Enough with the politics! Let’s talk about money.

The first thing to say about money (‘enough about me, let’s talk about you, what do you think of me?’) is that Warren Buffett, who has $43 billion, has endorsed John Kerry.

Those of you who think Buffett is good at judging management talent and discerning value, please take note.

In the same ‘Today Show’ clip yesterday, he said he was delighted with his friend Arnold Schwarzenegger’s performance as Governor of California (so Buffett, whose father was a conservative Republican congressman from Nebraska, is not above endorsing Republicans).

And he agreed that the economy is showing signs of real life. And why wouldn’t it be, he implied, considering all the fiscal and monetary stimulus that’s been heaped on.

But it is that stimulus that has him, and others, a bit worried about inflation.

If it comes, you have two problems:

  • As a consumer, stuff will cost more.
  • As an investor, interest rates will rise and your bonds will automatically fall (in the same way that a glass automatically gets more full as it becomes less empty) and your stocks will have to swim upstream. The current will be against them, because the yield from safer alternatives, like bonds, will be more attractive.
  • Just which way stocks would go depends on the strength of the swimmer (things like corporate earnings, dividend hikes, and investor psychology) and the strength of the current (namely, just how high long-term interest rates, which tend to sit atop inflation expectations, go).

Stocks can definitely rise with mild inflation expectations and moderately higher interest rates, when people feel that prospects are good. And they may feel that way.

But there are also clouds on the horizon, such as:

  • our massive budget and trade deficits – incurred not to invest in our kids or our infrastructure, but to give tax cuts to the wealthy and finance the world’s war on terror (having failed to inspire the world to share much of the cost);
  • the loss of jobs to eager, capable workers in India, China and elsewhere – which will ultimately make us all more prosperous, but in the short run may become even more of a drag on the job market and consumer confidence than it already has;
  • the uncertainty caused by the election – and the knowledge that ‘tough medicine’ is often taken, when it is taken, in the first two years of a President’s term, not the last two. (This would be true of Bush or Kerry, although it’s also historically true that the economy and stock market do better with a Democrat in the White House than with a Republican.)

So there’s reason for optimism, but at least as much reason, in my view, for caution. (This is what happens when you get old. You get cautious. That picture of me, top left? Taken in 1953.)

Real estate would eventually bob above inflation in most places, even if higher interest rates temporarily led to rough times. But in places with the crazy prices we’ve discussed in recent weeks . . . well, who’s to say that the condo that was $200,000 three years ago and $550,000 last week could not be $200,000 again? Or $350,000, anyway?

I’m not predicting this, but I wouldn’t rush to buy at today’s prices.

So what to do with your money?

The smartest short-term investment I can think of (after paying off all-your high interest debt) is to keep your money on the sidelines someplace safe, like a bank.

The safest long-term investment I can think of (which is not necessarily the same as the smartest) are Treasury Inflation Protected Securities (TIPS), like the 3.375% TIPS maturing April 15, 2032, first suggested here a couple of years ago at 100 that I suggested selling in part at 132 a few weeks ago. They may certainly have further to fall, but are now more attractive again at around 119. At that price (which will eventually wend its way down to 100 on April 15, 2032), you are assured about a 2.4% return on top of inflation. I won’t reprise all the pluses and minuses, ins and outs of TIPS here, but you can use the Search feature of this web site (lower left) to find past columns and click here to see current TIPS prices (scroll down just below the chart to ‘Inflation Indexed Treasury’). If you decide to buy, you would want to do this only within your retirement plan, and would do it by calling your broker.

A less safe but I think still quite conservative long-term investment remains timber, via shares in Plum Creek Lumber (PCL) – not as attractive at its closing price of $30.20 last night as it was last August at $26.50; but 20 years from now, what difference will that make? And better at $30.20 than the $33 it touched just five weeks ago.

A wildly risky investment I still like for the long-term is Borealis (BOREF), which will make veterans of this column roll their eyes (‘poor boy – and he had such a promising career’), but which continues to report progress. The stock is around $7, up nicely from where most of us bought it, but that’s not the point. This isn’t a stock you buy for a double. This is a lottery ticket you buy hoping for much more. As always, I caution you to invest only dollars you can truly afford to lose without regret. Most lottery tickets do not pay off. And as always, I disclose that I am awash with these shares, because what is life without a dream?

As most of you know, I think the bulk of whatever money you want to risk in the stock market should just go the simple, low-expense index-fund route (Vanguard being the most convenient low-cost vehicle). And that some of what you have in the market, if you are fortunate enough to be able to think in these terms, should be diversified into international mutual funds.

One closed-end country fund, the Templeton Russia Fund (TRF), suggested here in November of 2002 at 19, touched 46 a month ago. I suggested selling half, which was either smart (it closed last night at $35.70) or stupid (it closed last night at $35.70), depending on which half of your holding you choose to focus on. It’s a better value now than it was at 46 – and that pretty much exhausts my expertise on the topic.


Click here. (It gets funnier the further you read.)


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