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• Ms. Kristof in the L.A. Times
• Ms. Kristof's bio

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Tavis: We continue our 'Road to Wealth' series tonight with Kathy Kristof, syndicated columnist for the 'L.A. Times,' and author of books like 'Kathy Kristof's Complete Book of Dollars and Sense' and 'Investing 101,' something I should probably read. (Laughs) Kathy, nice to have you on the program.

Kathy Kristof: Thanks very much.

Tavis: What is the mood of the stock market these days?

Kristof: Schizophrenic?

Tavis: Yeah.

Kristof: Yeah. One day we're way up, the next day we're way down. I think it's just very uncertain.

Tavis: Born of?

Kristof: Well, there are a whole lot of things going on right now. Besides conflict in the Middle East, there's incredibly high oil prices, worries about inflation, worries about recession, worries about corporate earnings. There's just a lot of things that the market has not quite figured out, and whenever there's a lot of uncertainty, the market reacts like you and I would, right?

When you're uncertain about something, almost anything can make you, something good happens today, and you feel great and enthusiastic. And something bad happens the next day, and you're depressed and bummed. And that's what you're seeing in stock prices.

Tavis: Let me ask you a question about two or three particular events or items that impact the market, and help me understand better why and how these things do, in fact, impact the market and make the market schizophrenic, to your point. The Middle East. For the lay person watching right now, how does a crisis like the one we are witnessing now in the Middle East impact the U.S. stock market? How and why?

Kristof: Oh, there's a whole host of reasons. One of them is political, right? The market doesn't like change. The more stable you can make things, the better. And so, if you have a political crisis, you have a concern that there's gonna be any sort of change in the administration, Congress, etcetera. And we have elections coming up in November. The market gets a little bit nervous about that.

But also because this is where we get the bulk of our oil, that has a big impact, because oil has an effect on inflation. It has an effect on supply and demand, because if you can't get enough oil, all of a sudden maybe you can't run your trucks to bring your groceries to the supermarket, or whatever the things is. There's a huge filter-down effect. And so, that creates a great deal of uncertainty.

Tavis: The fed chairman is not new now, but relatively new.

Kristof: Relatively new.

Tavis: Even for those who don't know what the stock market is or does or really pay attention to it, you know that name Alan Greenspan 'cause he's been around for so long. He's no longer there. There's a new guy named Benjamin Bernanke. Tell me about the new guy, the relatively new guy, and how changing, since they don't like change, change at the top of the fed, how is that playing out right about now?

Kristof: Well, this is also a transition period. Although Bernanke is an awful lot like Greenspan, and so, whether the market gets used to him pretty quickly, as I think they may, or not is unclear. But right at the moment, every time Greenspan would sneeze, the market would go absolutely nuts, because Greenspan never said anything, right? And so now, Bernanke is saying a little bit more, and it's making everybody a little bit nervous.

'Cause there's, like, what does he mean by that? They just don't know him that well yet. They had Greenspan forever, and so it was kind of like a relative. You knew oh, if he says this, he really means this over here. And so, that's it. Everybody's acclimating to change.

Tavis: What was that great line he said, I'll never forget, irrational exuberance.

Kristof: Yeah.

Tavis: Remember that phrase he used one day, and people were, like, what the heck does that mean? Irrational exuberance in the market. That was a funny line, though.

Kristof: It was, except for it was true.

Tavis: Yeah. (Laughs)

Kristof: People were paying way too much for stocks. You look at it and you say, the market, underlying the market is math. Just straight, logical, reasonable evaluation of what a company is gonna be worth in the future. Because when you buy a share of stock, you're buying a piece of a company, right? And there should be a logical way to figure out how much that piece of the company is worth.

And at various points in time, the math in the market gets thrown off by psychology because everybody is so happy or everybody is so sad. And so you take this natural base, and then you have froth. And it'll go either way. And that's what Greenspan was talking about then, and I think we see a lot of that now. What you're seeing in this day-to-day price movement, where it's just going up and down by huge amounts every day is froth. And underlying it is where earnings are going, and that's really what people should be paying attention to.

Tavis: So the fed chairman spoke on Wednesday. What did he say, and how did the market respond to what he said?

Kristof: (Laughs) He said we're going through a transitional period, and everybody responded like they've been responding to everything else. It's like, what's that mean?

Tavis: Yeah. (Laughs)

Kristof: And so one day, the market was way down. And today it was way up, or on Wednesday, it was way up. So there you go.

Tavis: How do you explain, you've done it in a couple of books, obviously. But how do you explain investing so that it really does come across as 101? 'Cause I think if you ask most Americans, I haven't done a scientific study on this, but I think, let me speak for myself. And I'm relatively educated. It's hard to follow this thing. It's hard to understand it. It's hard to know how to play the game, if you're gonna play it yourself.

It seems like, you take the average person, you throw a 'Wall Street Journal' in front of them, they just scream. They don't know what (laughs) these little numbers mean, and what are these charts, they don't get it. How do you explain that to an everyday lay person?

Kristof: I would tell the everyday lay person to ignore 99.9% of it. Because it's really not important. Really what's important is what are your goals? What are you trying to do with your money? And you're gonna have a whole host of things, right? You're gonna wanna have a house, you're gonna wanna have a car, you wanna send your kids to college, you wanna retire someday.

And so, there are investments that make a lot of sense for, to get each of those particular goals. And what confuses everybody is trying to watch on a day-to-day basis. Because if you just divvy up your assets among stocks, bonds, and cash, and you put reasonable amounts of money in each of those pots to address those specific goals that you have, you never have to think about it again.

The problem that actually everybody has is that we're watching. And that people tell us we should be watching all of this stuff on a day-to-day basis. We'd be really much better off if we just ignored what the market did until maybe once a year you take a look at it, pat your portfolio, make sure you didn't change anything in your personal life dramatically that you should change your investment. And if everything's going well, you just leave it alone.

Tavis: That's a great segue for the three lessons I have time to get to that you really stress in your conversation with people about the stock market and about investing, for that matter. The first lesson is that bad markets are good for people who have time.

Kristof: Exactly.

Tavis: Yeah. Explain that.

Kristof: That's because stocks, on average annually, have returned about 10 percent per year from 1926 until the present, right? And so you can kind of figure that that's probably what they're gonna do over the future. But never in one year have you gotten that exact return, right? So one year it's gonna be up 26 percent, another year it's gonna be down seven.

And so what you just have to do is close your eyes and figure, I'm gonna get this average annual return if I have lots and lots and lots of time in order to get it. And if you get that average annual return, you're beating the rate of inflation by about seven percentage points per year. And that means you're gonna boost your buying power over time about five times if you're looking over your investing lifetime. That's all you need to know.

Tavis: They say nothing lasts forever, but your second lesson is that rotten markets can last.

Kristof: They sure can. They can last for decades. And that's the reason why buying stocks is a long term game. You do not buy, or you don't invest money that you're gonna need in the next five to 10 years. You invest only your really long term money in stocks, because for, like, the 1970s, the market just did what it's doing now for a decade. More than a decade.

And so anybody who invested at the beginning of that decade, thinking that they were gonna have more money and more buying power at the end of that decade was lost. So, if you have a shorter period of time, your money belongs in set investments like bonds and cash, or certificates of deposit, where you know what you're gonna earn on the money, and you know it's gonna be there.

You're not gonna lose your principle. So, you just say okay, that segment, if it's for my kids' college, and they're five, 10 years away, I don't put that money in stocks, I put it in bonds.

Tavis: The third lesson is to get in gradually, whatever you do, get in gradually.

Kristof: Yeah, and that's to avoid investing in days we have like today, right? 'Cause if you're buying, and you happen to hit the market on a really good day, you bought at the peak, right? And the next day, you've just lost a whole bunch of money, and that would just make you sick to your stomach. And so, (laughs) instead, you just invest a little bit of money every month, and you don't really particularly watch what the market is doing.

When you're putting that money in, you're gonna sometimes be buying high, sometimes be buying low. In the end, it's gonna average out, and you'll be happier in the end, and calmer. And that really is what it ought to be about.

Tavis: No matter who you talk to, the conventional wisdom is that, your point notwithstanding, that you wanna invest the money that is your long term stuff, not your short term stuff. That said, the conventional wisdom is that the stock market is always a good thing to put some money into. Will that ever change, and if it ever does, if the stock market ever becomes something that ain't what it used to be, how will we know that? Does that make sense?

Kristof: Well, I always have difficulty with questions like that, because the Psychic Network went bankrupt and (laughs) they didn't predict it. And it's like, God, if I know...

Tavis: Yeah. They should have seen that coming, huh?

Kristof: Yeah, exactly.

Tavis: The Psychic Network's gonna go under, yeah.

Kristof: Yeah, exactly. And so since they didn't do it, I'm - I do have some Gypsy blood, but I'm thinking not enough to give you a really good predictive answer on that. (Laughs) Nobody knows what the market is gonna do, certainly over short periods. Over long periods, I think we've been through almost every good and bad cycle that you can possibly imagine.

And in fact, I remember in the late nineties, all of these young kids were coming in, reporting on the market, and the market had been so great for so long, right? And price earnings ratios were just outrageous, out of kilter. And I'm there, I'm like the old gal (laughs) in the business section and saying, this can't last. There's no way. You can't have these kind of returns for year after year after year.

And they're going oh, it's a new paradigm, and you just don't understand, and everything's different now because of the Internet. And I'm thinking, well, what about the industrial revolution? Didn't that kind of make things different, too? Yes and no. We've seen these things before. Seventy-five years of history; it would be better if we had a hundred, but 75 is pretty telling of what the market, what you can expect from the market.

And so I don't really think there's gonna be a moment in time when the world as we know it changes. If suddenly we no longer have a Democracy, then start making, you wanna change your bets. But until then, you have a stable system of government, you can pretty much expect that we're gonna have what we've had.

Tavis: It's a good thing I'm out of time. (Laughs) This is not my show, because that last comment opens up a whole bunch of windows for commentary about how close we're getting to that reality. But I'm gonna leave it alone. I'm glad to have you on the program, Kathy Kristof.

Kristof: It's my pleasure. Thanks a lot.

Tavis: Thanks for your insight, I appreciate it.