Investing 101: Updated and Expanded

INTRODUCTION

Before we get started with the serious financial stuff, I'd like to share one of my favorite stories about investing. It's true, and it illustrates a point that you need to remember while you're reading this book—particularly if you're a little nervous about your ability to invest wisely.

The story starts one dark October day on Wall Street, when the so-called "Asian Currency Crisis" struck. The Dow Jones Industrial Average—a key indicator of market health—plunged more than 300 points. I, like every other financial reporter on the planet, was charged with making some sense of it all for the readers of a general circulation newspaper.

Luckily for me, I work for the Los Angeles Times, where dozens of skilled reporters mobilize whenever there's a major news event. As a result, I didn't need to do the straight story—the story replete with numbers and specific details of which stocks fell the most and why. Instead, I was charged with figuring out whether individual investors were in a panic (as the professional investors assumed they would be). Given the fast-paced trading and the rapid decline in stock prices, it was clear that somebody was panicking.

First I called the professional investors. Beads of sweat were forming under their starched white collars and gray pinstriped suits. They didn't talk. They sputtered, blurting out incomplete sentences, such as "The Asian financial crisis ... spreading ... could create global crisis. Market meltdown ... It may be time to sell." ...