FOOL'S EYE VIEW
Should We Reassess Our Foolish Principles?

By Stuart Watson (TMFTiger)
September 18, 2001

Great Titchfield Street, London -- A week has now passed since the terrible attacks on New York and Washington. We've all had time to reflect on what's happened and speculate on how it will impact upon our lives in the future. Like or not, consideration of financial matters is one of the things we need to look at. So do any of the fundamental tenets about our finances need re-evaluation? Well, let's look at some of the core beliefs upon which the Motley Fool is built on and see if they still hold true.

1. Debt is expensive and is best avoided

No change here. There are still many people who owe a lot of money and pay a lot of interest on what they owe. Now is as good a time as any to get out of debt. Debt is sometimes necessary. In that case make sure it is cheap debt and that you have a realistic plan to repay it.

2. You need to spend less than you earn

How can you fill a bucket that has a hole in the bottom? If there is more money going out than coming in you're always going to be stuggling financially.

3. You can't predict short-term movements with any accuracy

This is perhaps even truer today than when we wrote the Investment Guide where we said...

"We have no idea where the stock market is heading over the next three years. Neither does anyone else. Do not listen to anyone on TV, on radio, or in the papers who presumes to be able to foretell the short-term direction of the market. This person is an idiot. If you're convinced otherwise, research all his or her previous market predictions. Compare those to the actual moves in the market and you'll discover we're right. If you discover we're wrong, immediately e-mail us. We'll probably try to hire this oracle, even though we will almost certainly lost out to a large City firm first".

For stock market insert house prices, interest rates, currencies, oil, bonds, baked beans or anything else. We've seen lots of advice about switching out of shares, switching into shares etc etc etc. The trouble is, when there is so much advice flying around, someone has to have got it right, but you can't tell who that is without hindsight.

But even if someone's got it right that doesn't mean they have any special insight, they've probably just got lucky. Where is the evidence that their next prediction will be any good? We still think it's best to stick with the basics. Buy something that you think looks cheap, and sell it when you think it looks too expensive or you have something else that looks even cheaper. It may be that, due to recent events, you have changed your mind about what looks cheap or expensive. In that case you should act accordingly just as you would have done before.

4. High charges will dramatically reduce the amount of money you end up with

All else being equal, and it often is, an investment with higher charges will mean that you end up with less money at the end of the day. Finance is one business where a higher price doesn't translate into better value for money. Essentially it is a commodity business, and the lowest-cost provider is usually the one to go for.

5. Shares should outperform other investments in the long-term

This is perhaps the trickiest of the six. But we still think that if you looking at a long-enough period (5 years and preferably 10 or more) shares have a good chance as ever of beating cash, bonds and property. There are never any guarantees but the deck remains stacked in our favour.

In fact with the UK market where it is at the moment, shares are arguably at their most attractive level (if you're investing for the long-term) for the last five years. Why? Simply because they are cheaper. Remember that just because something has fallen it does not mean that it will continue to fall. A common mistake that we all make is looking at recent trends and extrapolating them into the distant future, rather than looking at the long-term picture. However, also bear in mind that just because something is cheaper it is does not necessarily mean it is good value.

6. Trackers are the most cost-effective way for majority of people to buy shares

I can hear you yawning already! Yes, we still think trackers provide the best combination of risk and return for long-term investment. They will never be the best performers but they are the most likely to be good performers. We've had a period of poor returns but that happens occasionally. The trouble is you never know when. Put your money in slowly and steadily (which you're able to do because you're spending less than earn) and take advantage of tax breaks like ISAs. If you've got a lump sum to invest then you could consider a high yield portfolio instead. By all means take a gamble and go for higher returns if you want. You'll need some luck and you'll need some skill. Taking risks is not the problem. Not knowing the extent of the risks and therefore not knowing how to compensate for them is the problem.

Overall, I'd say these six principles still hold firm. But that doesn't surprise me. Their durability was one of the main reasons that we selected them as a framework in the first place! There's lot more comment on this topic in this special on our sister site, Fool.com.