What About $$$ You CAN’T Afford to Lose? July 15, 2008March 11, 2017 But first . . . IT’S NOT JUST YOUR STOCKS THAT ARE LOSING VALUE So are your children. According to this, ‘the US environmental protection agency (EPA) has lowered the value of a human life by nearly $1 million under George Bush’s administration. The EPA’s estimate of the ‘value of a statistical life’ was $6.9 million as of this May – down from $7.8 million five years ago . . . ‘ In Euro terms, of course, your kids’ value has declined far more. ‘Though it may seem like a harmless bureaucratic recalculation,’ the Guardian continues, ‘the devaluation has real consequences. When drawing up regulations, government agencies put a value on human life and then weigh the costs versus the lifesaving benefits of a proposed rule. The less a life is worth to the government, the less the need for a regulation . . .‘ In fairness, while we all would agree every human life is priceless, even $6.9 million doesn’t seem completely stingy. And by not spending it to save each of those lives, the same resources, spent differently, might save ten times as many. But shouldn’t American lives become more precious each year, or at least keep up with inflation? Not in George Bush’s America. And now . . . SO WHAT TO DO? If you’re young, it’s easy. All the suggestions from my book apply, as usual: live beneath your means, keep your transaction costs low, don’t try to time the market, stick with a lifetime habit of monthly investing as much as you can afford in two or three mutual funds of the type recommended in the Appendix. And so on. Chances are, the world will not end, and when it doesn’t – what with the power of ‘dollar-cost averaging’ and your international diversification – you’ll be the envy of all your classmates at the 40th reunion. But what if you’re not so young? And/or what if, like me, you want to control at least some of your specific investments . . . if not for the excitement (I hope not, but we’re human), then for the tax advantages (using the short-term losses to lower your taxable income and the long-term gains to fund your charitable giving)? Yesterday I amused you with a long word picture of me digging an even deeper hole for myself with a shovel called Borealis. One reason I like this situation, apart from simple perversity (that’s why I liked Russian – everyone else was taking French), is that its success or failure really have little to do with the turmoil we are seeing and are likely to see in the financial markets and the economy. Borealis has no debt, and little by way of overhead – it’s largely a ‘virtual’ company – so (unlike a real company) it can likely sail right through recession or inflation. Its technology, if any of it ever proves viable (perhaps as early as 2010, perhaps never) will be in demand as long as we’re trying to conserve fossil fuel (which we will be trying to do from now on more or less forever). And its iron ore, if it ever proves viable (each summer, they shoo away the polar bears and pile up additional proof that it may), is likely to keep pace with inflation over the long term (I figure steel will be replaced by other materials for some uses, like automobiles; but that it will still be useful in building skyscraping cities, which will become increasingly economical versus the fuel-heavy lifestyle of suburban wood homes). That said – for the love of God do NOT bet anything on this preposterous speculation that you cannot truly afford to lose . . . do NOT place a ‘market’ order for the stock if you decide to buy a little (specify a ‘limit’ price or the market maker will take every dime you’ve got and buy a villa in the South of France) . . . and underdstand that if you ever needed to sell your shares, the market is so thin that the market maker will take it as an opportunity to buy himself a wine cellar. So what isn’t a lottery ticket? Here are a few random late-night thoughts. (You deserve better, but sleepy is as sleepy does.) The only retailer I can remember suggesting here is Walmart, whose shares have done reasonably well. Walmart is the low-cost provider, a huge advantage in trying times. I would avoid most other retailers – indeed most other companies that rely on sales to the consumer. As suggested over the last few years, I wouldn’t sell my oil stocks, even though the price could well drop sharply for a while, and even though additional taxes might be levied. For the very long term, I continue to like timber (PCL is the stock’s symbol) – and, really, any company rich in resources not saddled with more debt than it can handle in the event of a deep recession. (Think about the difference between trees and houses for a minute. People say their home ‘gained in value.’ It did? It was a three-bedroom house before; is it a four-bedroom house now? Did it suddenly acquire a view? Did a terrific new public school just open in the neighborhood? If not, in exactly what sense did the house gain value, other than going up in price? Trees, by contrast, literally grow. And as they do, they gain value disproportionately, because the wood from wide trees is worth more than an equal volume of wood from saplings. This is not to say the bottom might not fall out of the timber market. But over long periods of time, timber is likely to grow faster than inflation.) If you need a market hedge, there is the aforementioned RSW, which goes up when the market goes down, and about twice as fast. (And – be warned – vice versa.) HOW TO THINK ABOUT DEBT You want to owe as little as possible, especially adjustable-rate debt (because it’s hard to see how at some point inflation will not get reflected in higher interest rates). The one big exception is a good long-term fixed rate mortgage. This is a great deal, because the lender is on the hook to you for 30 years (say), at 6%, whereas you are on the hook to the lender, typically, not at all – you can pay off the debt any time you want. So in case we had nutty inflation for a while, the $200,000 you had borrowed at 6%, which was a stretch at the time, would seem ever less daunting with each passing year. Then again, don’t be too cavalier about this, because the inevitable antidote to nutty inflation is a wrenching recession (does anyone remember 1981?), which can daunt in a different way. HOW TO THINK ABOUT OWNING DEBT I’d be careful here, too. There is the credit risk – the entity you lend to could go broke. And there is the interest rate risk. If it’s a long-term loan (as for example a 30-year Treasury bond), inflation and rising interest rates could leave you feeling foolish for accepting 5% interest when everyone else is getting 12% – and if you had to sell, you’d have to take a steep loss to get anyone to buy your 5% bonds. I’d stick with short-term Treasuries. Or, perhaps, TIPS (the Treasury Inflation Protected Securities), though these have gone up sharply since we first bought them. CASH? Cash is good. Sometimes, ‘cash is king.’ We may be approaching one of those times. (Nor, as I’ve been saying, need cash be 100% in U.S. dollars, if you have a lot of it.) REAL ESTATE Not yet, I’d guess. By and large.