Finish Rich

December 20, 2005
Nine gifts that will help protect your money in 2006
By Paul B. Farrell

ARROYO GRANDE, Calif. (MarketWatch) -- Merry Christmas! There's one gift my wife expects every year: a Mary Engelbreit calendar. Her art is always brightly colored, toasty warm, joyful -- all year. Every month is a Christmas celebration. December's gets a smile every time I walk by: There's a jolly star-studded St. Nick, bells on his toes, totting a big bag of gifts, and an inspirational quote from Oscar Wilde: "Some cause happiness wherever they go!"

This year, with all that's going on throughout the world, skeptics, curmudgeons, contrarians and Scrooges are having a hard time seeing happiness anywhere. But Engelbreit's art is forever in a light spirit. So I've already got next year's calendar for my wife, wrapped and sitting under the tree. And, yes, it's really for me too. We desperately need these occasional reminders and little smiles telling us things really aren't as bad as the dark picture painted by the media all day, every day, everywhere. Out there, unhappiness is the bell-ringer.

Folks, you're going to hear a lot of hype in the near future from pundits, politicians and brokers, happy talk about how you can get rich investing in this or that hot stock, fund or sector in 2006. Misleading nonsense, like 2000 before the collapse. Be forewarned.

Here's my Christmas gift to you, like an Engelbreit calendar it'll keep giving all next year. And you'll need it. The gift is a simple formula, Warren Buffett's "Two Biggest Rules of Investing. Rule No. 1: Never lose money. Rule No. 2: Never forget Rule No. 1."

Too simple? Look folks, if this works for Buffett all the time, it's particularly relevant for investors preparing for the coming bear. You need wise counsel amid all the noise.

Play defense, go conservative, protect assets and forget about making money from Wall Street this year. Think like you should have been thinking back in early 2000, when the market tanked. When most investors were blind to all the warnings. When Americans lost $8 trillion in the 2000-2002 bear, about 40% of the market's capitalization ... and we're still in the hole five years later.

So this Christmas, I'm encouraging you to give yourself one of several books about personal finance and investing, all echoing a forecast of a coming bear and all guaranteed to anchor your brain in Buffett's warning: Never lose money.

Promise you'll read one of these books and play defensive investing this year. That way you'll do a lot better this coming year than you will if you listen to all the misleading gobbledygook coming out of Wall Street and Washington:

1. 'The Coming Generational Storm'

Wake up! The first boomers are just now turning 60 and will soon be drawing from Social Security. Add Medicare with its new prescription drug program and we have trillions in entitlements heavily mortgaging your future. This perfect storm severely handicaps your odds of making money on Wall Street, for many years to come.

2. 'The Battle for the Soul of Capitalism'

Vanguard's founder Jack Bogle has been preaching for years that Wall Street and the fund industry have 'lost their moral compass.' Their loyalty is lost in a culture of greed, worse in a bear market. Bogle's ultra-simple solution? A well-diversified portfolio of a dozen or so low-cost no-load index funds. Forget high-cost actively managed funds.

3. 'Irrational Exuberance'

Robert Shiller's 2000 classic captured the blind manic optimism inflating the dot-com bubble mentality and driving America headlong into the recession of 2000-2002. Shiller's new edition warns that the stock bubble was simply transferred from Wall Street into the real estate market. Big mortgages, minimum down, equity lines of credit all spell trouble. Prepare for coming bear market, temper your exuberance now.

4. 'Winning the Loser's Game'

Back a few decades ago Charles Ellis said Wall Street was the ultimate "loser's game." Peter Drucker said this was the best investment book ever. Bogle says it was the inspiration for his first index fund. Reread his 10 simple rules, like: No speculation, brokers can't be trusted, neither can your emotions, forget commodities, don't bet on tax benefits, etc. An easy read and a great game plan to avoid losing on Wall Street next year.

5. 'The Millionaire Mind'

Reread Tom Stanley's classic along with his Millionaire Next Door, co-authored with Bill Danko. Their research is convincing: Of the eight million American millionaires, Wall Street helps very few get rich, even in bull markets. The chances are even less in a bear market. Solution? "Think different," think like a millionaire, work for yourself, you cannot count on Wall Street.

6. 'The Automatic Millionaire'

You must take charge and get frugal. If the stock market isn't going to help you add to your retirement nest egg, you better tighten your budget belt! Burn this idea into your brain: If you're not saving 10% you're spending too much. David Bach's simple solution: Set up automatic direct deposits and live on what's left over.

7. 'Unconventional Success'

For 20 years David Swensen managed the Yale University endowment portfolio, with incredible 16% average returns. His goal: Share what he knew with average investors. But he concluded that was impossible. The financial industry is too greedy, in bull markets and bears. Play by their rules in their game at their casino, and you'll lose. His solution: Index with mutual and exchange-traded funds.

8. 'The Intelligent Investor'

Ben Graham was Buffett's mentor. Money magazine's Jason Zweig recently updated Graham's 1949 classic with annotated comments that make this a double classic. It should be in every investor's library. Find out why so little has changed in the last 50 years, why the market acts like a "certifiable lunatic," and gets even more loony on bear markets and recessions. Find out how to avoid losing on Wall Street this time around!

9. 'The One Thing You Need to Know'

This is one of my all-time favorites. Marcus Buckingham's message to so darn simple, like all advice should be. His message: "Discover what you don't like doing and stop doing it." If next year is a money loser, remember: Buffett hates losing money and you do too. So this year stop banging your head against a wall. Go do what you really want to do with your life. Now that's the ultimate Christmas gift you can give yourself. You'll make more money and you will "cause happiness wherever you go!"