Steve Forbes and Jim Rogers are celebrities on Wall Street. But both men prefer family life to cigar filled rooms. Here are a few of the lessons they are teaching their own kids to help them live up to their potential.

Mary Caraccioli: The last decade has been this period of bubbles and busts. Have these cycles changed your investment philosophy at all?
Steve Forbes: I think it underscores that you cannot do, what they call, rearview mirror investing. And that is assume that was is in the present is going to be in the future, or what is past is going to be in the future. I remember in the 1990’s the average return on a stock was 11.x% but between the mid-1960s and the early-1980s stocks actually in the real term went down 60 or 70%. Then you have this enormous surge upwards. Where in a period of 20 year, something like the Dow went up almost 15 fold.
So a lot of volatility. And in terms of investment strategy, you have to learn to be disciplined. Everyone says they are a disciplined investor until the market goes down. Then it’s “It’s too late to get out” or the market surges and it’s “oh is it too late to get in.” You see that attitude this year. “oh I’ll wait for the next turn then I’ll be sure to get in.” You get whipsawed. For younger people, the key thing is Mary, they put in a certain amount each month into several low expense mutual funds and keep doing it and don’t get caught up on the day-today.
And in terms of strategy…yes you have to be diversified around the world with companies that have a good overseas presence. The dollar is in one of these weak periods. So you have to be diversified, but don’t over manage it. But if you don’t have time to do it, go with the mutual fund…let others babysit your money for you.
MC: How do you structure your own personal investing? Are you more aggressive than the average person or are you more conservative?
Forbes: It’s probably aggressive in the sense that most of my assets are in company. So if that does well, I’ll do well. If not, what I do on the side isn’t going to much help me. So yes. But I do also have life insurance which is probably the most conservative investment you can have. But with a good company, it doesn’t look so bad in the last two or three years. So there’s balance, but I do like mutual funds again because if you are going to do individual securities you have to have time to really examine the thing. And if you don’t, don’t do yourself a disservice. Get someone with brains to do it for you
MC: Makes sense. So you like managed mutual funds as opposed to index funds, that are not actively managed.
Forbes: Yes and sometimes if you think there is a certain sector, you can try to get and exchange traded fund or an index fund to cover it. That’s fine. But in terms of the market as a whole, realize that you are not going to beat it. And also have a realistic expectation of what it is you want. Everyone wants capital gains, but what is your time horizon. What is your true tolerance? And then you can go beyond equities and take bonds.
Who ever would have thought two years ago that treasuries would be given at fantastic returns. That you could buy a thirty year treasury at a time when the dollar is going be weakened and you get a positive return. That’s the kind of crazy environment we’re in. But you’ve got to be ready for it.
MC: Being ready for it means that you don’t have the knee jerk reaction. It’s about essentially getting a plan and sticking to it. When do you get off of that plan and say, I’m going to divert from this. It’s obviously not to the news of the day, right?
Forbes: Right and it depends on where the money is. If it’s a 401k or an IRA and you’ve followed the rules of fiduciary responsibility to yourself, that is you’ve diversified, and not put too many eggs in one basket as they say, then you can ride a storm through. If you’re not going to need the money for a few years, ride the storm through.
And you saw that very graphically after the huge hit from late 2007 to early 2009, where a typical stock went down 60%. A lot of people got out. They said I can’t afford this. I can’t stomach this. I gotta put some stock on the side. Then March comes around and you have a huge snap back on the market. Now the same thing happened in the 30’s. Even though it was a dreadful decade, a horrible decade economically, you saw these real whipsaws. Same thing in the 70’s. 75, 76 fantastic for the market, even though it was a dreadful decade.
So yeah, especially for retirement, don’t try to hit homeruns. There was a money manager in Connecticut years ago that said “For certain kinds of money play it like you should tennis.” You like to play tennis Mary. And he advised, “realize you are not going to be playing Wimbledon. ” And a sensible tennis player focuses on just get the ball over the net. Leave the fancy stuff to others. Just get the ball over the net. Same thing with investing…just get the ball over the net and you will do just fine.
MC: So when the market goes down a lot of people get in that mode that they want to play catch up. But that’s where you can get yourself into a trap, because that’s taking you off your plan for the wrong reason.
Forbes: Yes and simple things. The miracle of compound interest does work if you let it. Dollar cost averaging, and that is so simple. That is, especially if you are a little younger. When a market goes down, that is your opportunity, because if you are putting in a certain amount of money, a hundred or two-hundred a month you’re in effect buying more shares. So when the thing comes back you will get a much bigger hit.
Reinvesting dividends and basic things like that. Again…stay away from the cocktail chatter. Don’t think of yourself as a Goldman-Sachs executive, you’re going to make $100 million. No, if you get that mentality, you are just going to frustrate yourself, and hurt yourself.
MC: That’s right, because it really is about your personal situation in the long run. And it’s hard sometimes to tune everybody else out and to tune out all of the noise. There is a ton of noise out there. But it really is an understanding of what your needs are.
Forbes: And if you at parties, and if we get in an environment again, which we might someday if you live long enough, where people start to boast about what investment genius’s they are. You are going to participate by citing the example of some others. “Oh yeah. Ed at the office, what a jerk, but he really hit a homerun on that.” Fine so you can participate in the conversation. You have to try to go out there and it the homerun. Let others try to swing. Most of the time they’ll strike out. They won’t tell you.
MC: And you know we have seen this cycle over and over again, where it’s the paper boy, the dentist and everyone giving you stock tips. That’s pretty much the call to get out right? When everybody else is telling you to buy. That’s when you bolt or at least have some sort of conservative position.
Forbes: Or the recent housing bubble when everyone becomes a real estate tycoon. You know something is probably wrong. And of you have that urge to be mad, to do crazy things, have a certain portfolio and money where you can play with it. But don’t do it in your IRA. Don’t do it in your 401k. those are things that you just want to be able to sleep on. If you lose your mad money fine, but your not jeopardizing something fundamental in the future. And as you get older, again, be disciplined on your retirement. Jack Bogle, created Vanguard, his rule of thumb is your age. If you’re 50, half of your investment, 50% of your investments should be in bonds, short term instruments. 60, 60%. So if something goes wrong with equity markets or the bond markets you have cover.
MC: And that I think is the best rule of thumb is to know that you have the conservative investment for a reason. If you have to take distribution on it, cash it in…you cash in the conservative investment. You don’t worry about if the stocks are up or down. If you they are down you can hopefully hold until they come back up again. You’re not forced to sell in a time you don’t want to. And I think that’s where people think well it’s just because bonds have a certain return. It’s gives you an out if you need money.
Forbes: And as you get older you have to look at things like annuities. Again, you don’t put everything in an annuity. You have to look at expenses. And a lot of them hit you pretty hard on expenses, so you have to do some basic homework. But having an annuity is not sexy, but it does give you some balance and a bit of an anchor if the storms rise up. And so be true to yourself and be realistic about what are you cash needs? The worst thing that can happen, and people went through it, and they are going to go through it again is…the market goes down and you need to raise cash.
It is a hideous feeling and you feel bad doing it. Then when the market comes back you say “oh my God I missed it” and you’re tempted to do something you shouldn’t do.

MC: The biggest knock to Wall Street…and as you know when everybody is getting rich no one is complaining about Wall Street, but when everybody is loosing money that is when they are complaining. The concern that I hear so often is that it is not just that they are doing something and are getting paid handsomely for it…it’s they are inventing the rules as they go and they have that unfair advantage. And therefore, when they fail, they should have been allowed to fail. Then there is this bailout where the small business man can’t be bailed out. And while the government did what it had to do in a tough situation, we didn’t want a global meltdown, there seems to be a lack of fairness in how the big banks are treated that they have unfair advantage. When the times are good, they make lots of money, but when times are bad — they don’t fail, they get bailed out.
Forbes: Well, they could not have done what they did, if the government hadn’t done what it did in printing the money or guaranteed the kind of paper that no banker would tolerate. And normally with a mortgage, you put 20% down. The government said 0% down. Well, don’t be surprised you are going to get some problems. Ignore somebody’s income, well that is something that you wouldn’t normally do. So…
MC: But where is the accountability?
Forbes: Well the accountability is…one, the government’s got to do its part. But having created the problem, then don’t compound it. Yes, we had to take emergency measures last fall, but that did not mean that the government had to come up with this too big to fail doctrine, which takes a handful of banks and makes them bigger…guarantees their paper in the marketplace to the disadvantage of somebody else. That’s profoundly wrong.
And there are some who see it. Paul Volker, former head of the Federal Reserve, now in his 80’s said this is ridiculous. This is distorting the system. So no…no too big to fail doctrine. And if that means you are not going to be able to make an acquisition because the government is not going to back stop you then so be it. So yes, the government has made it worse guaranteeing a lot of paper it shouldn’t have guaranteed and continuing to do so. Too big to fail…so if you are a certain size, government’s going to always be there to make sure you are alive. Whereas somebody else who is smaller…well sorry. No, stop it.
It’s like a natural disaster. A hurricane comes along, so you throw in the food, throw in the water, throw in the medicine, throw in the temporary shelter. Then you pull back as people start to get back on they feet. You don’t do it permanently. Well government’s got to pull back on that and too big to fail…is one of the biggest mistakes of this administration is going along with the too big to fail doctrine. No. You’ve got to know if something goes wrong, if the government won’t let the system collapse, but you as an entity will face the music broken up. And if that means creating a special bankruptcy law for financial institutions…You create it. But you don’t say…you’re too big to fail. No way.
MC: Any predictions for 2010?
Forbes: I think we’ll have some growth in 2010, but it is going to be a turbulent year. The dollar I think will be strengthened. Not because Washington suddenly sees the light, but the markets are going to force it. And so it is going to be a better year than 2009. But it should have been a much better year. So if the government immediately stabilized the dollar…oh that would go a long ways. Realizing healthcare with these 2000 page long bills…start over. Try to get some true entrepreneurship where people can create more healthcare.
You know in any other market…if there is a demand. If people want more software, Silicone Valley will turn out more software. Software writers will turn it out. Why can’t you have an environment where you do the same thing in healthcare and make it more affordable? As you did with cell phones. 20 years ago, these things were as big as shoe boxes, clunky. Hard to work. Today they are sleek, small, and everyone has them, even in the furthest reaches of Congo and Haiti…India. People do have their cell phones. So that’s the kind of environment we should encourage.
So 2010, better than 2009, or better than the fall of 2008, but it could be better. Like in sports…it’s like a ball player. Instead of hitting .150 he gets it up to .225. Better, but hey how about .300, .350.

by Mary Caraccioli

Mary Caraccioli: you’ve been a student of the economy and the markets for many years. But many americans have just become aware of the intersection between wall street and main street in the last four weeks. Let’s put this into perspective…Where are we right now in this crisis?

Steve Forbes: that depends on where the government goes from here. As you know there’s been a hug sell-off in the past year. The market has lost 30-35 percent of it’s value. Hank paulson’s announcement that it’s going to be weeks before he gets this 700 billion dollar bailout goin was a real downer. What he should do is treat this as an emergency not just a corporation and start putting that money to work right away, even if it means buying preferred stock which he’s allowed to do. Yes they’ll have congressional hearings five years from now, but we are in an emergency and you take emergency measures. The other thing that really matters is if the scc and the treasury finally bury mark to market which has artificially lowered the value of stocks between their real worth and a firesale price. That has wreaked havock on companies like lehman brothers and aig. Congress wants that rule repealed yet congress drags its feet. It should deal with rightaway and market will surely turn.

MC: beyond the auctions there are things he can do right now.

Forbes: well he’s got some flexibility and I don’t know why he thinks it takes several weeks to set up an auction process. The treasury dept. Manages the national debt which is the 10 trillion held by the public…So their doing auctions for money markets each and every day whether it’s treasury notes or treasury bonds…Those are ongoing operations, so I don’t know why they don’t grab some personal and start it with this other paper….Just do it.

MC: let’s talk about your second point. Mark to market. An accounting rule means that companies have to mark their assets to the market price. Your argument right now is get rid of that right now so they can mark these at a more realistic level.

Forbes: there is no market. It would be as if you had an automobile and say it’s worth 10-thousand. And your told you have to sell it in the next five minutes what kind of a price do you think your going to get for it? Well that’s what’s happening here. If you take the 500 million banks have written off…Almost all of that is book writeoffs. Not cash. Lehman brothers was cash positive to the end. You’ve got to go out and raise new capital which puts enormous pressure on companies. So it destroys innocent companies.

MC: let’s make the assumption you get the sec to do exactly what your calling for…. Are you concerned about the unintended consequenses that might occur if managers have more discretion and a little less transparancy. After all this is a crisis in confidence.

Forbes: well that’s the thing nobody still knows for sure what’s really there. If you mark this down to so called market you’re going to destroy a company so that’s a greenlight to the short sellers. If we’d had the rule in place in the early 1990s most of the large commercial banks would have been destroyed. We would have had a great depression in the 1990s with this rule. So the key thing is to have the market confident that these companies are not going to be artificially put out of business. They won’t feel that they have to horde the cash…They’ll feel they can function like bankers again.

Another ideal thing would be if the fed announced when this thing is over…It is going to work positively to make sure the dollar stays strong and if the two pres. Candidates would announce that you’re going to get big reaganesqe tax cuts this crisis would be over in five minutes.

MC: you ran for pres in 1996 and 2000…Are you sorry you didn’t run again given the major changes we are seeing in the financial infrastructure at this time. Your tax plan may have more of a chance of gaining traction in this environment?

Forbes: no I gave it a try. It’s one thing to think well this is an ideal environment…Quite another to get out there and do the job and so I gave it a shot. Tried it twice, now i’m trying to get others to do it…Trying to educate, agitage and it’s amazing….25 Other countries around the world have tried this tax simplification has worked everywhere it’s been tried and the american people would applaud across the board. Democrats, republican independent. They all know this tax code is a horror. A real deadweight on the american economy.

MC: and of course if people don’t know…Steve forbes is a long proponent of the flat tax.

MC: now let’s move back to investments and the stock market. How close do you think we are to a bottom?

Forbes: I think pretty close to a bottom. People who need the cash have sold in distress and that’s people’s moods are getting darker and darker and that’s usually a time when the market is reaching a bottom. So in terms of a of bottom at least in this leg…I think we’re almost at it if we’re not at it already. There are real bargains out there. There are survivors in the financial industry. There are some very big companies out there selling at distressed prices. You look at other industry. Look at boeing. Flush with cash selling at bargain prices. Look at what warren buffet is doing. He’s a smart guy. He plunked 3 billion into ge…5 Billion into goldman sachs. He’s probably looking at other bargains out there.

MC: is there any sector that’s immune to the downturn?

Forbes: you may find pieces here and there. You look at retailing. Walmart is growing a little bit…Not much but people do buy things. It may not be luxury items… But people do buythe essentials. You may find movies you may find some forms of entertainment that may do well in this environment. Export markets that are still working may do ok. But overall it’s a real downer and it’s not that the economy was inherently bad before this crisis hit… What we had was freezing up in credit. It’s similar to what you’d have if you couldn’t get water anymore. The reservoir is full…But the pipes are clogged.

MC: how long will this downturn last?

Forbes: the basic strengths of the economy are there…But we will be in a recession this quarter. I think it started in september if not august…It will go to early next year, but then things should start to really improve.

MC: what advice would give the small business to get through the next nine months successfully?

Forbes: watch that cash flow as never before. Small business people know better than big companies which is why some big companies get in trouble. Cash flow is the be all end all.

MC: how do we get an end to the housing crisis?

Forbes: well I think we’re near a bottom now. Before the credit crisis hit, which could have been avoidable. In calif. Bankers were noticing that when they sold foreclosed homes…The number of bidders that were coming was going up…So the bottom was beginning to be reached. If we just get a few things moving…This thing will start to heal.

MC: all right thanks. Always great to have you.

Forbes: thanks mary!