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Getting Fed officials, who don't generally see themselves as part of the government or accountable to the public, to return phone calls is a challenge. But persistence pays off. Bob Parry, president and CEO of one of the regional Federal Reserve banks, said to Eric of his investments, "It's pretty boring stuff. I don't have time to do research on individual securities, so I use mutual funds." Specifically, Parry says that he uses a lot of index funds (see Chapter 9), that hold a relatively fixed basket of stocks or bonds that mirror a broad market index, like the Standard & Poor's 500 index. Another Fed official that Eric spoke with also says he uses index funds because, as a former stock and bond analyst, he learned that, "You can't easily beat the market."
Somewhat to our surprise, the top brass at the Fed have few restrictions on the types of investments that they may hold and when they can trade. The government prohibits Fed employees from owning individual stocks or bonds of banks or dealers in government securities and from investing in government bonds. But no specific prohibitions prevent Fed officials, for example, from dumping their bond holdings if they think that interest rates are set to rise, loading up on them if the Fed enters a period of looser credit, or dumping stocks and bonds altogether.
Interestingly, most senior Fed officials come into the Fed from the private sector where they were forecasters. Greenspan, for example, was a partner in the Townsend and Greenspan economics forecasting firm. Surprisingly, despite earning a living for their predictions, most Fed official s dismiss their forecasting abilities after they join the Fed.
Chapter 4: How Financial Markets Function
Some financial market pundits say not to underestimate the role of the Fed and its ability to signal its interest rate intentions to the financial markets. Others see the Fed as possessing less and less influence on the increasingly global financial markets and economy. Ultimately, some financial market pundits say, supply and demand determines interest rates, not the Fed.
The Stock Market and Valuations
In This Chapter
► Understanding the market fr Buying low and selling high
he stock market seems mysterious — it contains lots of jargon and w supposed experts. When you want to buy stocks, you generally need a broker, and you may have heard about how you can seem like shark bait to these commission-hungry folks. Brokers and financial advisers possess many conflicts of interest. Some of them want to make the market seem complicated. If you understand the market and realize that their crystal ball has more than a few cracks in it, you can find other and sometimes better ways to invest your money in the stock market that don't involve their services.
Some people liken investing in the stock market to gambling. "I deal in a big floating crap game, one that is played every weekday in the richest and most exclusive casino in the world: the New York Stock Exchange," said Richard Ney, a veteran stock market prognosticator.
A real casino structures its games — slot machines, poker, roulette, and so on — so that in aggregate, the casino owners siphon off a healthy slab (40 percent) of the money that people brought with them. The vast majority of casino patrons lose money, in some cases all of it. The few who leave with more money than they came with are usually people who are lucky and are smart enough to quit while they're ahead.
We can understand why some individual investors, perhaps you, feel that the stock market resembles legalized gambling. So why bother with the stock market if it's so confusing and filled with people who are eager to separate you from your money? In Chapter 2, we discuss the potential risks and rewards of different investments. Shares of stock, which represent portions of ownership in companies, offer a way for people of modest and wealthy means and everybody in between, to invest in companies and build wealth.
Part II: Stocks, Bonds, Bay Street, and Wall Street
The stock market isn't a casino — far from it. A casino is a zero-sum game where for every dollar you win or lose, that dollar comes from the casino. History shows that nearly all long-term investors can win in the stock market because it appreciates over the years. We say nearly because even some people who remain active in the market over many years manage to lose some money because of easily avoidable mistakes, that we can keep you from making in the future.
R. Foster Winans, a former writer for Newsweek and the Wall Street Journal, said, "The only reason to invest in the market is because you think you know something others don't." Mr. Winans, who was later convicted of insider trading, was wrong.
You don't need any inside information to profit from stock investments. You simply need to understand this basic concept: The increasing profits that expanding companies will hopefully produce propel stock prices higher. Over the years, corporate profits continue on an upward trajectory. The path isn't a straight line up but more like the path that a small bird takes when it fights to gain altitude in a fierce headwind. Although the bird sometimes hits an air pocket or spot of bad weather and loses some altitude, the bird's aerodynamics win out.