Mariusz Skonieczny is the founder and president of Classic Value Investors, LLC, an investment management company. He is also the author of Why Are We So Clueless about the Stock Market? Learn how to invest your money, how to pick stocks, and how to make money in the stock market.

I recently had the opportunity to conduct an email interview with Mr. Skonieczny. Here is our discussion.

Michael:  In one paragraph, why are we so clueless about the stock market?

Mariusz Skonieczny: We are clueless about the stock market because too often, we view the stock market as a casino instead of a place where people buy and sell businesses Stocks are not just pieces of paper – they represent ownership interests in businesses.

Michael: Can you define what value investing is and compare it to growth investing?

Mariusz Skonieczny: You are either a value investor or you are a speculator. What I mean by that is that growth is a part of the value equation. The faster a company grows, the more it is worth. So, you are either getting a good deal by buying something for less than what it is worth or you are not getting a deal at all.

Michael: Do you believe in market timing? Why or why not?

Mariusz Skonieczny: People are obsessed with market timing. It is difficult to time the market because it requires you to forecast what other market participants are going to do. Because investors are driven by emotions, how can you forecast what people will do next? I can’t, and I don’t believe anyone else who says they can. Market timers use technical analysis, but the problem with that is that it only shows you what happened in the past; it doesn’t tell you anything about what will happen in the future.

Michael: How does an investor really gain an understanding of his/her true risk tolerance?

Mariusz Skonieczny: If you choose to invest in the stock market, you must take risks, but the question is whether the risk that you are taking is worth it. If it is not, then you should not be investing. However, people have a misconception of what risk is. The investment industry defines risk as volatility in prices which is nonsense. Risk is not knowing what one is doing, not doing sufficient research, and overpaying for investments.

Michael: Why did you write your book?

Mariusz Skonieczny: Since I began investing, I have read approximately 300 books, and I wanted to write something that brought together everything I wished I knew when I began investing in one book aimed at those beginning their journey into the stock market. I wanted this book to educate the general public about investing because I believe that the investment industry is taking advantage of their lack of knowledge.

Michael: Who’s your investing role model?

Mariusz Skonieczny: I was introduced to value investing by reading about Warren Buffett, Benjamin Graham, and Joel Greenblatt.

Michael: I see you’re from Chicago. Cubs or White Sox?

Mariusz Skonieczny: I will have to disappoint you because I am not a baseball fan.

Readers: What’s your take on Mr. Skonieczny’s take?

One of the best parts of the weekly personal finance carnivals, including this week’s carnival hosted by WiseBread, it the wide variety of personal finance topics covered.  In addition, I always take the time to enjoy an article or two that I’ve been meaning to write myself but just haven’t gotten to.  This week was no exception, even if my post about The New Frugality made the cut. Here are my three favorites of the week:

J. Money from Budgets Are Sexy presents Paying extra towards your loans now, goes a long way later! This is so true it hurts. How much pain?  As J. Money says, “It’s like kickin’ compound interest in its head and getting away with it ”  How could you not enjoy?

Another favorite:  Save Money By Buying the “Good” Toilet Paper by That One Caveman. Two very important lessons from this title. First, you can never go wrong putting “toilet paper” in a blog posting title, something I learned a while back when I wrote Toilet Paper As an Economic Indicator last fall – still is a bizarre way to look at the world.  Second, sometimes paying for quality is actually cheaper than paying for quantity.  (Amazingly, this was also the theme of the toast my brother gave for my wife and I at our wedding, but that’s another story for another day.)

Money Lessons from Monopoly is another wonderful article.  Free Money Finance reminds us that Monopoly is a great teacher not only of the importance of cash-flow (how much fun is it to mortgage our properties?) but also of luck (the frustration of your opponent consistently missing your hotels as he marches around the board).

Quick FYI: The Total Candor web site was featured in the Philadelphia Inquirer over the weekend for savings help.  Did you see it?  If not, see it now.

A headline on page one of today’s Wall Street Journal reads “Rally Sends U.S. Stocks Into Black For the Year.”  If that sounds unlikely, that’s because it seemed impossible just a few weeks ago.  But, as I mentioned last week, you should always expect the unexpected.

In recent months, I’ve seen several articles claiming the end of buy and hold investing, many at reputable sites and newspapers.  I’ve agreed with none of them.

You: Really?

Look, I’ve been disappointed by the significant negative impact the “buy and hold” strategy has generated on my portfolio over the last 18 months or so.  However, I’m honest enough to admit that I wouldn’t have had as much money to lose in the first place had I not benefited from the exact same strategy over the several years leading up to that market chaos.

Unfortunately, many of my peer investors have abandoned the “buy and hold” investment philosophy. As many experts have correctly pointed out, to be successful as a market timer (the only other choice besides following the “buy and hold” approach and avoiding stocks entirely), you must be correct twice:

1. When to get out of the market
2. When to get back in the market

Personally, I don’t think anyone is that smart (or lucky.)

Yes, some people got out of the market a year or two ago, and other folks 9 months ago. Still others waited until February or March of this year before finally bailing.  But if you got out of the market at any time and still haven’t yet got back in, you’ve missed something.

You: What could I have possibly missed?  The market is still way down.

From it’s historic highs, it certainly is way down.  But is that really the best measuring stick?  As you probably know, the NASDAQ, for example, hit its high of over 5,000 back in March of 2000.  Does that mean that it was a bad investment for every year since March 2000 (it’s currently at about 1,763.)?

You: Maybe.

Are you going to wait until it gets over 5,000 to invest in NASDAQ stocks again?

You: Should I?

How much time do you have?

You: Huh?

It could be many more years – or even decades – before we see the NASDAQ trading at over 5,000. In the meantime, the NASDAQ would have to more than double to get there.  If you wait until the markets are at their highs, you guarantee yourself that you “buy high.”  I’m obviously not into market timing, but you can see that such an approach would lead you to choose among the worst possible times to jump into a market.

With that in mind, here are the most telling statistics from the page one WSJ article:

Back on March 9, the S&P 500 and other indexes were at 12-year lows.

The S&P 500 has jumped 34% since then.

The S&P 500 is still down 42% from its record close on October 9, 2007.

Two questions for you:

1. Did you sell everything on October 9, 2007?
2. Did you put all your cash back to work on March 9, 2009?

If you can answer yes to either one of these questions, please consider:

• Donating part of your fortune to a worthy cause.
• Stopping lying.

Keep in mind that just because I advocate “buy and hold” investing, it doesn’t mean you can ignore the markets.  Choosing an appropriate asset allocation is critical as is annual re-balancing.  You can choose to receive assistance in managing your money, but you can never delegate total responsibility.  No one will ever care about the size of your portfolio and the risk associated with as you do.

Thoughts?

You might already know that I’m a pretty big Red Sox fan.  This weekend’s series with the NY Yankees was filled with a lot of unexpected events including a 2 run bottom of the ninth comeback, a 16-11 game (during which the Red Sox once trailed 6-0) and in my mind the craziest: Jacoby Ellsbury’s dramatic straight steal of home.

Depending on who you listen to, the last time a Red Sox player stole home was either 10 or 15 years ago. Regardless, it’s an incredibly rare event, especially when you consider how many games the Red Sox play every year.  And while it’s truly special to see it, if you watch enough baseball, you will, sooner or later, see it.

You: What’s this got to do with personal finance?

Plenty.

Expect the Unexpected

Emergency Funds are for Emergencies

To all those people who never feel the need to create an emergency fund because they’re super-confident in their job security: get an emergency fund. Even if you’re never laid off, you could still get very sick or have an expensive accident.  At that point, you’ll need an emergency fund and won’t have time to create one.

Investing Means Risk – Especially When it Feels Risk-Free

To all those who feel they can stomach the potential incredible short-term volatility of the stock market and therefore invest very aggressively even if they’re nearing or in retirement:  Open a newspaper.  Stuff happens.  Was any of it truly expected? Heck no and certainly not the actual combination of events that led to the most recent market meltdown.  Was something crazy going to happen sooner or later to spook the market? Of course.  Invest for your age and true risk tolerance.

Never Risk a Lot for a Little

To all those who don’t have renter’s insurance because the odds of something going wrong are so low and because they don’t own too much anyway: Just go buy the policy.  Since the odds are low, the cost of coverage is cheap and I can practically guarantee that, although you might not have much, losing all of it would be financially devastating.

Of course, there’s a good chance that you won’t need to tap your emergency fund, experience another tremendous market correction, or survive an apartment fire in the next few months, years, decades, or, perhaps, ever.

It was also quite possible I’d never see a straight steal of home – especially from a few hundred feet away.

Expect the unexpected. Sooner or later, it happens.  I was glad to be there for Ellsbury’s accomplishment, but I’m not looking forward to any of the other events I mentioned above. But I’m prepared. Are you?

This is a guest post from Grant Baldwin, the author of Reality Check, a book about helping students transition into the real world.  His new website, BrokePiggy.com, answers questions from teenagers about personal finance, savings, and all things money.

This series “12 Things Every Teenager Needs To Know About Money (And How To Teach Them)” is a community blog experience.  This post is only one of the 12 points in the series so to view the other 11, please visit the list of links below.

Living On A Budget Isn’t An Option

Ah, it’s time to discuss the dreaded ‘B’ word.  Not that ‘B’ word you filthy animal…get your head out of the gutter!

In order to be successful with money, you really need to have a budget.  It becomes a roadmap to guide your decision-making and your spending habits with your finances.

But I’m sure like most people, you and your teenager probably aren’t math nerds who stay up late into the night coming up with new ways to solve expert-level Sudoku puzzles.

I don’t do that either just so you know!

But whether you’re a math whiz or you still count on your fingers and toes, you need a budget. Most teenagers are more like free spirits who prefer not to live in the confines of a budget (I wonder if they learned that from their parents…hmmm…I’m just saying).  So how do you teach a teenager to budget?  Let me help young grasshopper…

·     Start Now With What You Got – Budgets aren’t just for millionaires or people who make over minimum wage.  Budgets are for anybody and everybody who has ever had a dollar (that would be all of us in case you missed it!).  Same with the concept of giving, if you don’t budget when you make $100 per week, you’ll never budget when you make $10,000 per week (don’t forget about me when you do).  I know expenses are limited and income is small, but establish that habit now to make a budget.

·     Do It On Paper – I like gadgets and gizmos. And oddly enough, I kind of like spreadsheets.  Spreadsheets are great for creating budgets, but don’t start off there.  Start with good ole’ fashioned pencil and paper. Why?  Something changes when you have to do the math by hand and see where your money is going.  It forces you to really think it all through and make better decisions with your finances.

·     Use The Envelope System – If you’re unfamiliar with this idea, basically the concept is to pay for as much as possible with cash.  After you’ve helped your teenager to establish their budget, find categories that can be paid for in cash.  Things like gas, eating out, movies, etc.  Make an envelope for each of those categories and put the budgeted amount of cash in each.  Then pay for items from their respected categories out of these envelopes. Paying with cash is tougher than swiping a piece of plastic and will also help your child to better manage their money, because when that envelope is empty, their spending is done.
Here are the rest of the articles in the “12 Things Every Teenager Needs To Know About Money (And How To Teach Them)” series:

• Money Doesn’t Grow On Trees @ Bargaineering.com
• Two Words: Compound Interest @ PoorerThanYou.com
• Delay Gratification To Succeed @ GatherLittleByLittle.com
• Credit Cards Will Steal Your Lunch Money @ PTMoney.com
• Should You Earn A College Degree @ TheDigeratiLife.com
• Spend Money Based On Needs Not Wants @ MoneyNing.com
• There Is More Free Money Than You Realize For College @ FreeFromBroke.com
• Taxes Are A Necessary Evil In Life @ MoneySmartLife.com
• Do What You Love, Love What You Do @ GenXFinance.com
• Don’t Be A Tightwad: Give Generously @ CashMoneyLife.com

This is a guest post from Grant Baldwin, the author of Reality Check, a book about helping students transition into the real world.  His new website, BrokePiggy.com, answers questions from teenagers about personal finance, savings, and all things money.

Market timing is dangerous.

You: You’ve said so before.

Indeed, it’s one of the key themes of my chapter about investing in Beyond Paycheck to Paycheck.  I bring the topic up again now for two reasons. First, because there are many people these days who, due to the yucky markets –

You: Yucky?

Yes, yucky.  Yucky is an increasingly used work in my house where there are two little girls under four years old.  Anyway, because the markets have been so poor for so many months (notwithstanding the last couple of weeks), I’ve spoken to several investors who have started to poo-poo the

You: Poo-poo?

Not that kind of poo-poo.

You: Pooh-pooh?

No, not Winnie either.

You: You have a strange house.

Thanks for the news-break.

Many investors have begun to look down upon the tried-and-true concept of buy-and-hold investing. One fact accelerating this trend is, that over a reasonably long period of the last ten years, bonds and money market funds have outperformed stocks.

You: Ugh.

I know.  Well, at least that was true two weeks ago before the recent market run-up.

You: What’s the second reason you’re bringing up the dangers of market timing now?

As I read through this week’s Carnival of Personal Finance and looked for the best article of the week, I read The Financial Blogger’s 3 Reasons Why You Should Not Do Market Timing.

TFB could have come up with many more reasons, but three is quite enough.  If you’re thinking about timing the market, take a deep breath, re-read this post, then read 3 Reasons Why You Should Not Do Market Timing and, provided you still have a long-term time horizon for investing, commit to staying rational, no matter the day-to-day pain.

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Think about bailing out the market?  Already done so? Have the last few weeks tried your patience (if you were out of the market), or give you (more confidence in your previous decision to stay in?)

I recently recorded a second series of podcasts with the Quicken team.  Topics included:

• Emergency Funds and Large Purchases
• How to pay off and manage debt
• Investment Advice

You can also listen to them on itunes by searching for Quicken. Or download them and listen to them later, like when you’re not supposed to be working.

Always welcome your feedback for new topic suggestions or anything else you have to say.

Free Money Finance hosted this week’s Carnival of Personal Finance featuring my post Economic Stimulus – What’s in it for me? where I answer the question “Is the new stimulus a big deal for you?”

It’s Friday, so it’s time for this week’s reader-submitted Q & A. If you’d like to submit a question, click here for more information or simply email a question.

My wife and I are going to receive a hefty income tax refund.  We didn’t adjust our W-4’s properly until September ‘08 (after we read Beyond Paycheck to Paycheck), and by then we had already overpaid.

We have been saving aggressively but are still 4-months short of a 6-month emergency fund; I also have an unsubsidized student loan at 6.8% interest and a Roth IRA I haven’t funded in a long time. Meanwhile, Wall Street is having a huge sale.

My wife’s job is very secure, so I don’t believe the emergency fund is as crucial for us as for some people right now, after I get done grad school I am going to be a teacher in Philadelphia public schools district.

So, what do I do with my tax refund?

- Jeffrey R., Pennnsylvania

Short Answer: No one ever expects an emergency. If you did, it wouldn’t be an emergency.

Detailed explanation: Jeff, it’s great that you’re viewing your finances broadly.  Your long-term holistic view will be a key ingredient in your ultimate financial success.  Your question, while partly an investing question, is also one of financial priorities.  While you and your wife have strong job security as teachers, events other than sudden job loss cause financial emergencies. Such possibilities include car accidents, a health issues, and expensive unplanned home repairs.  While job security reduces one key concern, it does not eliminate all of them.

I, along with most financial planners, recommend a minimum of three months of living expenses for an emergency fund.  Those people who are self-employed are better served by having a year’s worth set aside. Most employed individuals can be comfortable with about three to six months.  Keep in mind that the number of months included in the emergency fund is necessary living expenses, not income. In a true financial emergency, you don’t spend money on discretionary items, so living expenses include only rent/mortgage, car payment, groceries, utilities, child-care, and other monthly payments you can’t change in the short-term.

Your sizable tax return may instantly give you the ability to get your emergency fund to an appropriate level.  If you’re left with additional funds, I’d consider saving for retirement, either by increasing your 403(b) contributions (tapping into your income tax refund to make up any cash-flow shortfall) and/or establishing a Roth IRA.

Since you’re decades from retirement, you have a long-term time horizon and the majority of your investments should be equities to take advantage of this fact. That “Wall Street is having a huge sale” is just gravy when you’re investing long-term. (If you would have asked is this a great time to buy given that you want to sell in five years for some other non-retirement goal, I would say “I have no idea.”)

Good luck, Jeff, and thanks for submitting your question!

That a US Airways plane landed safely in the Hudson River saving all 155 people on board is beyond simple explanation.  A headline describing a plane losing both engines is supposed to be followed by an article featuring words like “tragedy” and “death,” and phrases like “much too soon” and “unfortunate victims.”  I doubt anyone actually on the January 15 flight will ever read what I write here, but there are plenty of lessons for the rest of us.

What We Learned From The Pilot (Chesley B. “Sully” Sullenberger)

Lesson One:  Realism Matters

By some accounts, the pilot momentarily considered landing at an airport (perhaps returning to LaGuardia or proceeding on to the other side of the river and Teterboro, New Jersey).  But Sullenberger quickly eliminated an airport landing as more risky than putting down in the river.  Rather than stay in denial or try to “force a recovery,” he chose to make the best of a particularly bad situation.

Financial lesson:  If an investment is no longer attractive because the facts have changed for the worse, be realistic.  Don’t try to get back to where you started – it’s irrelevant to your current situation.  Make the best of your facts.  Sell the loser and go with a different investment, a plan you truly believe in now.

Lesson Two: Know What You’re Doing

Sullenberger was no rookie. With 29 years of commercial aviation experience preceded by a career as a fighter pilot, he’s clearly an industry veteran.  But it’s hard to imagine he ever practiced descending into a river, as he did successfully on the 15th. Still, I’d bet dollars to donuts he’d contemplated, on numerous occasions, landing a plane with no engines.  Not necessarily in New York and not onto a river, but the concept of powerless flight is something he probably considered with all the hours of flying experience and training under his belt.

Of course, he was caught off guard.  But he possessed an immense amount of experience to draw upon when he  encountered something no one ever expects to have to deal with. No one wants a rookie pilot at the helm during that kind of episode.

Financial lesson:  Understand what you’re doing in the markets before you take a substantial risk.  If you simply can’t wait to get the experience you need, bring an expert with you (like a mutual fund manager or a highly regarded financial advisor that you’ve vetted personally.)

What You Can Learn From The Passengers of Flight 1549

Lesson Three: Stay Calm

There have been no reports of pushing and shoving to get out of a plane that was rapidly filling with water.  Think about that for a minute. Remember the tragedy at the Wal-Mart store over Thanksgiving where an employee was trampled by eager shoppers?  Now here we are with a life or death situation and women and children get out first from a plane sitting in rising water.

What an amazing contrast.

Furthermore, no one tried to jump out of the window when the plane was just a few feet above the water.  When it became apparent that there was little room on one wing for standing passengers, some passengers simply went to the other wing.  All this despite ridiculous cold air and water temperatures right after a six-minute flight from hell.

Calm.

No doubt the flight attendants led by example.  Fortunately, people clearly listened to their reason not to their own emotion.

Financial lesson:  If you’re in a really bad situation through no fault of your own, that’s not the time to ask “Why?” Instead, ask “What can I do to get through this?”  You can ask “Why?” later.  For now, ask “What can I control?”  Making important decisions while you’re not thinking straight is a recipe for disaster. Find a way to take a deep breath, look for solid guidance from those who’ve been trained to deal with a situation like the one you’re in and take one step at a time, be it out of debt, out from under a bad investment, or onto a financial life raft.

Lesson 4:  Have Faith

While the majority of the people on the plane couldn’t have completely appreciated what was going on as it happened, they clearly understood their predicament as a life or death situation; one in which death was the more likely outcome of the two.  Over the three minutes the plane descended after the collision with the birds, there was incredibly little, other than by staying calm and by praying, the passengers could do to increase their odds of survival.  They must have felt incredibly frustrated and powerless.   Yet by having faith in the pilot and flight crew, they were able to survive not only the water landing, but also the aftermath.

Financial lesson: We had the worst stock market year in decades during 2008.  There was little you could do to avoid being hit and being hit hard.  Most of the passengers will fly again and my guess is that some have already made it to Charlotte or beyond.  Likewise, you must once again get in the market (if you left it). You can get to Charlotte by driving in the same way you can get to retirement without stock market investing, but it will take you a lot longer and that path is fraught with its own set of risks as well.  Believe in what you are doing and you will get there, even if it’s bumpy at times.

Lesson Five:  The Unexpected Happens

Many of us just learned that birds take out jet engines with apparent regularity.  I suppose the FAA also knew that it was theoretically possible – but highly improbable – that birds could take out both engines at the same time.  Yet with enough flights and enough years, my unfounded mathematical conclusion is that such an event was likely to occur – eventually.  Maybe not on 1/15/09 on a flight from New York to Charlotte, but sometime somewhere.

Financial lesson:  Just because it’s unlikely doesn’t mean it isn’t possible.  You could have your identity stolen – protect it.  You could be laid off – save for an emergency.  Stocks could go down further in value – diversify.  You could become disabled or die early – have appropriate disability and life insurance policies, not to mention a will.  If birds could take our two engines at one time, you could be simply unlucky.  Will you be ready for something unfortunate to happen?  Sooner or later, it will. Be prepared.

What a wonderfully happy ending to this absurdly unlucky flight crew and passengers.  It would be a shame if we didn’t learn from it.  I’m sure they did.

Continuing on my year-end theme, I blogged yesterday about using your FSA funds before losing them.  Previously, I discussed the importance of maximizing your match in December.  Today’s tip, and one of the most commonly discussed, is those capital losses.

You: What are capital losses?

When the DC hockey team plays the Bruins.

You: What?

Forget it. Inside joke.

You: This is a blog.

Yeah, might be the last time I try the inside joke thing.  Getting back to it: capital losses occur when you buy an investment and then sell it for less.  Such investments could include stocks or mutual funds.

You: Like in my 401(k)?

Although you may very well have investments in your 401(k) that have gone down in value and that you chose to sell at a loss, such losses aren’t the capital losses I am talking about.

You: Why not? That’s what I want to talk about.

Sorry, but this post isn’t about year-end strategies concerning your 401(k) losses. Today, we’re talking about stocks and mutual funds you own outside of your retirement plans.

You: Again, why?

Because selling the stocks and mutual funds you own outside of your retirement plans at a loss can potentially reduce your taxes. Selling the investments held inside a 401(k) or IRA won’t do that.

You: Why?

Who am I talking to today, Bryant Gumbel?

You:  No. Bryant who?

Forget it.  Since your 401(k) and IRA accounts grow tax-deferred, you don’t pay tax when you sell investments within the plan that have gone up in value (gains).  On the other hand, if you sell such investments at a loss, you don’t get to deduct that loss either.  (Note: there are very rare exceptions to this rule, but you typically need to nearly liquidate your account, not a good retirement planning strategy.)

Investments you sell within a taxable account lead to either capital gains or capital losses. This year, most people who are selling investments are selling them for less than they originally paid.

You: Thanks for that insight, Mr. Madden.

Touche.

The year-end strategy here is to make sure that if you are sitting on investment losers in your taxable accounts which you are considering selling, to do so prior to December 31.  You can deduct your capital losses up to the total of any 2008 capital gains plus up to $3,000 of ordinary income.

You: Ordinary income?  My income certainly feels very ordinary.

Ordinary income has a tax definition and includes your salary, bonus, even interest income.  So selling an asset triggering a loss of $3,000 or more means, for tax purposes, that  you made $3,000 less than you actually di.

You: Works for me.

Just make sure you don’t sell something just for the tax benefits.

You: Right.  Can I sell an investment and then buy it right back?

Yes, but if you don’t wait at least 31 days before buying it back, then you can’t deduct any loss.

You: Why not?

Because then it is known as a “wash sale” and the rules say you can’t deduct losses from wash sales.

You: Is that where the phrase “It’s a wash” comes from?

I don’t know.

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How many obtuse sports-related jokes can you identify?  Are any of them actually funny?

What about personal finance comments?  Ever sell something and then realize that wasn’t such a good idea after all?