Only a small minority really knows the truth and, of those, an even smaller group truly understands the negative consequences to the average investor.

And who do you suppose is behind one of the biggest money grubbing schemes ever implemented in the entire history of the world?

If you guessed Wall Street and the mutual fund industry then you hit the nail on the head. And they’re not about to let you in on their multi-billion dollar secret either.

Put yourself in their shoes. If one day you stumbled across a flock of geese that laid solid gold eggs, would you take out a full page ad in the Wall Street Journal saying, “FREE GOLDEN EGGS HERE?”

No, I didn’t think so. But what’s happening today goes much deeper than that and is far worse than just keeping golden eggs to yourself.

Wall Street and the mutual fund companies have been keeping you in the dark for decades, all the while padding their already bulging pockets with more and more of your hard earned money.

They have systematically created a fantasy ideal that purportedly shows you how to invest correctly so that you can retire rich and fulfill your dreams and desires.

Unfortunately for those buying into the myth, the folks who are most likely to retire rich and fulfill their dreams and desires are the Wall Street and mutual fund insiders.

The average investor gets left out in the cold, saddled with high fees, underperforming investments and stuck taking risks they didn’t even know they were taking. In the end, they end up with millions less than what should have been rightfully theirs.

So how do these companies get otherwise intelligent people, from all segments of society, to buy into their games? It starts with the biggest lie of all when they say, with a straight face, that, “WE HAVE YOUR BEST INTERESTS AT HEART.”

Our beloved investment companies would have you believe that they are in business to make you money. To ensure you grow your investments as efficiently and effectively as possible with minimum risk. They’re your buddies who only want to do what’s best for you and your portfolio.

Surely they are the messengers of truth and have the noblest intentions for your well-being and money, don’t they? Ummm, no.

The reality is that they are a business and like most businesses are interested first and foremost in making money. Unlike most businesses, however, their products are usually detrimental to your well-being. In other words, if you knew how simple it is to invest on your own, you would no longer require their products – and you’d most likely do much better. Much better!

We like to think the big guys know what they’re talking about, but the fact is, the big guys talk about things to keep you dependent on them and their overpriced, underperforming products.

Do you remember the famous saying, “Give a man a fish and you feed him for a day. Teach him to fish and you feed him for a lifetime?” Well, that’s what they’re doing to the investing public. Except they’re not giving you the fish. They’re charging you for it. And charging you much, much more than what it’s truly worth.

If you want to shed the shackles of dependency and really start to make money in the stock market, then you need to learn to fish for yourself. Don’t depend on the fish sellers to tell you what you need to do (unsurprisingly they will tell you that you need more of their fish), but think for yourself and take control of your investments.

It can be one of the most profitable things you’ll ever do in your life.

Do you ever wonder how Wall Street bigwigs can make tens of millions (or even hundreds of millions) of dollars in one year? Ever wonder who pays for all of those full-page mutual fund ads running in expensive publications such as the Wall Street Journal and USA Today? Who do you think picks up the tab for the plethora of prime-time TV spots touting the latest mutual fund?

Could it be you? Well if you have any of your money in mutual funds, then it is you.

Make no mistake, Wall Street and its ilk would be flat-broke without the truckloads of money they pull in every second of every day from unwitting investors who buy into the myth that they should just turn their hard-earned nest egg over to these people.

You have to understand that the vast majority of investors are not as knowledgeable as you are. The fact that you’re reading this means that you want to learn and improve your chances of becoming truly wealthy through your investments. But the majority of people are ignorant and would rather remain blissfully unaware of the truth in order to stay in their comfort zone and not have to think about how poorly they are being treated.

And the big fund companies know this. And they take advantage of it.

They take advantage with snappy slogans and cherry-picked historical returns. They show beautiful people having fun on lakes and golf courses and imply that if you give them your money, you too can be part of this wonderful crowd.

And most of the investing public eat it up.

They don’t want to know the truth because it would unsettle them and would mean they actually have to take control of their investments and accept responsibility for their results (whether good or bad).

It’s far easier, and more comfortable, to have someone else make up your mind for you and have someone else to blame if you lose money (“hey, it’s not my fault and everyone else I know lost money too”).

The sad fact is that most people would rather be spoon-fed a nice sounding story that insulates them from reality so they don’t have to take responsibility for their current and future financial situation.

They can stick their heads in the sand and live in denial, justifying their poor returns and miniscule net worth by taking solace in the fact that everyone else is in the same boat.

Hopefully you’re not in that category. But even if you are, now would be a good time to extricate yourself from the unthinking masses and learn how to invest successfully for yourself.

Don’t let clever advertisements blind you to the fact that nobody cares more about your money and well-being than you do. Not Wall Street. Not Mutual Fund companies. And not even your well-intentioned neighbour who’s indirectly feeding you regurgitated Wall Street dribble.

The two things that Wall Street and fund companies are really good at are, first, keeping the typical investor in a constant state of turmoil by telling him that investing is too difficult for him to do by himself and, then, siphoning off loads of money from his investment and retirement accounts.

They spend lots of money trying to keep you in the dark by hiding the key issues. Don’t fall for it. Stop clinging to the naïve belief that Wall Street and the fund companies are interested in your and your family’s well being.

The one and only thing these companies are interested in is making money. Piles and piles of money. People gravitate to these jobs so they can make lots and lots of money. Period. They don’t go in thinking about how great it would be to help people realize their dreams.

And one of their greatest achievements is making people believe that they actually care about them.

How do they do this? Well quite simply they do it by smart and constant advertising, drumming the same message into the public’s heads over and over and over again. If someone hears something enough times, they eventually believe it to be true.

And where does the money come from for all of this expensive advertising (and lobbying, but that’s another story altogether)? It comes from the investing public in the form of high fees and other money-grubbing devices!

Wall Street has a vested interest in keeping you ignorant of the right way to invest your money. If too many investors took the time to learn the correct methods, Wall Street would be up the creek without a paddle. They’d no longer be able to pull in piles of money. And no money means no multi-million dollar bonus, no house in the Hamptons and no new Ferrari. That’s an undeniable fact.

Of course the balance has to be right. If you always lost money and never made any, you’d take your investments and go elsewhere.

But the fund companies know this and thus ensure that they only milk you to the extent that you still make some money some of the time.

It’s what psychologists call variable reinforcement.

Casinos and lotteries use it all the time. In short, it rewards the player on occasion, but not well enough to logically continue playing (add the fact that the big winners are publicized incessantly and you can imagine what everyone’s greed glands are doing).

And since people like to remember good things and forget bad things, the few rewards that are seen tend to carry greater weight in people’s minds than the multitude of times they didn’t win. So they keep playing in a futile attempt to hit the jackpot (or retire wealthy).

I hope reality is starting to set in. The big fund companies look after their own interests and quite often those interests are in direct conflict with yours.

The main thing to take away from this is to realize that you need to be in control of your investments. You need to take responsibility for your wealth. It’s much too important a decision to leave to the whims of others who don’t have your best interests in mind.

There’s more detailed information about how to build your wealth in the stock market the right way in the Pragmatic Investor book. Pick it up here to learn what you need to do immediately in order to escape from the Wall Street rat-race.

Not tomorrow. Not next week. But right now.

And that is to ensure you are backing up your data every single day. Most people don’t do this, or even think about it, until it’s too late. After a hard drive crash, virus attack or someone steals their computer, then they start to think of all the irreplaceable data they’ve just lost.

Of course it’s easy to understand why this task isn’t at the top of people’s lists, it’s just too tedious and time-consuming. Plus most people are busy and don’t want to have to search and find all of their recently updated data, zip them up to a file and then copy that file to an external hard drive.

But even for the rare breed who does this consistently, storing data on an external hard drive is not the best way to create backups.

The reason?

Unless you’re storing your backups offsite, a fire or theft can destroy all copies stored at the same location.

So it’s essential that you create backups frequently and store them in another location. Fortunately, with the advent of high-speed internet access, this has become extremely easy to do.

The backup service I use is called Mozy, and it allows you to select which files and folders you’d like to backup and when you’d like the backup process to begin. Then it automatically backs up your data – even files that you are currently using.

After the initial backup is done, Mozy then backs up only the files that are changed, so it’s usually very fast.

You’ll never again have to worry about forgetting to do a backup.

Plus your data is encrypted and stored safely and securely on Mozy’s servers. If you ever need a file, or all your files for that matter, you can simply select it and restore it to your computer.

You can even restore previous versions of your files.

And how much will it cost you for all this convenience and power?

Nothing. Nada. Zip.

If you have less than 2 GB of data to backup, the service is free (no setup fee, no credit cards, no monthly payments, just worry-free backups). If you have more than 2GB, it’s $4.95 a month for unlimited storage.

I currently have nearly 50GB of data backed up at Mozy, but for most people, 2 GB will be enough (remember, you only want to back up your data. Programs can always be reinstalled or redownloaded, so you don’t need to back them up offsite).

So if you don’t currently have a backup strategy and want one that is simple, reliable and easy-to-use, visit the Mozy site and sign up for a free account. Because losing your valuable data is not something you really want to experience.

Of course the Alchemists of old were best known for their attempts to turn common metals into gold. I’m sure tons of effort was applied to this venture, but as we know, without success.

What really intrigues me, though, is that it appears nobody thought how worthless gold would become if alchemy ever achieved its most lofty goal.

I mean, if you can turn copper or tin or any other abundant metal into gold, then gold would just become another abundant metal.

The value of gold is in its relative scarcity, not the fact it is “gold.”

Anyways, had the efforts succeeded there would have been lots of other benefits to being able to effect the transmutation from one metal to another. But, as we now know, since science is very clear on the matter, the point is moot.

Or is it?

What’s interesting is that good investors do this all the time. They turn knowledge into, literally, gold if they want to – or more likely lots of money.

Every day they use this investing alchemy to grow their wealth. They take ideas and strategies floating around in their minds and make them MORE valuable than gold.

If you’re not an investing alchemist yet, then what are you waiting for?

Correct knowledge is the key to wealth and freedom. And wisdom is even more valuable than knowledge, because wisdom is the ability to APPLY knowledge.

Applied knowledge is priceless.

One of the most important things you can ever “get” as an investor is that, “you are an alchemist.” Not a fake one, but a real one. You find real opportunities in the stock market that are unexploited and you capitalize on them.

You find solid, under-priced companies with strong economic moats and you create money from nothing when all the non-alchemists catch on.

You diversify and allocate your assets using proven methods to ensure your downside is properly protected.

Your life runs so much more smoothly when you don’t have to worry about how you will pay for your future needs and wants.

And… because investing alchemists have a plan in place to handle anything the stock market throws at them, THEY INVEST WITH MUCH LESS STRESS.

Most investors struggle to fully appreciate just how powerful a solid investing strategy really is.

I think many are so tied up with the day-to-day need to make a living, they don’t take the time to truly determine how to grow their investments correctly and automatically.

Yet doing so can generate HUGE returns on their time.

If you take a week or two to properly learn and implement a successful investing strategy, it can pay off by returning decades to you in the future – decades in which you don’t have to work at a job or do what others tell you to do.

Remember, good things don’t happen with your investments until you do something to make them happen.

Don’t sell yourself short.

Start a proper investing regime today and it will pay off like you wouldn’t believe – both now and well into the future.

Of course not everyone knows how to be an alchemist. Not everyone can do it.

Just because it’s easy, doesn’t mean others will learn it.

There’s so much disinformation and bad advice on the Internet today, appealing to people’s natural tendencies to be lazy and greedy, it holds them back… and continues to hold them back as they jump from one crazy scheme to the next or follow the latest hot stock being touted on T.V. or in overpriced advisory newsletters.

The investing world is teeming with outdated strategies and obsolete tactics – not to mention hyped up promises that were never good to begin with.

The greatest danger to your investment success is BAD information… and the Internet contains a LOT of it.

So, is advice on the Internet always bad advice?

Of course not. But how do you tell the difference?

Well, I gave you one method last issue. Plus I’m sure you can think of many more ways.

Today, I want YOU to take control of your investing future. Carefully evaluate every investing idea and pitch you see. If it doesn’t pass your hype-o-meter test, ignore it. Turn off the television. Unsubscribe from the newsletter.

Do whatever it takes to learn the correct way to invest in the stock market.

It will be one of the best things you can do to secure your (and your family’s) financial future.

I would daydream of a robot that would do all that stuff automatically for me, so I wouldn’t have to do it.

Well l nowadays they’ve got robots that do some of that (“Roombas”) and gee, I guess that’s pretty cool.

But you know what’s waaaay cooler than that?

When your investments automatically work for you 24/7/365 regardless of whatever else you’re doing on any particular day.

I’ve got to tell you, that is the most liberating thing you can have going for you as an investor. It’s better than not having to vacuum the living room, that’s for sure.

But… there’s one thing that HAS to be right before it works: Your investing system — the algorithm you use to decide what to buy, what to sell and how to construct your portfolio.

If your system is consistently profitable year after year, you’re liberated. If it’s not, you’re sunk and probably will be tied to your job for a very long time.

Fortunately you don’t have to wonder which systems work and which ones don’t. It should be obvious. If you look around for about 10 minutes, it will be there staring you right in the face.

Unfortunately most people don’t look around. They don’t think. And they end up using a system, that doesn’t work, simply because it appeals to their emotions (usually greed and fear). So rather than using logic, they jump in based on emotions.

Here’s the thing… if you find someone trying to sell you an investing system (whether it’s a Forex robot or an options strategy or some secret black box software) purporting 500% returns a year, think about it. Ignore the greedy emotions flowing through your brain at that moment and just think.

First, look at the numbers. Let’s say you start with $10,000, which most people can come up with, and you’re able to achieve those succulent 500% returns.

Guess what?

In 5 years you’ll have over 77 million dollars. Do you know of anyone who has made $77 million in 5 years?

If you extrapolate over 10 years, you’d have more than $600 million. Does that sound achievable?

Even if someone is touting “just” 100% returns, you’re still looking at over $10 million in 10 years from a $10,000 investment. It won’t happen.

Second, look for others who have done it. If someone consistently returns 100% a year over 10 years, you’ll hear about him in the News.

If he’s using a system that does that, you’ll hear about the system. So if you haven’t heard about that person or his system, ask yourself, “why?”

The reason, as you’re no doubt aware, is because the system doesn’t do what it says it will do.

So don’t waste your time trying to follow it. You’ll just lose your money and be back at square one.

There is good news, however. There’s a system that can consistently return between 20 and 30% each year (on average), and it does so over very long periods of time (such as 40 or 50 years). It’s well documented and many people use it to turn $10,000 into $2 million over 25 years.

Plus you’ve certainly heard of the most famous user of this system. His name is Warren Buffett and he’s been pulling down 24 to 30% returns for more than 50 years using a value investing strategy.

At the end of the day, that’s about the best you can expect to make consistently over long periods of time. And it’s certainly not chump change, because Buffett rode this system all the way to a nice little nest egg of 50 BILLION DOLLARS.

Unfortunately it’s not always possible to invest in individual stocks. There are times when you don’t know enough about and industry or geographic region to invest safely. Recall that one of Buffett’s main rules is to invest in what you know.

Say you’ve heard that China is the next big thing (perhaps because you read a past issue of the Aptus eGazette) or you’d like to get some exposure to gold stocks or energy stocks (because, again, you read a previous eGazette), but you don’t know enough about China or gold stocks or energy stocks.

What can you do?

Well, rather than speculating and taking a big risk on a company you’ve never heard of, the smart money would buy some solid Exchange Traded Funds (or ETFs) that specialize in whatever you’re looking to invest in.

Wikipedia gives a good definition of an ETF:

“An exchange-traded fund (or ETF) is an investment vehicle traded on stock exchanges, much like stocks. An ETF holds assets such as stocks or bonds and trades at approximately the same price as the net asset value of its underlying assets over the course of the trading day. Most ETFs track an index, such as the S&P 500 or MSCI EAFE. ETFs may be attractive as investments because of their low costs, tax efficiency, and stock-like features.”

Basically an ETF combines the best features of mutual funds with those of individual stocks. Of course you do pay more for an ETF than you would if you invested solely in individual stocks (because there is a management fee), but if you’d like to invest outside of your sphere of competence, that relatively small fee is very much worth the extra peace of mind you get.

ETFs are fairly new (having their genesis in the early 1990s), yet today there are literally hundreds of different ones managing over $600 billion in the U.S. alone.

They track everything from broad market indexes, such as the S&P 500, to individual sectors, like gold, technology and energy to specific countries — such as China — and regions, like Latin America.

Today I’ll share my favorite ETFs with you. Keep in mind I usually only consider using an ETF if I can’t purchase individual stocks in a particular sector or region for some reason.

I like to use them to gain exposure to foreign markets of which I have very little knowledge (China is a good example of this).

For example, the Shanghai stock exchange was up over 5% at one point on Wednesday, compared to a pretty flat domestic market.

Plus China’s GDP is estimated to grow almost 9% this year and nearly 10% next year! (and if you’re keeping score, the U.S. GDP has been negative and will be lucky if it squeaks into positive territory anytime soon).

Combine this with the fact that Chinese markets usually have low correlations with U.S. markets, and it makes quite a bit of sense to diversify some of your portfolio into China.

But, what Chinese stocks should you purchase?

If you’re like me, you don’t really know. And that’s where ETFs can help.

If you’d like to invest in some of the largest Chinese companies, the iShares FTSE/Xinhua China 25 Index Fund (ticker FXI on Amex — 0.74% fee) fits the bill.

You get instant diversification plus exposure to an economy that is growing by leaps and bounds (only India and Brazil are currently playing in the same league).

PowerShares Golden Dragon (PGJ — 0.6% fee) and Claymore/AlphaShares China Small Cap (HAO — 0.7% fee) are two others you might also want to look at.

At the end of the day, you still need to do your own due diligence, but investing in foreign ETFs, rather than individual stocks, takes away some of the risk.

The other ETF investment strategy I use is a little closer to home. I don’t follow the energy industry very closely, so if I choose to invest in energy, it will usually be through an ETF.

There are quite a few energy-related ETFs from which to choose, and they range from broad coverage of the energy sector down to specific sub-sectors (such as Oil or Natural Gas).

The most popular, by trading volume, is the Energy Select Sector SPDR (XLE — 0.22% fee) which holds many large, integrated oil companies such as Exxon Mobil (XON) and Chevron (CVX).

Of course if you’re only interested in clean energy companies, you can find an ETF for them too. There really are many choices and you definitely need to do your own homework when investing in ETFs (or anything for that matter).

But I did say I would tell you what I like to do, so here’s my 3-step plan for effectively using ETFs. First, I’ll select 2 or 3 sectors or regions that aren’t correlated (so when one sector or region moves one way, the others don’t usually move in the same way).

Second, I’ll purchase 2 or 3 good ETFs that track those respective sectors or regions.

And third, I’ll monitor and rebalance back to the original allocations when the current allocation strays too far from the original.

This allows me to automatically maximize my returns (rebalancing ensures I’m always buying low and selling high) and minimize my risk.

So there you have it.

You can drastically reduce the risk in your portfolio by utilizing ETFs when you don’t have the first-hand knowledge necessary to select superior individual stocks.

You gain exposure to the desired industry or region and you pay a relatively small fee in order to significantly reduce your risk. To me, that’s a win-win situation.

If you haven’t read it, go do that now. I’ll wait.

Back? Okay, so it’s 2 months later and has anything changed my mind about what I said?

Nope.

In fact recent events have just reinforced my views.

I’m even more convinced that it’s only a matter of time until inflation rockets upward and tax increases follow. I just can’t see another way out of the situation we’re currently in. I guess a miracle could occur and economic output could rise dramatically, but I’m not really holding my breath on that one.

The U.S. government appears to be committed to spend, spend and then spend some more. With its $1.8 trillion dollar annual deficits (can you even wrap your mind around that number?), health care “reform,” continuing bailouts, and other borrow and spend policies, it doesn’t take a rocket scientist economist to see the writing on the wall.

If you borrow like there’s no tomorrow and print money faster than mosquitoes breed, you’re bound to pay the piper sooner or later.

Now I can guarantee you that there will be many people who get blindsided by this. All of a sudden they’ll be paying much more for much less, their tax bill will increase and they’ll scratch their heads and say, “when did this happen?”

You don’t have to be one of them.

Listen, sometime between the next 2 and 10 years the probability is that the money you have today will be worth significantly less. That means you do not want to have your investments in fixed income securities. If you’re being paid a fixed rate every year, inflation will chew you up and spit you out.

Imagine being able to borrow money today and pay it back years later with inflated dollars. That’s the side you want to be on, not the side that’s lending money today and being paid back with inflation-adjusted dollars.

However I’m certainly not recommending that you borrow huge amounts of money today. There are too many variables involved in that strategy to ensure you have a good chance of making money (variables such as your cash flow situation, your income in the years ahead and more).

No, there is an easier way to make money in such times.

So if you believe that inflation is coming, the smart thing to do is invest in things that rise by at least (or preferably more than) the rate of inflation. What are these things?

Well, historically gold and energy have done well in inflationary times. So has other natural resources.

If you want to hedge your portfolio against the threat of inflation, you should be purchasing gold and energy stocks right now – not 2 or 3 years from now. When the underlying asset rises, these stocks tend to rise too.

But what if you’re not sure how to evaluate stocks in these industries? What if you don’t know if these stocks are too expensive right now or not? What if you don’t know what combination of stocks to purchase in order to construct a strong portfolio?

If you’re not sure about these questions, then get the Pragmatic Investor book. It will explain what you need to know and give you a step-by-step system for selecting stocks with a built in margin of safety. It will also tell you exactly how to construct solid, efficiently diversified portfolios.

And here’s a secret just for reading my stuff: enter coupon code “aptusSub” (without the quotes) and you’ll receive an additional 50% off the already discounted price (but only until 11:59pm on September 4th – so don’t delay, do it now).

On the other hand, if you don’t want to order the book because you’re not interested in individual stocks, here’s a way to protect your portfolio from inflation without having to do too much thinking.

Purchase a handful of Exchange Traded Funds (ETFs). These combine the best characteristics of both mutual funds and individual stocks. They’re somewhat diversified, generally low cost and can be traded like stocks. Plus they come in a variety of flavors designed to suit your investing style.

There are tons of ETFs that invest in gold, energy and other natural resources. Do a bit of research and you’ll come up with a huge list. Then pick one in each of the 3 sectors and put between 10 and 15% of your portfolio in EACH sector ETF.

That will give you an inflation hedge of between 30 and 45% of your portfolio.

Plus you’ll be somewhat diversified within each actual ETF (since each holds a number of stocks) and you’ll be somewhat more diversified between the ETFs you hold (since they’ll be holding stocks in different industries).

And if you need any more proof that this is a strategy that has a high chance of succeeding, look no further than China, India and Brazil. These countries’ economies are actually expanding at a time when traditional first world economies are falling. And the expansion rate is dizzying, to say the least. China’s GDP grew at 6.1% in the first quarter of 2009. And it grew at 7.9% in the second quarter! But that’s not the end. China is expected to do even better in the coming years.

And what do you think a fast-growing economy needs? You guessed it. Energy and natural resources.

China alone, with its gigantic population, could put upward pressure on prices, but when you add India and Brazil (plus others who are developing huge middle-classes now that many of their citizens are pulling themselves out of poverty for the first time), you should be salivating at the potential profits available to those who act now.

Add what we talked about earlier, massive U.S. government spending, and the stage is being set up for a select few, who know what they’re doing, to grow their investments at an astounding rate over the next 10 years.

September is just around the corner, and with it comes a new year of investing opportunities. Do a bit of research and your own due diligence. It could be the difference between retiring wealthy and just getting by.

And of course if you’re at all interested in the stock market, get the Pragmatic Investor book. Until September 4th at 11:59pm you’ll receive a 50% discount just by entering the special discount coupon code of “aptusSub” (without the quotes).

It’s not a new system. Variations of it have been used for 50+ years and it has been directly responsible for many billions of dollars in investment returns.

I’ve just adapted it to take advantage of the plethora of information available on the Internet today in order to get better results much faster.

You can use this system yourself to start your very first investment account.

You can use it to revamp your existing portfolio to limit your risk and maximize your returns.

You can use it set up an efficient, diversified portfolio.

You can use it to significantly increase your returns.

And you can do what I did, use it to extricate yourself from expensive mutual funds that pay themselves first and probably cost you thousands of dollars a year in invisible fees that you don’t even realize you’re paying.

I haven’t owned a mutual fund in over 10 years and my investments have more than doubled the market’s returns over that time (and when you consider that 80% of actively managed mutual funds underperform the market, you can imagine why I don’t miss them).

No doubt you’ve at least seen, if not tried, other investing systems before. You might even have tried this one, but didn’t know exactly how to implement it.

Well now you will.

I’ve created a special report that includes a step-by-step guide to implementing the best investing system ever created.

These are actual, actionable steps that you can take to seriously improve your returns and minimize your risks in the stock market

It’s the same system that Warren Buffett used to make 50 billion dollars in four decades.

If you’ve ever paid hundreds, or thousands, of dollars for investment courses or newsletters, you’ll be kicking yourself today. Because what I’m about to show you will most likely make you more money than all of those things combined… and I’m not going to charge you for it.

It’s yours for nothing.

Click here to read about How to Invest in the Stock Market now.

Valuation. That’s what.

Just because a company is fundamentally solid, doesn’t mean you should jump in and purchase it without first asking yourself two very important semi-related questions:

1) Is it too expensive at its current price?
2) What price should I pay for it?

Now there are a number of methods available for determining a company’s intrinsic value, but the one I use the most is based on its Earnings per Share (EPS).

Note that there are a number of pitfalls in using this approach, the chief one being that it relies on estimating the EPS growth out into the future – usually for at least the next 5 years.

Be aware that not all companies have predictable EPS growth. In fact, a large majority don’t. However there is good news. The fundamentally solid companies that Value Investors should be looking at generally have stable and predictable businesses and thus stable and predictable earnings. And since I’m usually not (and by “usually not” I mean never) interested in fundamentally weak businesses, the EPS method of determining a company’s intrinsic value works well for me.

But your mileage may vary and depends on the types of stocks that catch your attention.

Okay, so with that prologue out of the way, let’s dive in and find some intrinsic value.

As an example, I’ll use Moody’s Corporation (MCO) since Warren Buffett holds a big chunk of it, through his various companies, and, in the past, has said it is a great company. The thing is, he might be having second thoughts in today’s economic climate.

During July, Buffett sold about 16% of his stake. Nonetheless, he still holds about 17% of the company even after his recent divestiture. So Moody’s it is.

Before we can begin, we’ll need some data. We’ll need the company’s current Earnings Per Share (EPS), its annual Dividend payment (if any) and the average analysts’ estimates of its Future EPS Growth to estimate what the stock will be worth in the future.

In MCO’s case, the numbers are:

EPS = $1.68, Dividend = $0.40 and 5-year estimated growth rate = 12 %.

Next we’ll need to determine how long to hold the stock. Longer periods are better, but the issue here is that the longer you project, the less accurate your EPS growth rate estimates might become. But then again, if you’re dealing with a top-flight company, your estimates might end up being even more accurate.

In any event, we’ll use 5 years for our calculations (I know, Buffett likes to hold stocks for eternity, but we’ll still use 5 years).

Using these data, we can calculate the future value of EPS for the 5-year time period using the following formula:

Future EPS = P(1 + r)^Y + c[ ((1 + r)^(Y + 1) - (1 + r)) / r ]
Where P = the current EPS; r = Est. EPS Growth; c = ½ the dividend rate; Y = Years to Hold.

Note that we use ½ the dividend rate rather than the entire amount, because dividends are not guaranteed and they can be reduced or eliminated at any time. So by using half the current dividend, we start building a very conservative estimate of the Future EPS value.

Therefore,

MCO’s Future EPS = 1.68 (1.12) ^5 + 0.20[ ((1.12)^ 6 - (1.12)) / 0.12] = 4.38

So Moody’s Future EPS is $4.38

Once we have the future EPS value, we can now estimate a future price for the stock by using the Lowest Average P/E ratio for the past 5 years (17.80 for MCO). Again, we want to build a conservative estimate and therefore we err on the side of caution whenever possible.

We can calculate the estimated future price using the following formula:

Estimated Future Price = Future EPS * Lowest Average P/E for past 5 Years

So,

MCO’s estimated future price = 4.38 x 17.80 = $77.96

Once the Future Price has been estimated, the next step is to discount that price back to the present day. The formula to do this is:

Price = FP / (1 + r)^Y
Where FP = the Future Price; r = Discount Rate; Y = Years to Hold.

To determine the correct Discount Rate, we need to decide on the Margin of Safety and expected Worst Case Return we require.

The formula to calculate the Discount Rate is:

Discount Rate = Worst Case Return / (1 – Margin of Safety)

Plugging in all the numbers gives us the maximum price we should be willing to pay today in order to have the required Margin of Safety and worst case return.

If the stock’s current price is less than or equal to maximum purchase price we calculated, then we should be happy to purchase the stock. Otherwise we should pass, as the stock is currently too expensive.

Note that the higher the Margin of Safety and the Worst Case Return we decide upon, the fewer stocks will meet these criteria. Lower settings will return more stocks.

You can use any Margin of Safety and Worst Case Return values, but the recommend values are 50% and 12% respectively.

You can interpret this to mean that if the stock’s return drops 50% from what you expect, your return will be 12% annually.

If the stock returns what you expect, you’ll see a 24% return.

The reason we use a worst-case return of 12% is because this is the average annual return of the S&P 500 over long periods of time.

If you’re going to spend the time and effort investing in individual stocks, you should expect to do MUCH better than the S&P 500. If you can’t do that, then you’re better off investing in a low-cost S&P 500 index fund.

Plugging in the data based on our 50% Margin of Safety and 12% worst-case return, our discount rate = 0.12 / (1 – 0.5) = 0.24

So our maximum buy price = 77.96 / (1.24) ^5 = $26.59

As I write this, MCO is trading at $23.86. So it looks like the company is a buy (assuming its fundamentals are strong).

At this point you might be thinking, that’s an awful lot of calculating I need to do in order to find the intrinsic value of ONE STOCK! And you’re right. It’s also error prone. But that’s how it was done for decades before computers came onto the scene.

Nowadays you can simply use a Compound Interest calculator to determine the Future EPS value and use a Present Value calculator to determine the maximum purchase price. Or better yet, use a spreadsheet. Or even better, use the Value Stock Selector software that does it all for you!

But I digress.

Back on topic, let me say that there won’t usually be a very large number of high quality stocks trading at a discount with a sufficient Margin of Safety at any particular time.

However you can find a handful if you’re disciplined and patient. Using the Value Investing approach, you can actually pick up these bargains when others are jumping out of them for any number of short-term reasons.

And when you do, you position yourself to profit handsomely.

Nevertheless, the only way you can achieve these types of returns (and safety margins) is to be patient and pay less than what most people pay. In other words, the price you pay for a stock will determine the return you can expect on your investment.

The less you pay, the greater your return. The more you pay, the lower your return.

And that is what Benjamin Graham meant when he talked about the Margin of Safety.

Now it’s all well and good to answer that question based on an opinion, but wouldn’t it be grand if we could find an answer based on hard facts and data?

With that in mind, I went digging through some of my favorite books to see what I could come up with. And wouldn’t you know it, I didn’t have to dig very far. In fact, I hardly did any digging whatsoever. It seems that Pat Dorsey (Morningstar’s Director of Stock Analysis) was kind enough to list 4 things (in his book, “The Five Rules for Successful Stock Investing”) that, taken together, do a relatively good job of telling us which companies have strong economic moats.

In fact he states, “The concept of economic moats is crucial to the way Morningstar analyzes stocks because a moat is the characteristic that helps great-performing companies to stay that way.” He goes on to credit Warren Buffett and Harvard professor Michael Porter for the idea of an economic moat.

Now if you’ve been following me for any period of time, you know I like to test things rather than just take them at face value. So, even knowing that Dorsey probably does tons of testing in his role at Morningstar (not to mention he probably has lots of staff who also test for him), I thought I’d run some companies through his Moat Test and see which ones rose to the top.

Then I’d analyze them, using a Buffett-like fundamental rating system, and see if there was any correlation between great fundamentals and Dorsey’s economic moat.

The results are very interesting to say the least.

However, before I get to them, here are Dorsey’s 4 Moat defining criteria:

1) Free Cash Flow / Sales is 5 percent or better (I also went back 5 years and required that the company beat this mark in all 5 years).

2) Net Margins greater than 15 percent (again, the company had to beat this mark in each of the past 5 years).

3) Return on Equity above 15 percent (in each of the past 5 years).

4) Return on Assets higher than 6 percent in each of the past 5 years.

I also added one more criterion, which comes right from Buffett’s own strategies, and that is Depreciation / Gross Profit being less than 18% for a general pass and 8% or less for a big fat A+. Buffett has found that companies with lower Depreciation tend to have a sustained durable competitive advantage (which translates into a strong economic moat).

Alright then. Armed with these 5 criteria, I proceeded to test about 7800 stocks (those trading on the NYSE, NASDAQ and AMEX exchanges).

And this is what I found.

Forty companies had perfect scores on Dorsey and Buffett’s moat test (that’s about one half of a percent, if you’re keeping track).

For those who like to see tickers, here they are:

COH, INTU, ALTR, WAT, NVO, JCOM, SIAL, HITT, PAYX, ACL, ADTN, CHKP, CSCO, OXPS, BTI, JNJ, STRA, WRLD, SAP, FII, KO, GRMN, SOHU, FDS, LDR, NTES, TECH, INFY, DEO, TSP, APOL, CTSH, LOOP, NVS, PRAA, TROW, WFR, SAY, CTRP, QCOM

Right off the bat I noticed some great companies in there (PAYX, QCOM, KO, CSCO and SAP to name a few) that I know have solid economic moats. So maybe this Dorsey guy was onto something. At least it was worth further probing.

The next step was to evaluate these 40 stocks to see if their fundamentals were any good.

I used a rating system I developed based on Buffett’s voluminous works. The maximum possible score is 32 and anything that scores 25 or above is considered a fundamentally solid stock.

Here’s what I found:

21 stocks scored 25 or above. five scored 24, three scored 23, two scored 22, two scored 21, four scored 20, two scored 19 and one came in at 17.

So just over 50% of the stocks with strong moats also had excellent fundamentals. Plus when you think about it, another 8 just missed the mark (so it’s not like they’re slouches in the fundamentals department).

Now I’m not saying this was a scientific test or anything like that, and I’m definitely not saying that you should rush out and buy any of these companies – because, after all, they might be good companies, but they could also be highly overvalued (which I can tell you, according to the valuations I did on them, most are – in fact only 9 are what I would call attractively priced at the moment).

However, it does appear that Dorsey is onto something here. And it makes sense. If a company has a strong moat that allows it to beat out its competition, then it should be able to make more money than everyone else. And that’s the beginning of a strong company – one in which Warren Buffett likes to invest (and you should too).

And when it comes to investing experience, no other investor has more or does it better than the Oracle of Omaha. He’s amassed a fortune of over $50 Billion using strategies he learned from his mentors and from techniques he created himself.

That’s why I listen to him.

Let’s face it, there are thousands of investing strategies out there today and there are even more people who will gladly tell you what you should be doing with your money. Just look at the talking heads on television or the advertising from investment banks, Wall Street and mutual fund companies.

But at the end of the day, two things are clear: 1) Nobody cares more about your money than you do; 2) Warren Buffett doesn’t just tell you how to invest, he shows you by doing exactly what he says and making Billions of dollars doing it.

That’s why you should listen to him too.

And the nice thing about Buffett’s strategies is that they are easy to learn, simple (requiring no advanced mathematical techniques, just plain arithmetic) and, most importantly, they work like gangbusters.

He sums up his philosophy with these words, “I don’t try to jump over seven-foot bars; I look around for one-foot bars that I can step over.”

At a high level, his plan is to:

1) Ask a series of questions to determine if a company is worth further investigation.

2) If so, determine the fundamental strength of the company.

3) If the company is fundamentally solid, determine what price to pay so that he has a built-in margin of safety and maximizes his chances of receiving market-beating returns.

4) Not diversify too broadly. He concentrates his holdings into a few excellent companies. In other words, rather than putting his eggs into too many baskets, he puts them into a few excellent baskets and then watches those baskets carefully.

That’s it. That’s the plan he’s used to make his Billions. He just keeps repeating these steps over and over again.

Of course this begs the question as to why, if investing is so simple, do so many people fail to do it well. Why do so many underperform the markets? Why are their risks so high? Why do they pay outrageous fees to mutual funds and money managers even when their portfolios lose money? Why? Why? Why?

There are answers to these questions, and Buffett hints at one when he says, “there seems to be some perverse human characteristic that likes to make easy things difficult,” but since the point right now is to show you which questions Buffett asks, I’ll simply point you to my book, THE PRAGMATIC INVESTOR, which answers these and more.

Now let’s get back to Buffett.

For anyone who’s read his writings, it’s very clear that he likes to keep things simple. “It’s not necessary to do extraordinary things to get extraordinary results,” he’s said more than once.

Okay, so without further ado, what are the, literally, Million Dollar questions?

1) Is the company free to adjust prices to inflation?

2) Is it likely that a new product or service will come along within the next 10 years and completely wipe out customers’ needs for this product or service?

3) Does the company have a strong moat? A moat is one or more of brand, exclusivity, size or price (for example, does the company have a strong, trusted and recognizable brand, does it have an identifiable consumer monopoly in its region or globally, is it large enough to overcome competitors or can it compete effectively on price for long periods of time?).

4) What does the company do or have that protects it from competition and keeps its customers coming back?

5) If a new competitor came along with one year’s worth of unlimited funds to fight for the company’s customers, how vulnerable would the company’s future be?

6) If the company had to quit advertising or expanding for the next year, how badly would it be hurt? Could it recover after that year and bring customers back?

7) Does the company produce a product or service that has been used by its customers for at least the past 10 years? Will this company’s products be used for the next 10 years?

If the company you’re looking at can make it through these questions, chances are you’re looking at a great company of which Buffett would be proud.

On the other hand, if the company fails to pass through these questions, it’s probably best for you to ignore it and move on.

So there you have it. The seven most important questions you need to ask BEFORE investing your money. If you use them, you’re more likely to profit handsomely. If you don’t, you’re much more likely to fall in with the masses and spin your wheels.

Earlier I mentioned that asking these questions was just 1 of 4 steps Buffett utilizes when evaluating a company. If you’re interested in learning the others, I’ve put together a step-by-step course that shows you exactly how to determine the fundamental strength of a company and how to determine what price to pay for it.

The course is available to you at no charge. It’s short and to the point. It also gives you something most other courses and books don’t – STEP-BY-STEP, easy to follow instructions on exactly what to do.

Just sign up on the right side of this page (if you’re reading this on the blog) or visit the blog at http://www.PragmaticInvestor.com/blog.

The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.

In fact, the history of the recent, financial crisis, which doubles as a history of the rapid decline and fall of the suddenly swindled-dry American empire, reads like a Who’s Who of Goldman Sachs graduates. By now, most of us know the major players. As George Bush’s last Treasury secretary, former Goldman CEO Henry Paulson was the architect of the bailout, a suspiciously self-serving plan to funnel trillions of Your Dollars to a handful of his old friends on Wall Street.

Robert Rubin, Bill Clinton’s former Treasury secretary, spent 26 years at Goldman before becoming chairman of Citi-group – which in turn got a $300 billion taxpayer bailout from Paulson. There’s John Thain, the asshole chief of Merrill Lynch who bought an $87,000 area rug for his office as his company was imploding; a former Goldman banker, Thain enjoyed a multibillion-dollar handout from Paulson, who used billions in taxpayer funds to help Bank of America rescue Thain’s sorry company. And Robert Steel, the former Goldmanite head of Wachovia, scored himself and his fellow executives $225 million in golden parachute payments as his bank was self-destructing.

There’s Joshua Bolten, Bush’s chief of staff during the bailout, and Mark Patterson, the current Treasury chief of staff, who was a Goldman lobbyist just a year ago, and Ed Liddy, the former Goldman director whom Paulson put in charge of bailed-out insurance giant AIG, which forked over $13 billion to Goldman after Liddy came on board. The heads of the Canadian and Italian national banks are Goldman alums, as is the head of the World Bank, the head of the New York Stock Exchange, the last two heads of the Federal Reserve Bank of NewYork – which, incidentally, is now in charge of overseeing Goldman – not to mention …

To read the rest of this article click here.