In July, 1776, the Continental Congress voted to dissolve its connection with Great Britain; however the War for Independence did not end for seven years, until the signing of the Treaty of Paris in 1783.

In 1792 the New York Stock Exchange was organized by twenty-four Wall Street merchants. The exchange helped to finance the growth of a nation and the world, but it was not the first form of investing, nor was it even the first exchange. It represents only a sliver of the history of investing.

To begin our examination of The History of Investing we need to go back to 1776, the year of our Declaration of Independence, and transport ourselves across the Atlantic Ocean to Scotland, where a man named Adam Smith lived and worked.

Adam Smith, a moral philosopher, wrestled with serious economic and political questions related to the best way to create wealth. What is the best way for countries to organize their political and economic systems so that they can maximize the wealth of the society? Smith’s thoughts and theory appeared in 1776 in his book, The Wealth of Nations.

Now you have to remember the environment that Adam Smith was in. Countries had been ruled by monarchies for thousands of years and the monarchies basically made all the rules, made all the laws, set all the prices, and set property ownership. So when Adam Smith postulated that governments should not set prices, he was very much on the fringe and very much a heretic in his day.

He said something quite simple, yet seemingly bizarre – you don’t want a centralized monarchy to determine prices. Rather, the best way to create wealth is for people and governments to stop trying to mess with markets. Let markets, through the process of supply and demand, determine the best price for goods and services. So no one is in control. And through this process of supply and demand, you can maximize the wealth of the economy far better than you can with any centralized committee. He said this back in 1776 when he made the first argument for what we now view as modern capitalism.

Adam Smith’s ideas quickly began to catch on. And now, after more than 230 years of empirical data, it is clear that capitalism, which uses free markets to set prices, provides a much better way to maximize the wealth of a society than do various socialistic and autocratic forms of government.

The findings are conclusive: free markets maximize the freedoms, the wealth, and the survivorship of their economies and countries because these societies are able to create wealth, and then protect themselves via their technology and military, in ways that other societies with less wealth are unable to do.

So the experiment is conclusive. We have seen in just the last 20 years the fall of the Berlin Wall in 1989 and the end of the Cold War; we’ve seen the demise of the Soviet Union and the socialistic economies which governed the various countries which were part of the communist state, and we’ve seen numerous countries throughout the world starting to adopt free market economies.

In 1847, Karl Marx, wrote The Communist Manifesto. Basically what he said (and I find it ironic that the Manifesto came after The Wealth of the Nations) is that free markets don’t work and that it's not fair that some people could create lots of wealth while other people were suffering because they didn’t have wealth. Therefore, according to Marx, what’s best is that the society sets prices using a centralized mechanism, and that the government owns the means of production to help ensure fairness of outcome, and to achieve equality in the process.

What Karl Marx failed to understand about human nature is that the people in government responsible for achieving fairness and equality are not above human greed, human avarice, and human fallibility. Therefore the system would not be fairer. And, as a matter of fact, it would be unfair to those people who were truly creating wealth, because that wealth would be confiscated by the government and redistributed to others.

In a free market system, the only way that wealth is created is when someone creates value and then the participants in the free market system vote, by buying the created products or services. It's the ultimate in fairness. The only way someone creates wealth is to create value.

In a socialistic system, wealth is taken from one entity to be given to another. For example, in communism as formulated by Karl Marx and advocated by Nikolai Lenin, the leader of the Communist revolution in 1917, there would be a classless society with an equal distribution of goods achieved by a dictatorial government that emphasizes the state needs over individual needs.

Much later, F.A. Hayek, who ended up winning a Nobel Prize, helped clarify that in a communist system, because there is a centralized committee, or a system of taking resources from one part of the community and giving it to others, you have to have more military strength and might. This ends up creating a fascist state, characterized by forcible suppression of opposition and by economic enterprise under government control. And throughout history, we see that countries like Germany, under Hitler, Italy under Mussolini, and Russia under Lenin and Stalin experiment first with some idealistic form of socialism, such as communism; but when it fails, they resort to fascism, and then the whole society suffers in immense ways.

So it's very clear that ever since Adam Smith said free markets work, and Karl Marx said free markets fail, we’ve had this dichotomy of economic understanding about the best way to maximize wealth in an economy. And this question about whether free markets work or free markets fail, is going to be key to our understanding of how to invest in capitalistic markets, and to where and how wealth is really created. By inference, we will know the best way to capture that wealth.

In a capitalistic system, wealth is created because entrepreneurs are attempting to create wealth for society, and they stay in business because they create value, and they grow because they create value. Businesses die when they don’t create value for the society at large, and they are basically driven out of the system by consumers not voting to buy their products and services. In a capitalistic society the consumer is the ultimate determinant of who creates wealth and who has wealth, versus the government in a communist society.

In 1792 the New York Stock Exchange was organized. Prior to that “investors” would buy or sell stocks in the coffee houses or pubs of the day. And buying stocks was pretty much viewed as speculation, since transactions were done while drinking coffee, beer, or something stronger. It was very speculative in nature, almost like a lottery, and there was no formalized structure for investing as we have today.

In 1934, Benjamin Graham wrote the book, Security Analysis, which became the stock- picking bible. In this book, Benjamin Graham put out the theory that by studying the financials of a company, by studying the market fundamentals, and by studying all the technical aspects of a company, you can actually pick out what companies are going to be the best. And by buying only the best companies, you will get high rates of return on your investment.

Benjamin Graham basically put down the first organized argument, if you will, for the idea that stock-picking works. But here he ran afoul of the very idea that Adam Smith had put out in 1776 that free markets work. In this idea that stock-picking works, what Graham was basically saying is that the free market that sets prices for stocks, is wrong. Supply and demand has somehow failed, and really smart people know better what the real prices should be. So by taking advantage of the mispricing of the free market, one can create additional wealth for himself and pass that on to other investors as well. So, basically, Graham sided with Karl Marx by arguing that that free markets fail. He went on to say that it was possible to find where the failures in pricing occur and take advantage of them.

With this view of stock-picking in mind, many so-called professionals and very many bright people consistently tried to beat the market and tried to pick the best stocks. It was assumed that wealth was created because smart individuals know what stocks to pick, thereby creating wealth for themselves and others. But other than the idea of just trying to pick the best stocks, there was no underlying philosophy or strategy of how to create a diversified portfolio.

In 1952, Harry Markowitz, who was a graduate student in economics at the University of Chicago, published an article entitled, “Portfolio Selection” in the Journal of Finance. This work, which was part of his doctoral dissertation, laid the foundation for what we know today as Modern Portfolio Theory. Markowitz found something extremely enlightening. He found that by combining different assets into a portfolio, you could consistently increase the rate of return of any given portfolio and systematically reduce the volatility. He calculated this using statistics, and he found that by using stocks, you could combine stocks or asset categories into a portfolio that had dissimilar price movement, meaning that they wouldn’t move in a stepwise fashion, where if one crashed, they all crashed. He said that assets classes or stocks that had a high positive correlation moved in a stepwise fashion, while stocks or investments that had a low positive correlation or even a negative correlation added diversification to your portfolio and reduced the overall volatility because they had dissimilar price movement.

He was the first person to really look at the portfolio in a holistic way. Nearly forty years later in 1990, Dr. Markowitz won the Nobel Prize in Economic Science largely for the work he did in his doctoral dissertation at the University of Chicago.

Harry Markowitz was the first person to apply statistics and analysis to portfolio construction, and to determine that you could actually increase returns and reduce risk or volatility of the portfolio. This was groundbreaking research in 1952. And yet, as in so many other things in the history of investing, this idea would take nearly forty years to catch on. Even today, many investors, and many financial professionals still don’t fully comprehend the impact of what Dr. Markowitz discovered.

At the University of Chicago, when Markowitz presented his dissertation to faculty members, Dr. Milton Friedman, a noted academician and economist, said that he wasn’t even sure the work had any real economic impact and wondered whether it was worthy of a Ph.D. in Economics . Friedman said it just looked like some interesting math that Markowitz came up with. Fortunately Friedman was overridden by the other faculty members on Markowitz’s graduate committee.

But you can see that it took many, many years to catch on, and even the computer power that was necessary to finally lend credence and prove what he found, wouldn’t really come to fruition until the 1980s.

In many respects, Markowitz’s experiences were similar to Einstein’s when he discovered the existence of black holes. Since scientists didn’t have the computer power or the ability to actually look into space and find a black hole, it would be nearly forty years later when the science and acceptance caught up with Einstein’s discovery. Very similar to that, Harry Markowitz wouldn’t be fully proven right until many years later.

Let’s move forward to 1960, to a gentleman named Edward Lorenz, who was studying a completely unrelated area of science. We will find this many times in investing and other areas of science that it's often people in seemingly unrelated fields or areas who discover something extremely important, that also has applicability in some completely unrelated field. It’s like a random mutation of ideas. There is no way anyone could have imagined or predicted how Lorenz’s work would affect investing; but Edward Lorenz, in 1960, formulated the basis of something called Chaos Theory. What happened was he was actually studying weather patterns at Massachusetts Institute of Technology (MIT). His idea was that if he could get all the initial inputs or states by measuring humidity, temperature, and wind velocity, etc., he could take these and put them into a formula, and reliably predict what the weather was going to be weeks or months from now.

One of the assumptions in this model was that you could ignore very small, initial conditions that were largely immeasurable. This assumption turned out to be critical and wrong. Lorenz found that these small, immeasurable inputs ended up creating massively different outputs in his program and in the formula. The way that he discovered this was when an intern had put in the number for humidity – let’s say 13.32947 (i.e. 5 decimal places) – and observed the output. The next time he ran it he used the same humidity input only this time he used six decimal places rather than five. Given Edward Lorenz’s assumption that small input changes shouldn’t dramatically change the output, what he found was astounding. He found that, in these chaotic systems, small immeasurable changes in the initial inputs created dramatically different outputs.

He called this The Butterfly Effect based on a paper he wrote, entitled, “Does the Flap of a Butterfly’s Wings in Brazil set off a Tornado in Texas?” This effect explains why it is impossible to forecast, with any degree of certainty, what will happen to the weather several weeks from now. The system itself is chaotic, being impacted by random events that we’re incapable of controlling or predicting with certainty in advance.

Lorenzo’s work has a tremendous impact on how free markets actually function, and why free markets need to be random and unpredictable. In a free market society the randomness is an inherent part of the system. Small immeasurable inputs that are beyond anyone’s ability to clearly see can create massive differences in outputs.

For example, think of the “guy in the garage” effect, whether it's Bill Gates coming up with Microsoft, or whether it's the Beatles learning their music in a garage somewhere, and how each one has impacted our world. These small initial inputs, which are unpredictable and immeasurable by anybody’s ability to think, have massive impacts on outputs.

Another easy way to relate to this is through an old saying: For lack of a nail the shoe was lost, for lack of a shoe the horse was lost, for lack of a horse the general was lost, for lack of a general the battle was lost, and for lack of the battle, the war was lost – all for the lack of a nail. So little, teeny things somehow have a tendency or propensity to snowball into things that are completely unpredictable or immeasurable by mankind. And that’s what Edward Lorenz actually found in 1960 when he was trying to find a mathematical equation to predict or forecast the weather.

Moving forward we come to 1964, when Dr. William Sharpe found a very simple way of measuring risk and expected return in a portfolio. He called this The “Beta Sharpe Ratio”, or more simply Beta.

He looked at different stocks and measured the overall volatility of the market. He did that by looking at all the stocks that were available on the stock exchange throughout the history of the New York Stock Exchange, and he assigned that an arbitrary number of one. He said that if we look at the baseline of the market, we’ll give it a volatility figure (Beta) of one. He then measured different stocks against that baseline. And his basic assertion was that if you had a stock that was more volatile than the market, (i.e. had a Beta greater than one) it should have a higher expected return because it has more volatility and, therefore, was more risky. Similarly, a stock that was less volatile than the market (i.e. had a Beta less then one) would be more safe or less risky, and should have a lower expected return than the market. He also found that there was some correlation between stocks with more volatility and higher returns, and stocks with less volatility and lower returns.

Dr. Sharpe would later win the Nobel Prize for this one-dimensional model for explaining risk and returns in the market. Even so, there was still significant agreement among investors and financial professionals at that time that the best way to get high returns on investing in stocks in the market was to try to pick the best stocks, as advocated by Benjamin Graham.

But in 1965, Paul Samuelson at MIT, who would also later win a Nobel Prize, thought that maybe what Adam Smith said had significant ramifications in stock investing - this idea that free markets work and free markets set the best prices. What Paul Samuelson said was that the market provides the best estimate of value for a stock. You have not only the people who are actually buying and selling the stock at a given point in time, but also all the consumers, politicians, business managers, and economists, etc., who are looking at a stock’s price and creating supply and demand. All of these market participants, among the roughly seven billion people on the planet, actually contribute to setting the price of a stock.

Dr. Samuelson also looked at stock and market prices and found that the price movements followed a random or unpredictable pattern, and no amount of knowledge about what happened in the past to a stock or to a market, could tell you anything meaningful at all about what the prices were going to be in the future.

So he started to break down this idea of predictability, that we can predict what the market is going to do, or that we can predict what an individual stock or an individual company is going to do. His basic conclusion was that price movements are unpredictable; no one, no CEO, no large broker-dealer, no economist, no politician, and no Chairman of the Fed, can tell you with any degree of certainty where prices are going next for individual stocks, or for the market as a whole.

At the same time Paul Samuelson was saying that price movements are random and unpredictable, the mutual fund industry was evolving and growing with fund managers trying to pick stocks. This whole industry had grown up on Wall Street telling investors and leading them to believe that you can pick the best stocks and you can beat the market, and that’s where the wealth comes from when investing.

Running counter to all this was Dr. Samuelson who said the movement of the market is random. No one can predict what stocks are going to do next. No one can predict what the market is going to do next; it’s random. What camp was right?

In 1968 Michael Jensen and A.G. Beckencamp decided to find out. If market prices are random, and stocks move in a random fashion, then it should be very, very difficult for these active managers who are trying to pick the best stocks, to beat the market as a whole. Prior to that time, no one asked what would have happened if you had just bought the market portfolio. Instead of just trying to pick the best stocks, what would have happened if you just owned all the stocks? No one had ever asked that question before. No one had ever taken the active managers to task and compared their performances to the market as a whole. Could they consistently deliver rates of returns that were better than the market?

So that’s what Jenson and Beckencamp did. They went out and they started creating these things called Indexes. What would have happened if investors owned all the stocks in one market rather than specific stocks? What they found was brutal for the industry to hear. They found that all these supposedly brilliant stock-picking professionals did miserably and they failed to deliver market returns. Not only were they not beating the market, they were losing in the ball park of about two to three percent per year, and that investors would have done much, much better if they had just gone out and bought the whole market.

Jenson and Beckencamp wrote papers in many of the financial journals, and confronted the active managers and chastised them by saying that people would be much better off investing in the market as a whole than with them. The active managers were very, very quick to point out that investors couldn’t do that. You couldn’t just go out and buy all the stocks. There was no investment vehicle that does that.

In 1971, John McQuown acted on this and created the first Index Fund. Instead of trying to beat the market, McQuown convinced his employer, Wells Fargo Bank, to buy five hundred of the biggest companies and hold them; and, in so doing he eliminated all the stock-picking, all the speculating, all the gambling, and all the buying and selling. Wells Fargo eliminated all that and investors would just own the market portfolio. McQuown’s reasoning was based on Jenson and Beckencamp’s results. Since actively trading managers weren’t beating the market, investors should be able to own the market.

Wells Fargo created the very first Index Fund that was available to investors in 1971. Initially it was only available to very large institutional pension plans and the fund included just the five hundred largest companies available in the US market. But it did eliminate stock-picking from the process.

A Recap:

• Adam Smith (1776) and Karl Marx (1847) presented two diametrically opposed views of how the world works.
  
  
• Benjamin Graham (1934) said that intelligent people with enough data can pick the best stocks and increase the rate of return.
  
  
• Harry Markowitz (1952) identified a statistical, scientific way to build diversification into a portfolio.
  
  
• Edward Lorenz (1960) identified certain systems characterized by random chaos. The stock market is one of those random or chaotic systems.
  
  
• William Sharpe (1964) developed the basic groundwork for understanding risk and return for individual stocks.
  
  
• Paul Samuelson (1965) linked the early concepts of Adam Smith to the completely random and unpredictable nature of the stock market. His work jived well with Smith’s assertion that prices move in a random manner based on supply and demand, and that the market is the best system of pricing.
  
  
• Michael Jensen and A.G. Beckencamp (1965) tested the free market assumptions. They wanted to see if active managers could beat the market, or whether it was better to own an “index” fund comprised of the entire market. They found very conclusively that active managers trying to pick the best stocks do a terrible job as a whole, and that they can’t beat the market.
  
  
• John McQuown (1971) while working at Wells Fargo Bank formed the very first S&P 500 Index Fund available to very large institutional investors.

That brings us to 1973 when Dr. Burton Malkiel wrote a landmark book, A Random Walk Down Wall Street. Malkiel reasoned that because prices are random, because markets are efficient and markets work as Adam Smith said, and because markets are random and chaotic (according to Chaos Theory) that investing in the market can be like a random walk. We should eliminate ideas like stock-picking, market-timing, and track-record investing from the whole process of investing, because eliminating all speculative and gambling methodologies of investing is one of the primary requirements for being a successful investor. He put all this right in the face of the investing community. Malkiel’s book is widely heralded as the most in-your-face, contradictory book to the investing community, and it proved beyond a shadow of a doubt to anyone who was really listening or wanted to be open-minded, that what most of the investing community was doing – stock-picking, market-timing, and track-record investing – was an absolutely inappropriate way to invest.

In 1975 the very first major pension plan committed to the idea of indexing. It eliminated stock-picking and market-timing. It was the New York Telephone Company which invested $40million in the S&P 500 Index Fund.

And then in 1976 Benjamin Graham recanted what he said about stock-picking 40 years earlier. Think of this. The very father of stock-picking, said, “I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities. This was rewarding forty years ago. Today I doubt whether such extensive efforts will generate sufficient superior performance to justify their cost. I am on the side of the efficient market school of thought.”

Think of this for just one moment. This is like going back in history and having the father of bloodletting in medicine, coming back and saying, “Blood letting doesn’t work. You can’t get the demons out of your body by cutting open a vein and dripping blood out on the floor; in fact, the practice of blood letting is injurious to your health and may cause death.”

Benjamin Graham was saying the same thing. He said stock-picking and market-timing and trying to forecast and predict all this stuff is equivalent to bloodletting because you are wasting all of your returns in gambling and speculating. You are basically dripping all of your returns into someone else’s pocket, because you are losing returns in fees, in trading costs, and in commissions. So he recanted. He said, “No, it doesn’t work.” Even then he was a little soft on himself when he said stock-picking may have worked forty years ago, but it doesn’t work any more.

The research and idea that markets are random and that markets are efficient argue strongly that even forty years before it didn’t work; it didn’t work a hundred years ago, or two hundred years ago, and it won’t work three hundred years into the future.

In 1977 Roger Ibbotson and Rex Sinquefield created the first completely comprehensive, extensive database on market returns. Basically what they did is they employed graduate students at their universities, and had them go through all available stock and fixed income investment data looking at all the dividends, all the stock splits, and all the returns, as far back as data were available (since roughly 1926) in order to compute the returns for stocks, bonds, and T-bills over this long period of time. Through this process they started to find relationships of how different asset categories and dimensions of returns performed over long periods. And they identified what they called risk premiums.

For example, they found that stocks had approximately a three to six percent risk premium over fixed income, because it was a more volatile investment and investors wouldn’t invest in stocks unless it had an expected premium. They found that bonds had a slightly higher rate of return in the ball park of one or two percent compared to T-bills. And they started to identify and really have a comprehensive look at what markets did, and how they reacted over long periods of time.

Armed with some of this data in 1981, Ralph Banz at the University of Chicago, identified another dimension of return, and he called this the Small Company Effect. What he found was that if you systematically buy very small companies, there was an expected premium, or additional rate of return for owning that asset category of about two to three percent per year, as opposed to buying very large Fortune 500 companies.

In 1981, Dimensional Fund Advisors (DFA) launched the first passively structured market portfolio to capture the small company premium. They took the research by Ralph Banz coupled with the fact that financial analysts are equally as bad at picking small stocks as they are at picking large stocks, to develop a portfolio that bought all of the small stocks to capture that market rate of return. This was the very first small-market, passive portfolio.

So now from the extensive database on returns for stocks, bonds, and T-bills, and also from Dr. William Sharpe’s work, some different premiums start to emerge. We see that stocks have a higher expected return than bonds. We see that small stocks have a higher expected return than large stocks. And in 1986 Eugene Fama and Kenneth French identified a third premium factor, which they called the Value Factor. They found that in addition to the equity premium and the size premium, there is a value premium where stocks which have a high book-to-market value have higher expected returns because these companies are distressed companies, and they have additional levels of risk.

If you look at the premiums - the equity premium, the size premium, and the value premium - this provides an extremely high degree of explanatory power for a portfolio; in particular, these three factors explain in excess of ninety percent of the expected return of a portfolio. So virtually everything that is important to a portfolio’s returns is encapsulated in the research by Fama and French.

In 1988, F. A. Hayek published a book called The Fatal Conceit and he won the Nobel Prize for it. He went into great detail about how self-ordered systems are far greater and superior in many instances to human-ordered systems. And he talked about economies, and how the economy pricing system accumulates vast amounts of data into the pricing system. Then it became very clear to other economists specializing in stocks, how F. A. Hayek’s work could be incorporated into the free market pricing system.

In 1990 several of the authors of modern finance were recognized with a Nobel Prize. Dr. William Sharpe was honored for his capital asset pricing model; Dr. Harry Markowitz was honored for his theory of portfolio choice and diversification; and Dr. Merton Miller was honored for his study of capital structures. And all of this built on what Adam Smith said about free markets in 1776.

So when we look at the underpinnings of modern finance and modern investing, we really have nearly three hundred years of economic studies and philosophy about how investing really works.

In 1991, Matrix Asset Allocation was formed to apply this research and these studies to real-life investor portfolios, even though structured market funds were largely not available to individual investors at that time. Matrix has as its foundation Modern Portfolio Theory, which shows how the market works and emphasizes that by capturing dimensions of return of the market and eliminating stock-picking and speculating, investors can increase their rates of return. Matrix also incorporates the three-factor model by Fama and French, that shows how the different premium dimensions – equity, size, and value - can be integrated into a portfolio to increase expected returns while reducing volatility.

So what are the important “take always” to the investor after reading this history? One is to forever give up on the idea of predictability. The market is a chaotic system that takes all the different market inputs, and all the things that are completely unpredictable and unforeseeable, and incorporates them in a far better way than any individual or committee could do. But it will be random. Just as news events are random and unpredictable, so too will be the market.

This chaos, though, is a good thing. It's easy to think of chaos as a negative and many times investors say they hate volatility. Well, that’s not altogether true either. Investors tend to hate downward volatility. They are very much happier, if not euphoric, with upward volatility.

So one thing to remember is that the market is random, and the market’s randomness identifies where the returns come from. Without the randomness, and without the volatility, there would be no expected additional premium for owning, let’s say, stocks over just investing in CD’s, or going to the bank and throwing your money in a savings account.

Randomness is good. Randomness means that the market is working. It’s incorporating new information and new capital.

It's also very important to understand that if we tried to take out the chaos, it actually destroys the underlying system. For example, if you made some hypothetical law that said stocks could make no more than fifteen percent a year, and that you can’t lose any money at all, what you would have in essence is the same rate of return that you would have going to the bank. Take out the volatility and you take out the additional rate of return at the same time.

So it's basically the job of the market to be a chaotic system and it prices things far better than any individual committee or government could ever hope to do. It also creates wealth for society and those individuals investing in the market, far better than any one committee, governmental agency, or stock-picker could ever do.

I think it’s also important to emphasize the reason why diversification is so important. The idea embedded in Modern Portfolio Theory is that we should diversify. We own asset categories that have dissimilar price movement because the asset categories themselves are unpredictable. Therefore, if you want to have some large US stocks, you should also own some small international stocks, because those stock categories have a very low correlation as far as stocks are concerned, and they will ultimately provide you with higher expected returns given the amount of volatility in your portfolio. This is a key principle from the academic research.

Another key from the research discovered, going all the way back to Adam Smith, is that it's crucial to control cost in your portfolio. You control cost by eliminating turnover, by eliminating speculating, and by eliminating gambling in your portfolio. Stock-picking has been proven over and over again to reduce returns, to increase volatility, and to increase the cost of the portfolio, and so you must constantly watch and protect against this.

To be a successful investor and to fully ingest all this body of information is to understand that stock-picking, market-timing, predictions and forecasts simply do not hold weight in a prudent investing process. It also tells you, turn off the TV. Turn off Neil Cavuto. Turn off the Money Honey; and turn off all the market forecasting and predicting shows out there, because they are designed to move you to speculate and gamble with your money. They are not based on academia. They are not based on scientific research. They are not based or founded on anything.

The other thing to know here is that investing isn’t a game. When investing is done properly, investing integrates all of this information and this history and all the academic data and research, and incorporates it with any new academic research that’s coming out. It's not just a hit or miss, buy this, or sell this, proposition. A successful investment strategy must incorporate the full body of financial and economic research into a consistent process.

It is not simple. It is not easy even for a professional to consistently integrate all of these things and keep investors educated in order to understand what is really going on.

Most of the time, when people look at their investments they want to create peace of mind and security for their future. And by understanding this large body of academic research, you can start to eliminate the speculative gambling aspects of investing, and focus on creating your wealth, and prudently investing for peace of mind for life.

These are just some of the “take always”, and I think it's important to understand the history of investing to see how this has evolved over time, because it really adds greater depth to our understanding. Ultimately your peace of mind is created by your knowledge and your understanding. And I hope this book has helped you to grasp the full weight and the wonderful dimensions that go into building a prudent investing process.

Source: Abundance Investor Coaching Systems, 2008.