I learned how to invest in an unusual way. I didn’t do it by reading books. I didn’t do it by listening to experts. I didn’t do it by hiring a financial planner. I did it by learning how to save.

It works! I’m far ahead of all the indexes dating back to 1996, the year when my learning process began.

I’ve learned some amazing things.

One thing I’ve learned is that most people are intimidated by investing. They think its complicated. They think they could never figure it out. They think that the best thing to do is to hire a planner or, if they cannot afford to do that, to follow the instructions of the experts as closely as possible.

Nothing could be further from the truth.

The Secret to Buying Stocks

The secret to buying stocks is understanding that they are much like just about any other asset you can buy. You know how to buy cars, don’t you? You know how to buy comic books. You know how to buy bananas.

That means that you know (without knowing it) how to buy stocks.

What do you have to look at before buying cars or comic books or bananas? Two things:

(1) the long-term value proposition offered by the possible purchase; and
(2) the price being charged.

Stocks offer a great long-term value proposition.

The average return in the U.S. has long been about 6.5 percent real (that means 6.5 percent plus inflation). That’s a great deal. The experts have been telling us for a long time that stocks offer a great deal. They got that one right.

It’s the price one that they get wrong. Have you ever heard the claim that stocks are always best for the long run? That suggests that price doesn’t matter, that stocks offer a good deal at any price. Or have you heard that timing doesn’t work? Again, the claim is that stocks offer a good deal at any price — that price doesn’t matter.

It’s not so. Price matters. A lot.

I’ve studied this question in depth. It turns out that there are some price levels (such as the price level that applied in 1982, at the beginning of the huge bull market) when stocks are likely to provide a long-term return far in excess of the average 6.5 percent number (how does a long-term return of 15 percent real per year sound to you?). And there are other price levels (such as the price level that applied in early 2000, at the top of the bubble) at which the likely long-term return is negative. Yowsa!

So it makes no sense to go with the same stock allocation at times of insanely high prices (as applied from 1995 through the first part of 2008) as at times of moderate or low prices. Those seeking long-term investing success need to lower their stock allocations when prices are too high.

The experts don’t know this. Or if they do, they don’t tell. My sense is that it’s a little bit of both. In any event, investors who learn how to invest by listening to the experts don’t understand the realities. And they have paid a big price for their lack of understanding of the realities. The experts have failed us.

I was lucky. I learned how to invest by learning how to save.

When I was trying to become an effective saver, I learned that the secret is paying attention to value propositions. You might enjoy going out to eat. But you have to understand that there’s a cost attached to developing a habit of visiting expensive restaurants. When you pay to eat out, you are giving up something else you could have done with the money. The question is: Is the dining-out experience worth it?

It works that way with investing too. Stocks are great. Still, there are prices at which the risk of losing most of your life savings in a huge price crash are just too great to make it worth it to go with a high stock allocation. Huge price crashes only take place at times of insanely high prices. It makes no sense for the middle-class investor to be investing as heavily in stocks at times of insanely high prices as he or she does at times of moderate prices.

None of this should be surprising. Price matters in the purchase of all other assets that can be bought or sold for money. Why would anyone think it would be any different with stocks?

The reality is — millions do. Millions believe that they should stick to the same stock allocation at all price levels. This idea is referred to as “Passive Investing.” It is the idea pushed by most of the big-name experts of today.

You don’t need to study investing for years to understand the flaws in the idea. If you have ever tried to save effectively, you know that price matters. Big time.

It’s common knowledge that that’s so with everything other than stocks. By learning how to save, and by then not forgetting the lesson just because the experts were telling me that different rules apply with stocks, I learned how to invest.