TIPS (and Other Tips)

Paul Langley: ‘You are plagiarizing yourself!! The tip you published last week about not having to enter the http://www and .com was originally published in your column on March 8, 2001. I use this tip all the time and I remember I got it from your column so when I saw it again, I checked the archives and sure enough there is was. I hope you aren’t turning into Dear Abby (or was it Ann Landers? I can’t remember, but one of them reran columns without noting they were reruns and caused quite a stir).’

☞ You mean people actually read these columns? And remember them? I hereby extend your subscription by a full week.

Another tip you’ve found here beginning with May 12, 2000, and repeated several times since, was to buy Treasury Inflation-Protected Securities – TIPS. At the time I first suggested them, they yielded 4.25%-above- inflation. Since then, TIPS have more than held their own while the NASDAQ index has fallen more than 60% and the Dow, 23%. Indeed, last March this column suggested the 30-year TIPS yielding 3.375%-above-inflation and selling at 99 cents on the dollar. Today they sell at $1.15, so you are 16% ahead on the price plus a little more than 3% in interest.

(Those of you who chose to buy I-Bonds instead, as first discussed May 15, 2000, have also done OK.)

So the question naturally arises – what about TIPS now? And my answer is: you could do worse. The risk is a bit greater (the 30-year bonds that have risen to 115 could drop back to 99 or even lower … though I doubt they will, and they would eventually be redeemed for full inflation-adjusted value). And the return is somewhat less (instead of 4.25% or even 3.375% above inflation, the premium they command means that you will get more like 2.5% above inflation). And there is still the nuisance that the inflation adjustment is reported as taxable income each year even though you don’t actually receive it until you sell.

Still, TIPS remain a very conservative place – some would say a too conservative place – for, say, a bedrock portion of your retirement plan.

(To get a rough idea of what these bonds are selling for on any given day, click here – and scroll down to the very end of the page. Note that where you see something like “115-20” as the price of the bond maturing April 15, 2032, that does not mean the bonds are trading “around 115 to 120.” It means they are trading at around 115 and twenty thirty-seconds. Treasuries have traditionally been quoted in “thirty-seconds” of a dollar. For those of us with fewer than 32 fingers and toes, this has always come unnaturally; but the thing I like about it is that I get to call them “two-nies.” Sixteenths are “teenies.” I can’t imagine this will last much longer, so enjoy it while you can.

Let’s face it . . . I’ve been a bit glum in my financial/economic outlook for quite some time now. (Personally, I inherited the happy gene; but that’s a different story.)

Some of you may think my bearishness is simply borne of Al Gore’s loss, and I’ll admit that’s part of it. I think the borrow-and-spend, regulators-be-damned Republican stewardship of the economy has been just dazzlingly, breathtakingly bad. (And this is something they were supposed to be good at?) But really long-time readers will recall my urging Dorothy to sell her Amazon.com shares at 400 and at 300 and at 200 and at 100 and at . . . well, you get the picture. Yes, Amazon is a wonderful company – I am still one of its best customers. But stock prices in the late ‘90s became a once-in-a-lifetime bubble and that’s made me a sourpuss in this space for a long time now, happy gene or no.

It’s been hard to know where to put our hard-earned dollars (not that it’s ever been easy) – especially if we need some investment income to, say, pay the rent.

This past November 25, I again suggested TIPS, but also four stocks:

Real estate investment trust BF Saul, BFS, first mentioned here at $16.75 on May 3, 2000. It pays $1.56 dividend and was $23.25 or so November 25, up 38% – which is about where it was again this past Friday. I worry about the real estate market, but it still yields 6.6% and I have held much of mine.

Enterprise Production Partners, EPD, then $17.75, now $20.80, up 16% plus a few months of its hefty dividend.

Ferrell Gas Partners, FGP, then $20.50, just a few cents higher today, which yields better than 9%.

The Templeton Russia Fund TRF, then $19.60, about a dollar higher today.

With the Dow down 6% or so since November 25, these have done OK – so far. But there are some serious caveats to stress. First, I’m no expert in any of these securities. Second, I find that when I begin to gloat this way, it is a sign that a well-deserved comeuppance will shortly follow. Third, free advice is generally worth what you pay for it (although that’s a better value than you generally get for paid advice). Fourth, it makes little sense for most people to choose individual stocks – far better, for that portion of your funds which you wish to commit to the stock market at any given time, to go the no-load, low-expense index mutual fund route, at least for most of your stock market money.

As for other stocks that I’ve gingerly brought to your attention from time to time, there is the natural tendency for me to forget the ones that did terribly . . . so I ask you to remind me and I will own up to them later this week if you do.

One of you, I know, paid $11 a share for BOREF, a stock that I have been telling you from the very beginning is surely going to zero (not least because I own a ton of it). It was trading at around $3 when I first wrote about it and is trading at around $3 today – a virtual blue chip when compared with the Standard & Poor’s 500, down 38% in the same time period. Indeed, it has been trading not far from $3 more or less the full four years except for that one day one of you put in a “market order” – meaning you would pay any price – for 500 shares (or some number like that), this with a stock that sometimes trades no shares at all for a day or two, but which had just then gotten noticed by a potential customer no less august than Boeing. So your elephantine 500-share order, combined with what could easily have been four or five others, drove the stock up to a momentary, glorious, wind-rushing-through-its-hair $11. It was grand. (In future, always use limit orders for thinly traded stocks.)

If BOREF some day gets back to $11, I will not sell. As I’ve said all along, this is a wild speculation. I will either sell much, much higher or, far more likely, watch the stock fall to zero. Still – here comes the fate-tempting hubris again – I would like to point out to all you securities analysts and portfolio managers who were earning millions of dollars a year recommending Cisco to your clients at $42 the same day I was being paid nothing to write up BOREF at $3, that BOREF is still $3, while CSCO is $13, down 75%.

Now watch me fall down a flight of stairs or something.