservative investors.

Speculators want something more exciting. I understand that. Personally, I’m into the stock market and out of gold, but that could change at any time. I watch my investments closely. Frankly, many speculators could do a lot better forgetting about all those enchanting opportunities and just adding to their money fund every day. The conservative tortoise almost always beats the speculative hare.

My experience has been that the most profitable approach for the vast majority of people is to invest their money in their own business and keep any surplus capital in the bank or a money fund, and perhaps some real estate. Gold should be held primarily as insurance against bad times, not as a profitable investment. I doubt that very many of you will take this advice. You didn’t spend hundreds of dollars to come to this seminar and be told to invest in a money market fund! Yet it’s the safest course, and many of you are going to do a lot worse than a money fund by getting into some risky investment because of this seminar.

You want my advice to make money at this seminar? Don’t do anything for at least two weeks! That will keep you from getting involved in a bad investment deal in the heat of the moment. The exhibitors aren’t going to like this advice: but it will help you separate the wheat from the chaff. Many attendees near the end of a big conference come up to me and complain, “I’m so confused, I don’t know what to do.” I say, “Good!” When you’re confused, you’re immobilized. You won’t be tempted to waste your hard-earned funds on a bad investment. I’m not saying you shouldn’t visit the exhibit hall. Go ahead, and pick up all the literature (although I wouldn’t give them my real name and telephone number). And buy some good books on various investment topics. I’m a firm believer in education – better to learn from knowledge than experience!

WATCH OUT FOR UNORTHODOX “INVESTMENTS”

Before I move on to another important topic, I want to warn you about one more thing. Be skeptical of unproven, non-traditional investments. Most of them are artificial, phony markets. I can think of several recent examples: diamonds, gemstones, jojoba beans, newly minted coins and medallions, certain collectibles and many private placement tax shelters. Even penny stocks often fit in this category. Common characteristics include:

1. highly illiquid, i.e., little or no secondary market

2. high or excessive commissions for the seller

3. artificial “limited” editions or new issues

4. must be held for the “long-term,” usually 4-5 years, before “profits” can be realized.

I look back at the so-called “investment grade” diamond market in the late 1970s as a classic example. Huge profits were promised by promoters and hard-money investment advisers because diamond prices were controlled by DeBeers and had never had a “down tick.” Dozens of new diamond dealers exhibited at seminars. Today, of course, the story is quite different. At the same seminars I now attend, I don’t see a single diamond dealer. Many of them are out of business. I read an article the other day stating that a top-grade one carat diamond that sold for $69,000 in 1980 is selling for $12,000 today! Unfortunately, most people bought in 1980, and where are those stones today? Still buried in a plastic case in a safe deposit box! The original buyers are still holding on, waiting in vain for their diamonds to recover. Even if they wanted to sell, it’s often very difficult to find a buyer for an “investment grade” diamond.

Today the “hot” investment is penny stocks, and it’s the same old story. “Buy a dozen penny stocks, sock them away and forget about them – you’ll be rich someday!” Meanwhile, the penny stocks have fallen out of bed. They may have cost you a dollar a share to buy them, but today they truly are “penny” stocks!

Let me ask you a question: How many of you have tripled your money in a penny stock? How many of you have actually bought and sold a penny stock and made 200% or more? (Note: not a single hand went up.) I rest my case.

Well, I have a confession to make. I did triple my money on a penny stock! I’m not trying to be egotistical (I’ve had my share of bad investments too), but I’m trying to make a point. The reason I tripled my money in a penny stock was because:

· First, I bought at the right time, during a period of time when penny stocks were moving up in value.

· Second, I monitored the stock closely.

· Third, I had a goal in mind. When the penny stock’s price rose 200%, I figured I had made enough money, so I sold out. I didn’t become greedy.

Another reason I made money was because I didn’t view it as a “long-term” investment. I held the stock for less than six months. Fortunately I didn’t have to worry about the tax consequences because I used my tax-free pension funds to invest!

BEWARE OF FOREIGN OFFERINGS THROUGH THE MAIL

Let me discuss another concern. There are many fraudulent deals being promoted by unscrupulous operators outside the United States, and you ought to be concerned about them. Many of you in the audience may have one of these “secret” offshore investments, completely unaware that your money is gone forever. So sit up and take notice!

I have a sad story to relate. Several weeks ago, I was awakened at 7 a.m. by a telephone call from a subscriber who was distraught about a foreign mutual fund he had gotten into. He had tried for six months to make a withdrawal from the fund, but without success. After numerous telephone calls, letters and even one trip to Europe, he was still unable to get his money back. The mutual fund finally sent a check, but the check bounced! Desperate, he was calling me for help.

I told him that I had warned my subscribers about this firm in a recent issue of my newsletter. He was surprised and said, “I don’t remember your mentioning it in your letter.” I told him that I didn’t mention it by name because I didn’t have absolute proof that the company was a fraud. I told him that the company president is known to slap lawsuits on publications which are critical of his fund, and without proof my publisher and I were vulnerable. (You think we in the newsletter business are free to say what we want? Not when the courts are so willing to challenge the freedom of the press.)

So I did the next best thing. I didn’t mention the mutual fund by name, but I did emphasize several warning signs to avoid offshore seams, describing this company and its promotions to a “T.” Particularly, I told subscribers to be leery of mail-order solicitations of foreign-based newsletters, which offer “funds” with a spectacular past performance. Legitimate foreign funds don’t solicit business in the United States unless they are registered with the Securities & Exchange Commission. (Needless to say, the fund in question hadn’t registered, and was on the SEC’s foreign restricted list.)

The subscriber had failed to realize that this advice applied to all such promotions, even the one he was interested in. He invested his entire life savings in this fraudulent mutual fund, as well as his wife’s entire savings! It totaled $250,000. I couldn’t believe that someone who reads my newsletter could be so naive and foolish. Even if it had been a legitimate deal, how could anyone in his right mind invest all his savings in one investment? That’s financial suicide. Such a fundamental principle as diversification shouldn’t have to be emphasized constantly, but apparently it does.

I have since learned that this mutual fund is in deep trouble and may never pay anyone back. It’s a bitter pill to swallow, but my subscriber can get back on his feet if he follows some simple rules, such as diversification, staying with traditional investments and being in control of his own funds. I can’t repeat it too often: Stay away from unorthodox, nontraditional investments, particularly those that prey on your privacy. This particular off-shore fund seemed very attractive to hard-money investors. It offered secrecy, high returns in precious metals and “hard” currencies and no commissions. But I’m afraid this “no-load” fund turned out to be an “all-load” fund!

If you’re tempted to invest offshore, keep it simple. Open a Swiss bank account, invest in U.S. dollars and don’t worry about speculating from thousands of miles away. You’ll sleep better.

BE A LOW PROFILE PRIVATE INVESTOR

I have raised a great many key issues and deeply disturbing facts in this talk. I don’t want you to be unduly alarmed, however. Don’t panic, or act hastily. But you should seriously and carefully consider these things. Your personal and financial affairs are threatened, now more than ever. The best approach is to quietly arrange your affairs and protect yourself from the high-pressure salesmen, professional fraud peddlers and aggressive government agents who fill the land.

We live in an Age of Envy, as Gary North calls it. You have to fight back to keep your private wealth from being stolen, sued or taxed; but do it in a low-profile way. Your freedom depends on it. Good luck.

–Mark Skousen

Televised nationwide on C-SPAN, Mark Skousen’s lecture on “Puzzles and Paradoxes in Economics” at the Cato Institute on October 10, 1997, took the “ho-hum” out of economics. He explained common paradoxes like, “Why are all the best Washington apples found in New York City?” and “Why are diamonds (impractical) more expensive than water (extremely practical)?”

In this clip of the speech, Mark Skousen reveals the reasoning behind a common grocery store paradox — why ketchup is more expensive in the larger bottle than the smaller one.

Check back soon to view a short video clip!

“What Have We Learned?” It’s an important question because the events of the past have much to teach us about making money today.

In fact, for 20 years I have been applying that truism in the financial business. From Managing Editor of The Inflation Survival Letter (now Personal Finance) in 1974 to Editor of Forecasts & Strategies, today, I’ve seen a great deal over the years: bull markets, bear markets and everything in between. During these 20 years, my wife, children (now five) and I have lived in Washington (D.C.), Nassau (the Bahamas), London (England) and Orlando (Florida) and have visited 50 countries. We’ve been around the world and back to learn the lessons of economics and finance, and in this special issue I’d like to share them as my special holiday gift to you.

A PERIOD OF UPHEAVAL THAT CHANGED MANY INVESTORS FOREVER

I cut my teeth in the upside-down market of 1973-74, a period of major upheaval in the financial and economic world: the energy crisis, commodity shortages, double-digit inflation and the beginning of a financial revolution as money market funds, precious metals, real estate, foreign currencies and survival foods moved into the spotlight.

A new coalition was formed, the “hard money” movement, made up of investors fed up with politics as usual who sought to protect themselves from bad government and preserve their capital by investing in inflation hedges, offshore accounts and non-reportable investments. Rejecting traditional investments such as stocks and bonds, their rally cry was, “Buy gold, buy silver, buy Swiss francs!” My first investment was not GM, Disney or McDonald’s stock, but a silver dollar.

The early 1970s was the first inflationary phase, quickly culminating in the horrific 1979-80 blow-off of runaway inflation. The bond market was rocked by skyrocketing interest rates; Jimmy Carter seemed helpless to stem the tide. The election of Ronald Reagan and the trauma of the 1980-82 credit crunch, marked by historically high real interest rates, introduced “Reaganomics,” which brought us seven fat years of an unprecedented bull market in stocks and bonds – traditional investments we had dumped just a decade before – and a disinflationary environment. Investors who failed to change were hit hard.

Now in the 1990s we are profiting from the great transition to a new global economy, a technological revolution and emerging free markets around the world. In sum, the sea changes in the financial markets and the world economy over the past two decades have been dramatic and breathtaking. What have e learned from these exciting years of boom and bust, inflation and deflation, and bull and bear markets? Here are seven key lessons I have learned:

Lesson One
GOVERNMENT POLICIES AREN’T ALWAYS BAD

The first lesson is that government policies can be good or bad, depending on who is in charge. In the 1970s, many investors concluded that government could do no good. “Politics is dead,” proclaimed Libertarian mentor Karl Hess. Whether under Republican or Democratic leadership, we suffered from more inflation, higher interest rates, more socialism and greater instability in the economy. Around the world, nationalization and totalitarianism were on the rise. It seemed that the world was sliding downhill and the only protection was to withdraw from the political system and traditional investments.

But then the world’s geo-politics changed. Thatcher was elected in Britain and Reagan in the United States. Both brought a new mandate to the world – government must be fiscally and monetarily responsible. Government isn’t the solution, they insisted, it’s part of the problem. The state can do only a few good things – it should deregulate, decontrol and denationalize everything else. The supply-side, free-market revolution became a reality, with Britain and the United States leading the way.

Many hard-money investment gurus failed to adjust to this dramatic change. Even today, they are primarily gold bugs, hoping gold will rise again. Meanwhile, they’ve missed out on some fantastic investment opportunities in stocks and bonds around the world.

Luckily, I saw it coming. When Reagan was elected, I proclaimed, “The Financial Shock of 1981: Reaganomics Will Work!” I recommended selling gold and silver and buying U.S. stocks and bonds. Very few listened, and I was denounced by many stalwarts in the hard-money movement. Yet my prediction turned out to be accurate.

The sea change under Reagan taught me another important lesson: Wealth is created from the production of goods and services in the U.S. and around the world. And stock markets best reflect that growth in wealth, not collectibles or precious metals. This is a difficult, but critical, lesson for all gold bugs to learn, especially for those of us who started in this business investing in hard assets, not traditional investments.

WE CAN PROFIT FROM WORLDWIDE POLITICAL CHANGES

Now in the 1990s, we are witnessing governments making dramatic changes for the better, with multitudinous opportunities for investors. Full-scale socialism and Marxism were shattered when the Berlin Wall came down. Third World countries have shifted dramatically in favor of free markets, deregulation, privatization and foreign capital. Each has, in turn, seen its stock market skyrocket. Examples include Chile, Mexico, Argentina, Turkey, New Zealand and India. This new trend is still in its infancy. Investors should look for opportunities to buy these country funds.

Other nations, especially in Asia, are opening up their markets and avoiding the sins of the past. Countries such as Hong Kong, Taiwan, Korea, Thailand, Malaysia and Indonesia are growing rapidly because they rely on free markets, not a large public sector, to determine their destiny. China, the largest country in the world, is growing dramatically for the first time in 50 years because it has made significant pro-market reforms (although they still have a long way to go).

Many positive changes are taking place in Europe. Europeans are now free to move goods, labor and money to their most efficient use within the European Community, an underlying factor in the bull markets there. This new measure of freedom will help offset their high levels of socialism and welfare.

Not every nation is making the right decision, however. Each country must be judged on its own merits. Some nations are going in the wrong direction by raising taxes, increasing the size of government intervention and using artificial means to create prosperity. They include the United States, Canada, Japan, France and other industrial nations. But clearly, the trend is toward less government intervention in most countries, and it would not surprise me to see leaders in the Group of 7 reverse their anti-growth policies or be removed from office. Until that happens, though, we will be cautious about their potential. Investors must not cynically assume that government will always make the wrong choice in policy. In general, when politicians do the right thing, investors should get in. When they do the wrong thing, investors should get out. Today, our opportunities lie largely overseas with funds such as Janus Worldwide (800/525-3713), T. Rowe Price International Stock (800/638-5660) and Morgan Stanley Emerging Markets (NYSE: MSF, $27), which can take advantage of governments and markets that are doing the right thing. While we may avoid getting involved in politics, we must know how to read the political “signs of the times” for maximum profit.

Lesson Two
DOOMSDAY KAS DEEN POSTPONED (AGAIN)

The second lesson is that the global economy is far more resilient than anyone imagined. During the past 20 years, we have suffered through two major energy crises, double digit inflation, stock market and real estate crashes in the U.S. and Japan, an unprecedented credit crunch, mammoth federal deficits, the AIDS crisis, several major wars, terrorist attacks, the collapse of the Soviet Union and many other mini-panics, and yet we continue to survive and even prosper. We are not depression-proof, but we are surprisingly depression-resistant. Armageddon has again been postponed.

Given the expansion of political and economic freedom, the advances in technology and other favorable trends, it is highly likely that we will see more prosperity in the future before we see another Great Depression. Many parts of the world are coming out of depression. Bear that in mind the next time you read a best-selling book predicting the end of the world in 1995.

Granted, our nation faces many serious problems, including the deficit, high taxes, business regulation, unemployment, bankruptcies, crime and government intrusion in our private lives, but let us not ignore the good developments – low interest rates, livable inflation, increased quality and variety of goods and services, and a fairly decent degree of personal and financial freedom. For almost every bad statistic, there is a good statistic. Banks and S&Ls are failing in record numbers, but more banks and S&Ls are profitable than ever before. Bankruptcies may be at all-time highs, but so are new incorporations. It’s easy to dwell on the bad side of things when, in fact, things aren’t always as bad as they seem. Remember, bears make headlines, bulls make money! When the bears move to cash, we’ll move to explosive growth opportunities, like Montgomery Global Communications (800/526-8600) and Fidelity Select Telecommunications (800/544-s888).

Lesson Three
DON’T RELY ON TRADITIONAL ECONOMIC THEORY

The third lesson is that all modern establishment economic theories have failed and can’t be relied upon for forecasting the future. The first model to collapse was the Keynesian model, in the early 1970s. The Keynesians arrogantly claimed the ability to ban the business cycle forever through tracking the vast powers of government fiscal policy. But when inflation and recession occurred simultaneously in the early 1970s, their model was repudiated. Deficit spending and bigger government are no longer considered the cure-all for our problems.

The monetarist philosophy of the Chicago School was the next model to fall, in the 1980s. According to their Quantity Theory of’ Money, when the money supply goes up, so should prices. Therefore, when the Fed adopted an easy money policy in the early 1980s, Milton Friedman and other monetarists predicted a return to rapid price inflation. Yet it never happened. Instead, the new money went into real estate, stocks and bonds.

Finally, the Marxist model self-destructed when the Berlin Wall came down in 1989, and the Soviet Union disintegrated a year later. The long debate between capitalism and socialism was over. “Capitalism has won,” Robert Heilbroner confessed. “Ludwig von Mises was right.”

Throughout these two decades, government and academic economists have relied on sophisticated econometric models to predict the direction of the economy. Yet they failed time and time again. The last straw was when they applied their techniques to the 1929-32 Great Depression era to see if they could predict the crash and depression using their sophisticated time series data. They failed miserably.

Where does this leave us? Devoid of any reliable economic model to predict the future! The economics establishment has no model to predict the next business cycle, whether boom or bust. In fact, last month, two studies were issued by top economists at the National Bureau of Economic Research attempting to determine the cause of economic growth. Their conclusion? There is no sure cause – not savings, investment, education or any of the other common explanations. It was all “just plain luck”! (Source: Business Week, Nov. 1, 1993) No wonder Herbert Stein, former chairman of the President’s Council of Economic Advisors, recently stated, “This is the age of ignorance.” And Alfred Malabre, economics editor of The Wall Street Journal, calls today’s economists “Lost Prophets,” the title of his new book.

FREE MARKET MODEL PROVES ITSELF AS A TRIED AND TRUE WINNER

Fortunately, there is one model that is powerful and useful in forecasting the future: the free-market model of the Austrian School. Building on the work of von Mises and Hayek, the Austrian model breaks down the economy into various sectors and stages of production, focusing on the micro-foundations of the macro-economy. This is precisely the model I use to determine the direction of the economy and the financial markets in Forecasts & Strategies I believe it is one reason our Ideal Portfolio is up 28% so far in 1993.

If the Fed inflates or the government spends more money, I ask the all-important question, “Where does the new money go?” None of the other schools ask this question. The Austrian school also maintains that the government causes a business cycle of boom and bust when it embarks on an inflationary course. Inflation creates the seeds of its own destruction. Therefore, according to the Austrian school, no boom can last forever. Eventually a bust must come.

In the financial markets, this means that no bull market lasts forever. There is a time to buy and a time to sell. That’s why until now, we’ve been optimistic on the U.S. stock market and even more bullish on emerging markets. The Austrian school doesn’t claim the ability to predict the exact time or magnitude of moves in the markets, but it can offer general directions.

Lesson Four
THERE IS NO SUCH THING AS A PERFECT INVESTMENT

The fourth lesson is that there are no “sure-fire” investments – all investments go through cycles of bull and bear markets. An amazing number of investments have been touted as “no lose” money-makers: “investment grade” diamonds (“never a down tick”), real estate (“they’re not making any more land”), rare coins (“never a down year, according to Salomon Brothers”) and stocks paying increasing dividends (“if earnings are rising, the price must go up”). We were also told that becoming a “name” at Lloyd’s of London was virtually risk-free. Or that oil and gas limited partnerships were conservative investments (“with the tax advantages, you can’t lose”).

All these claims turned out to be fictitious, often the hopeful dreams of those who made their living in those markets. Even if there is a limited supply of rare coins or beachfront property, demand can fall and so can prices. Companies with rising dividends can still get ahead of themselves. Claims against Lloyds of London overwhelmed them in the late 1980s. And dry holes could never make up for the tax deductions from “conservative” limited partnerships. (Why were investments with 90% losses ever considered “conservative”)!

In a frenzied boom, prices can be bid sky-high to excessive values. We witnessed the madness of crowds in the oil and gold markets in 1979-80, real estate in 1987-89, and Japanese stocks in 1988-89. Then sellers came out of the woodwork, and prices eventually declined.

Sometimes the tailspin turns into a rout, and prices are bid to bargain levels. We witnessed that, too, in stocks and bonds in 1982, and then again right after the 1987 crash. Real estate hit bottom in the early 1990s. In sum, all investments have their days in the sun – and in the shade.

The same is largely true of mutual fund performance. A fund can have a great track record for a decade, then suddenly lose steam. In the 1970s, United Services Fund (gold) and 44 Wall Street (junior oils) were the darlings of Wall Street, but in the 1980s, they were the dogs. Mutual Shares (specializing in turnaround situations) even went through a dry spell. There are no sure deals.

During the past decade, with all the turmoil in markets, we have all tried to become “contrarians,” but it’s easier said than done. Only a small minority of astute investors can outsmart everyone else by buying at the bottom and selling at the top. The key to successful investing is to search for bargain prices in investments that are bound to increase over time, and to avoid buying-fever at the tops of markets. The most successful investors over the long run (J. Paul Getty, Warren Buffett, John Templeton and Peter Lynch) have held to this approach.

Lesson Five
INFLATION ISN’T WHAT IT USED TO BE

The fifth lesson is that consumer price inflation is not as reliable an investment indicator as it once was. That’s because today it’s more difficult for the government to create consumer price inflation. Witness the growth in gold stocks in 1993. Even though consumer prices remained steady, gold soared. The government is still inflating the money supply at a rapid pace, but the money is being absorbed in higher stock, bond, real estate, precious metal, commodity and consumer goods prices.

But note: Just because the CPI rate stays in the single digits doesn’t mean real inflation isn’t going on or that gold won’t rise. Gold is not dead by any means. It may be sleeping from time to time, but it can awaken at a moment’s notice.

Because inflation is likely to rise only gradually, rather than rapidly as it did in the 1970s, you should expect gold and silver to rise by fits and starts. Stick with high-quality favorites like United Services Gold Shares (800/873-8637) and BGR Precious Metals (T: BPTA-T, $11-1/4), but don’t count on doubling your money every year in gold stocks as we did in 1993!

Lesson Six
BEWARE OF CYCLE THEORIES

The sixth lesson is to be skeptical of “guaranteed” technical trading systems, such as cycle theory. It is easy for investors and financial “gurus” to get hooked on a particular theory of investing. Once a financial advisor publishes a book or a newsletter defending a certain trading device, he has a vested interest in the theory and will be reluctant to abandon it, even in the face of clear evidence.

I’ve seen this time and time again. Advisors get caught up in a pet theory, and they refuse to see evidence to the contrary. If you write a doom-and-gloom book, you will likely only focus on bad news in the economy. But the wise investor is always flexible, knowing that times change and his investment approach must always be up-to-date.

I’ve also seen numerous “guaranteed” investment systems come and go. Usually they are technical trading methods. I’ve even reported on some of them in my newsletter. But almost every one has eventually collapsed. Somehow more and more people find out about them, which throws the system off balance, and they lose their advantage.

Always be careful of technical systems. I am reminded of the time a famous investment newsletter writer attended the New Orleans conference a month after the October 1987 crash. He confidently showed us a chart of the Dow Industrials, pointing to the technical triangle that had developed since the crash. “If the Dow falls through the triangle, it means sharply lower stock prices the Dow could fall to 1,000.” A few days later, the Dow did indeed fall outside the triangle, but the chartist’s prediction proved wrong. The market quickly reversed itself and headed toward new highs.

COUNTING ON HISTORY TO REPEAT ITSELF IS DANGEROUS

Not all technical analysis is bogus. To the extent that price trends, volume, new highs/new lows, put-call ratio, and other “technical” indicators reflect the psychology of investors, technical analysis has considerable value. But cycle analysis and wave theory are a different matter. They put investment strategy into a strait-jacket.

Cycle theory assumes that history repeats itself in the same way every time, as if human beings have no free will, no ability to change the powers that be. It is as if it doesn’t matter who is in the White House or directing the Federal Reserve, as if prices are predetermined by some deep, hidden instinct. This mechanistic approach to investing has serious weaknesses, and investors relying on it can fall into fatal traps.

The classic example of cycle analysis gone awry was the so-called six-year cycle in gold and silver, a technical system popular in the early 19sOs. Proponents argued that since gold and silver topped out in 1974 and then in 1980 at higher prices, the metals should reach another new high in 1986. While they did pick the precise bottom for precious metals in the summer of 1982, the new bull market never materialized six years later. Gold never came close to $6,000 an ounce and silver didn’t reach $100. In 1986, gold was lucky to reach $450 and silver barely touched $6. This kind of crude cycle analysis was discredited.

Another example is the Kondratieff long wave, named after the Russian economist Nicholas Kondratieff, who predicted 50- to 60-year business cycles in the capitalist system. Since 1929-32 was the last depression, proponents began predicting a similar event in recent times. I remember some forecasting a devastating depression as early as 1973-74. Others said the depression would hit in 1980-82. Some predicted that the 1980s would be a replay of the 1920s, year by year. When the stock market crash occurred in 1987, instead of 1989, they had to rethink their position. All the Kondratieff followers were disappointed in their forecasts because they were based on faulty understanding of human action.

Experienced traders still use cycle and wave analysis, but they know that cycles and waves are subject to frequent and unpredictable changes. While it is true that investors often have a herd instinct, it is also true that investors can learn from their mistakes and can react differently in the future. There is always some degree of uncertainty in the markets, an uncertainty which reflects human action. Markets do not always respond as we think they will, so predicting the future is difficult at best and often humbling. There are always unknown factors.

Use of probabilities is the best way to predict the future. But no matter what, every investor and financial analyst makes mistakes (and yes, that includes me too). It’s part of the process.

BEWARE OF THE “RANDOM WALK” THEORY OF INVESTING

At the same time, let us not go to the opposite extreme and conclude that the financial markets are completely unpredictable at all times. In the early 1970s, the Efficient Market Theory became all the rage in academic circles. Their studies demonstrated forcefully that almost all professional money managers did not beat the market. They concluded that full service brokers, security analysts, money managers and other stock pickers were wasting their time and your money.

In fact, they claimed, a randomly selected group of stocks might do just as well. The financial wizards recommended that you simply buy stock index funds (such as the Vanguard Index 500 Fund) and hold through thick and thin. Eventually Wall Street bought into this argument, and today there is over half a trillion dollars invested in stock index funds.

However, recent evidence suggests that the ivory tower financial analysts might have drawn their conclusions hastily. A small number of money managers and commodity traders have consistently outperformed the averages, including Warren Buffett, George Sores, Peter Lynch and others.

Over the years, I have learned that the agile financial entrepreneur and speculator, relying on sound economic principles (especially from the Austrian school), can foresee changes in the financial markets before the crowd and be rewarded accordingly. Often the establishment interpretation of events is grossly inaccurate, as was the case in 1987 before the stock market crash, or in 1992 before the European currency crisis. By understanding what’s really going on, one can profit handsomely when the truth becomes apparent and the markets respond to new information. We were fortunate to achieve a 28% return on our ideal portfolio in 1993 – far ahead of the S&P 500 – but beating the market is never easy.

Lesson Seven
DON’T RELY ON BROKERS, MONEY MANAGERS, OR THE GOVERNMENT TO PROTECT YOUR ASSETS

The seventh lesson is that no one is better-suited than you are to manage your financial affairs. During my 20 years in this business, I’ve attended dozens of investment seminars, met thousands of investors and reviewed hundreds of financial statements. Those who have lost the most money have, almost without exception, blindly turned their money over to brokers, money managers or financial planners and let someone else manage their affairs.

I’ve seen a lot of fraud-peddlers and bad advisors over the years, and you have to be really careful to avoid them. You generally can’t tell a fraud-peddler or bad advisors just by meeting them, although my wife does a pretty good job of sizing up people.

There are no shortcuts to making money. It requires hard work, study and experience. If you invest your funds in managed accounts or mutual funds, find out as much as you can about them. Do your homework and monitor carefully how your money is invested. Whatever your source of information about a particular investment – whether you get that information from reading an article in a magazine, talking to an exhibitor at an investment conference or discussing it with a broker over the telephone – get the advice of an independent, unbiased person before acting. (This is one important reason why I do not sell or receive commissions for any of my recommendations.)

Over 20 years, I have seen few opportunities that have benefited the investor more than the broker/dealer. It’s tough to find new investment gems. A few exceptions that we took advantage of were Magma Copper Indexed Bonds and Convertible Holdings Capital (NYSE:CNV, $11-1/2). Often the best deals come from undervalued investments created by panicky investors who overbought or oversold the market. Two recent examples that we capitalized on were Unimar (an Indonesian oil play yielding 29% in 1992) and closed-end high yield bond funds Clunk bonds yielding 25% in 1991). Neither opportunity for high yield exists today, though I’m sure others will come along occasionally.

Wherever you place your investments, don’t go overboard by investing too much in any one category. I remember people in the 1970s loading up on gold and silver, up to 50% of their portfolio, only to discover they had overdone it and lost a great deal during the 1980s. Others made the same mistake in real estate, rare coins and bonds. The easiest thing to do is get greedy and invest too much in an investment or managed account that promises more than it can deliver.

GOVERNMENT IS NOT YOUR FRIEND

Don’t count on government agencies to protect your hard-earned assets. Just because the Securities & Exchange Commission exists doesn’t mean you can’t be taken for a ride. Sometimes there is little recourse if you are defrauded.

Taxation and inflation, both government creations, are two of your greatest enemies. Throughout the past 20 years, I don’t know of one year when taxation and inflation didn’t eat away at your capital. You’ll never maintain your purchasing power by investing in government bonds, T-bills or U.S. Savings Bonds. In today’s world, you need to increase your investment portfolio by 10% or more each year just to stay even. Do you think government bonds will give you that 10%? No, they are long-term losers.

The best formula for capital preservation is to invest in free enterprise (through the stock market) and keep your powder dry by putting a portion into precious metals and investments outside the control of government. You’ll have to take some prudent risks to preserve your investments, and for that goal, my newsletter can be of service.

– Mark Skousen