There is a popular belief that knowledge is power.  This sentiment is the motivation behind most programs of education that endeavors to create a more knowledgeable workforce.  It is certainly true that knowledge creates vast potential and opportunity.  But it is also true that there is one major piece that still needs to be added in order for opportunities to be realized.  Knowledge must be accompanied by intelligent action to produce results. This insight is extremely important for the emerging workforce of the twenty first century.  The reasons for this is because there is a growing belief that compensation should be based on what you know, instead of what you do with what you know.

The pervasive impact of this fallacy creates large masses of highly educated people that perpetually complain about the insufficiency of their wages while the creative capacity of their minds lays dormant, because of a terminal unwillingness to act. Typical manifestations of this situation occur when large amounts of people attend ‘boot camp’ seminars on subjects like real estate investing, or stock market investing and then spend large amounts of time and money learning about elaborate strategies, but fail to act on what they have learned.  Another version of this situation happens in the world of large corporations. There is an increasing population of people who focus on ‘strategic vision’ and 5, 10, 25, 50, 100, or 500 year business plans.  However, all of this ‘strategic thinking’ is ultimately useless unless it drives real, tangible action.

This is not to say that people should stumble through life without vision or strategy.  It is not to say that all thoughts of the future are useless and frivolous.  What I am saying is that strategy, vision, and all other forms of long-term thinking are only useful when they are acted upon.  Because of this, we can see that knowledge only represents potential power.  It must be accompanied by intelligent action to produce meaningful results.

 

As this post is being published, the Dow Jones Industrial Average has closed below 10,000 placing an exclamation point on what many people fear to be a foreboding of future economic sluggishness or even the dreaded ‘double dip recession’.  Throughout 2010, the stock market has been abnormally volatile, with no clear up or down trend.  This phenomenon demonstrates the extent to which the financial marketplace is uncertain about both future economic prospects and the actions that the government and federal reserve may (or may not) take to help (or harm) the economy.

Dow Jones market value trend from WSJ

In addition to all of these market concerns over economic fundamentals, there is an additional specter facing investors.  Unless congress acts in the remaining sessions before the end of 2010, federal taxes on long-term capital gains will increase from 15% to 20% in 2011.  It is important to note that this is not a “5% increase in capital gains taxes” as some on the left attempt to characterize the initiative . . . it is a 33% increase in taxes on capital gains.  (5% tax increase divided by a 15% current tax rate = 33% increase)

Unless action is taken to address this problem soon, there is likely to be a large amount of investors who sell their stocks and mutual funds to lock-in their gains at the current favorable tax rates.  As this unfolds, it may push the stock market into a temporary downward spiral where people taking gains push down the value, which compels more people to capture gains before the value goes down even more.  When this phenomenon combines with the generally unpredictable nature of government action, it could create the conditions for a second recessionary dip.

Action Item: Consider diversifying some of your stock market assets into cash so that you have capital available for strategic buying opportunities that emerge if an investor sell-off to lock in profits at favorable tax rates pushes the stock market value below a level that reasonably represents its underlying fundamentals.

 

Act Now . . . Limited Time Offer . . . Buy Today . . . Offer Ends in 24 Hours.  How many times do you see or hear one (or more) of these lines every week?  What these sales pitches are trying to do is influence you to buy NOW instead of waiting until later.  It is certainly true that you may be ready to make the purchase that you have been contemplating now, but it is also the case that you may want to think about it some more or wait until you are in a better financial situation.  However, you feel worried that if you don’t act now it will result in losing out on a great opportunity.  In one way of thinking, this is a valid concern since deals do expire . . . but in another way of thinking, this is a minor concern since new deals come along every day.

This principal not only applies to purchase opportunities, but investment opportunities as well.  There is always pressure to act today on the great stock deal or the great real estate deal.  If you are educated, prepared, and ready to invest then today may be the right time.  However, if you do not feel comfortable with the investment yet, it may be best to wait since there will always be another deal . . . it’s just a matter of finding the right deal when you are ready to act.

It is worth mentioning that this is not a recommendation to avoid taking action . . . instead, it is a call to do your research first so that when you take action it can be done boldly and confidently.  Finding deals will always be important, but deals come and go.  In the end, it is far more important to make sure that you are ready for the deal than finding the deal that is ready for you.