Big Allies of Today’s Investors? Education, Patience, the Internet

David and Tom Gardner, founders of the Motley Fool investment service, were among the experts who met with Southland investors at The Times’ second annual Investment Strategies Conference last weekend at the Los Angeles Convention Center. They filed this report.

During the rustle and bump of last weekend’s Los Angeles Times Investment Strategies Conference, the two of us found ourselves inspired again this year by the growing number of individuals and families from across Southern California seeking to take control of their financial destiny.

With pencils, notebooks, calculators and questions, they were scripting their way out of a life of short-term obligations and into a world of long-term investment success.

Last weekend, we found ourselves thinking about three issues central to individual investors’ great opportunity to continue developing sound investing programs into the new millennium.

1. The Internet Has Become a Priceless Tool.

In the 1990s, Americans have proved to the world that digital communication and collaborative learning can bring a flood of new ideas. On the Internet today, neurologists are exchanging reams of data every hour in the search for a cure to multiple sclerosis. High school Spanish teachers are trading lesson plans and communicating directly with native speakers in Guatemala. Extended families are connected across the world by a technology (e-mail) that wasn’t a mass phenomenon even five years ago.

In the financial world, this growth in interactivity means that no individual need ever again make important financial decisions in isolation. Whether you’re buying a car, a house, insurance or your first stock, the public exchange among hundreds of thousands of people enables you to get the information you need in the comfort of your den, at school or down at the local library.

If the value of that interplay is lost on you, consider the enduring performance of a non-digital network: investment clubs, which were represented at The Times’ conference in workshops both days.

The National Assn. of Investors Corp., an umbrella organization for investment clubs, has documented market-beating performance by its average club in the 1990s. That’s something that 91% of all “professionally managed” mutual funds have not achieved this decade.

These networks of individuals sharing information, opinions and experiences are a national treasure. Join an investment club, link up to the Internet, sign up early for next year’s Investment Strategies Conference. The value of staying connected is inestimable.

2. Education Is Returning Authority to Individuals.

Ten years ago, many Americans didn’t have a clue about their financial state. They were never taught this stuff in school, so they had little context for understanding the dismal long-term consequences of borrowing heavily on their credit cards.

They didn’t grasp the potential of decades’ worth of compounded growth for even a small amount of savings in stocks.

They never learned that a full-service broker often was compensated based on the number of trades in a client account, not the performance of that account--a terrible compensation model for individual investors.

And they had no idea that over the long run, the majority of professionally managed mutual funds have below-market-average performance.

Today, all of that has changed, and the changing continues. For example, stock investors are taking their capital away from commissioned traders on Wall Street and using discount brokers that charge up to 95% less per trade.

Also, the last 36 months have shown a dramatic shift of retirement account monies out of often-costly managed stock funds and into low-cost index funds that simply track the market.

And even common “fools” are beginning to understand the principle that $1 saved per day and invested at just average stock market returns for 50 years grows into $600,000.

Although personal finance and investment education is only beginning to reach down into our universities, high schools and grade schools, our young graduates today have a much better chance of avoiding the pitfalls of consumer debt than we did as graduates a decade back. They’re beginning to understand the extraordinary value of compounded long-term growth on even a small base of savings.

The proof of that learning was evident in the hallways of the Los Angeles Convention Center last weekend.

3. Patience Is Small Investors’ Trump Card.

Do you remember the fable of the goose that laid the golden eggs? A farmer, unsatisfied with the one egg laid each day, cut the bird open in search of more riches.

Don’t be that farmer when it comes to your financial life. The stock market has, on average, generated annual returns of nearly 11% this century. So don’t cut up your investment portfolio with highly speculative plays looking for a way to quickly double your money.

The fact is, most of your golden eggs in the market won’t hatch for another 10, 15 or 20 years. Leave them alone.

At The Times’ Investment Strategies Conference, keynote speakers Charles Schwab, the brokerage-industry legend, and John Bogle, senior chairman of mutual fund giant Vanguard Group, both emphasized the need for great patience in stock market investing.

As the market has surged in recent years, some on Wall Street have suggested that the sharp rise in individual investors’ buying of stocks is by itself a sure sign of a market top.

How arrogant. Everyone, whether they’re shining shoes at La Guardia Airport or schmoozing at cocktail parties in Redondo Beach, should be encouraged to eliminate credit card debt, build a savings plan and, yes, begin using the stock market as a lifelong savings vehicle.

Excessive and unrealistic short-term speculation by individuals and institutions often is what fuels stock market busts--not the participation of individuals investing within their means and concentrating on rewards 10, 20 and 30 years down the road.

Wall Street worries about small investors’ eventually fleeing the market, yet it’s Wall Street’s compensation system that typically motivates active short-term trading and encourages a slew of jargon that disconnects the investing process from our daily lives.

It’s time to reconnect the two. Last weekend, thousands of investors came to The Times’ conference to assess their current financial state and better plan for their future.

The conference reminded us that we shouldn’t blindly give our money to Manhattan to invest “wisely” for us. The hum of new ideas mixing with age-old truths at this year’s Investment Strategies Conference suggested that people’s eyes have been opened.

More so than at any point in the last 50 years, the future of finance rests in the hands of individuals working together.