All jesting aside, these fools are optimists

Since its founding in 1993, The Motley Fool has become one of the most successful multimedia financial-education firms.

Created by two brothers, David and Tom Gardner, the enterprise, based in Alexandria, Va., has included a popular financial website (www.fool.com), a number of books, a syndicated newspaper column, and a weekly program carried on National Public Radio.

Often sporting jester hats, sometimes humorous in their analysis, definitely iconoclastic in outlook, the Gardners believe that investors should be well informed and financially literate – heeding the old cliché that a fool and his money are soon parted.

So when it comes to your finances, they are telling investors, be a wise fool.

Earlier this month, the Gardner brothers visited New York to promote their latest book, "What To Do With Your Money Now." They shared their views on the stock market – and the steps investors might take to preserve their assets in the current turbulent setting.

Is this an usually severe stock-market downturn, or a more typical downturn – with a correction to the upside finally under way?

Tom: For the economy, this is not an unusually painful downturn. For the stock market, this is a very painful period, particularly for those people who are invested in the Nasdaq market. Even the S&P 500 is down 20 percent over the past year. One of the reasons we sat down and wrote the book is that there are 75 million baby boomers who are within 10 to 20 years of their retirement. They are going to have to work longer and plan better, starting now, if they are going to be on top of retiring.

David: Many people only began investing in the past five years. This is their first time being exposed to a bear market. So we felt it was time to write a book that said, "Hey, our stock portfolio got cut down, too. That's the way it works. Don't sell at the bottom. Don't overreact to short-term events."

What's your outlook for the months ahead?

Tom: The market has come back from Sept. 11, but if you look at this year from Jan. 1, we're still down about 10 percent. It's very difficult for us to make any estimate based on the short term. But investors should look long term. Take an interest in what Warren Buffet is saying. He's pegging his pension fund to 6.5 percent growth per year. Maybe we will be in an environment where your real rate of return will be lower than in the 1990s, say, about 6.5 percent, not as high as 8 or 9 percent, as it has been historically.

So its sounds like careful selectivity of investments will be the key to financial gains in the period ahead.

David: I think that's a good way of always thinking about the stock market. Think of owning the stock market through a good index fund; if not, then think about carefully selected individual stocks. Even in a bear market, there are companies that do well. Talbots, the woman's clothing store, for example, has doubled in value over the past three years.

Which do you like better now? Stocks, bonds, a blend?

David: We're big fans of the stock market. People should own a total stock-market [index] fund. The investors are going to pay one-sixth per year in expenses for what they would pay for a professionally managed fund and, based on history, they will likely do better than the majority of those funds. Those who go out and buy individual stocks [will] want to have some recession-proof companies in their portfolios, whether its a supermarket stock or a company like [warehouse club] Costco, where people are going to find substantial price discounts.

Is it time to get back into tech?

David: It's probably time to buy the Nasdaq if you are thinking of 10-plus years, because there has been such an erosion in the value of those [firms].

What kind of technology stocks?

Tom: Consumer-technology stocks. In fact, I like consumer everything. Take Electronic Arts company. They basically are a software [games] company. That company has done very well. At this point, video games and computer games are actually bigger than Hollywood. The box office for movies is about $8 billion [annually]. The market for the video-gaming platform, including hardware and software, was $9 billion last year.

And the Nasdaq 100 – Microsoft, Intel, Oracle?

Tom: I'd be inclined to invest in Microsoft rather than to take some of the first-tier technology companies. Microsoft is just such a well-managed company.

David: Also, the companies that have a lot of cash are pretty good defensive investments. Microsoft has a ton of cash. What is it Tom, $25 billion?

Tom: If you compare that to AOL-Time Warner, they are on opposite ends of the spectrum. AOL-Time Warner has more than $25 billion of debt.

We seem to have a problem of public accountability these days. Where do investors go to get good, reliable information?

David: Look for independent analysts. You're talking to one. That's been our relevance for eight or 10 years now. Independent voices matter more now than ever before. There are many independent voices now: Value Line, Morningstar.

Tom: You're asking the right question: Where do you turn? Reading Berkshire Hathaway's annual letters to shareholders for the past 20 years, or investment books, are great ways to learn without being caught up in the daily hype of the market.

What about investments beyond stocks – CDs, money-market funds, US Treasury I Bonds?

Tom: One of the things we write about in the new book is the need for people to have three to six months of emergency savings, which should be put in a money-market account or perhaps a short-term CD. Most people that have run into problems have told us that they didn't have that. They lost their job or they ran into personal difficulty and what did they have? Just a couple of months of cash set aside.

David: So having 90 to 180 days of cash set aside should be a core investment for everyone.

What's the mood of the public that you are discerning? Are people grim, or becoming optimistic?

David: It's hard to generalize. A lot of them probably reflect our basic optimism about the American economy and the American stock market.

Tom: If you can generalize about the group, they are probably 45 to 55 in age and their 401(k) plans are down.... They're not throwing their hands up in despair, but they are trying to figure out what to do next. Their philosophy has changed. They are ... being conservative with their money. They would rather see actual 7 percent growth than the potential for 40 percent growth – or a 40 percent decline.

And the bottom line from you two seems to be general optimism on the market and the economy.

David: Yes, it's a mistake to be pessimistic. A lot of people are afflicted by the 'rowboat syndrome, ' a great phrase from John Bogle [founder of Vanguard Group]. They are paddling down the river looking backward. They think that whatever has happened in the past six months is what's going to happen looking forward. But they are going to be entering new territory. They should be looking ahead.