Section 2

Stock Market Investing

The idea of investing is simple:  You put up money with the expectation of getting your money back plus a profit.  There are many different ways to invest.  Most investors (sane ones anyway) consider the safety of the investment.  When we talk about investment risk, we are talking about the odds of losing some or all of your original money that you put in.  Investors are always playing a balancing game, trying to maximize profits and minimize risk (what I call the MAXMINCON Principle).  As a rule, the more potential reward an investment has, the more risk it tends to have.  Savings accounts have a very low risk and very low reward.  Investors usually refer to the profit an investment makes as the return.  When sizing up an investment, they often talk about the Return On Investment (ROI).

Many years ago, a brilliant social scientist named Fred Kerlinger came up with a way to optimize the power of experimental designs to explain social phenomena.  He called this his “MaxMinCon” principle.  This important new word was formed by the first three letters of his three important principles:  Maximize, Minimize, and Control.  For our purposes, I am going to steal Kerlinger’s word, but change the application.  We are not going to use it to talk about the optimization of experiments but rather to the optimization of your personal finances.

The MaxMinCon Finance Rule

Always seek to Maximize income, Minimize spending, and Control Debt.

Hope is wonderful, but hoping for a bright financial future will not get you there.  You have to actively plan for financial success.

People often fear the stock market because they haven’t studied it and figured out how it works.  They’ve heard some stories about the great depression and folks on Wall Street jumping out of twenty story windows.  They may have heard that Uncle Ernie lost his life savings investing in stocks.  Bad things can happen to your money if you do stupid things with it.  Don’t worry; we are only going to do smart things.

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