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Greed and Fear

  ``When I hear the word `culture', I reach for my gun.''

Hermann Goering

``When I hear the word `leverage', I reach for my coat and head for the door.'' 

Dan Drake

``In investing money the amount of interest you want should depend on whether you want to eat well or sleep well.''

J. Kenfield Morley

      Dan Drake suggested that I add a section talking about the kinds of things to watch out for. Frankly I'm of two minds about this. Walker's first law of investing says, ``If you don't totally understand it, ignore it''. I cannot possibly give you enough information herein to make an intelligent decision, so I'll just concentrate on the lingo. But if you're unwilling to take the time to learn the game, I think you're better off not playing at all. Professional money managers have years of training, access to extensive libraries of research material, massive computer support systems, and full time analysts watching every piece of data. Yet few of them do better than random chance. If you intend to better them, realise you're going into a business venture and prepare to spend the time and effort a business requires.

What follows is Walker's acerbic, opinionated, tour d'horizon of investments.

With your money you can spend it on stuff or paper. Stuff includes BMW's, yachts, Big Macs, houses, and gold. Paper includes stocks, bonds, CD's, options, futures, options on futures, futures on options on futures on gold, etc.

  Bonds are debt. You give somebody your money and they agree to pay you back someday (if soon, like 90 days, it's ``short term'', if not, like 30 years, it's ``long term''. Exercise: what does ``intermediate term'' mean? See, it's not so hard!), and to pay you interest at some percentage rate. Usually, the longer the term, the higher the interest. But the longer the term, the higher the risk, because if interest rates go up, the value of your bond goes down. Also, there's the risk that the issuer won't pay off, or may even stop paying interest. Issuers with tons of cash and a record of prudent financial management such as the U.S. Government get to pay less interest than fly by night operations like IBM. In general, the greater the risk, the higher the interest.

  Stocks are equity. You own part of something. This can range from the telephone company to Autodesk. Generally stodgy old companies pay you a dividend in cash and are much safer. Utility stocks are the stodgiest of all and are very similar to bonds. Stocks in established, well capitalised companies such as Computervision or Union Carbide are much safer than wild-ass startups like Apple, Intel, Tandem, and Autodesk. This is because it is less painful to lose your money in good company.

All the rest are pinstripe Las Vegas in New York (or Chicago). The purpose is to have the most fun as you lose your money.

  So what's leverage? Leverage is how you can lose or possibly make money even faster. Options (buying, not writing), buying stocks on margin, and futures are ways to obtain leverage. You can, by proper application of leverage, lose even more than you invested. Isn't that neat? (All right, this is somewhat unfair. Leverage, properly applied, can let you hedge illiquid assets and shift risks to speculators willing to assume them. Leveraged markets are essential to the efficient deployment of capital in a free market. See you at the track.)

And I could go on and on. This is really fascinating, and as one who has long been a market follower and player, I could go on for hours. But as I swore off all market playing when I started Autodesk, I'd rather not. It seems to me that it's a lot easier to make money than to multiply it, and for the moment, that's my focus.

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Editor: John Walker