The Ignorant Investor

Every now and then I need to remind myself, in writing, just what I'm trying to do with my retirement money these days. To accomplish this I've written a series of notes that I'm recording here for future reference. This post is directed at some future me, which is why I frequently address "you" throughout the document. If you are reading this post and are not me, don't think of it as being addressed to you in particular, but rather to you generally, as if you were me. Which you aren't, obviously:

1. There is always an investment out there that will pay off more than the ones you're holding now. Problem is, you don't know what they are until a few years from now. That's when there will be some other investment that will be the new high-flyer and which, again, you will not recognize until years afterwards. Come to grips with this fact, dude. Just because you don't shoot the biggest deer in the forest doesn't mean the one you bagged doesn't have enough meet [those that are offended by the idea of hunting can insert their own metaphor here]

2. There is a cottage industry, or rather, a mansion industry, in rendering investment advice. Brokerage houses tend to be permanently bullish, gold fund managers and short sellers are perennially forecasting a depression. Others consider themselves as sophisticated players of the market. They have only one thing in common: none of them can say for certain what Mr. Market will pay for a stock at any given time in the future. Their views should be taken as evidence of market sentiment, or as the description of one potential outcome of many possible outcomes in the market's future. In any case, I'm not paying for any of it. Newsletters will charge annual fees of $200 and up for stock picks that also appear in magazines, on CNBC, on various investment blogs or websites, or are screamed by the crazy bag lady who has been camping outside Trinity Church near the New York Stock Exchange.

3. The temptation to beat yourself up for failing to buy a given stock that's gone up 70% or 100% or 300% in the past year makes no more sense than beating yourself up for failing to pick the winning numbers in the week's lottery. You have to think about what you were doing at the time the purchase should have been made. That the pick would have seemed too risky even had you heard of the stock is eminently reasonable. You must think of it like this: you would be willing to jump snake canyon on a rocket bike if you knew that you would make it. The bragging rights alone would be worth it. But what about if you couldn't know one way or the other? Would you hope on a rollercoaster if the guy at the ticket booth mentioned that the cars frequently leapt the rails, allowing passengers to drop to their doom in a bloody mass of flailing limbs and deathly screams? Prudence is not a character flaw outside of Hollywood movies and advertisements for brokerage houses.

4. Unless it's fun to read balance sheets or discuss companies, no more than an hour or two a week should be spent on investing or talking about investing. There's no reason for someone who is buying stocks and holding them for a year or more, or putting money into fixed income funds, to look at the market more than once a week. It's too easy to get caught up in endless commentary, worrying about what's going to happen in the next month, the next year, the next decade. On the other hand, if a stock or investment opportunity pops into your mind or appears in the press, there's no reason to ignore it. Stay aware without becoming obsessed (by the way, if you begin to have dreams that, say, IBM is ready for a big move upward- it's time to step back from the edge).

5. Make a list of great companies you'd like to own for the long-term. Stocks that are, as a group, likely to outperform the S&P for the foreseeable future. Then keep an eye on them to see if they fall out of fashion or the market as a whole gets cheap. Then buy and hold. That way, you get good performance without having to always worry about whether you should sell them.

6. Limit the amount of material you read on investing to a few classic, widely respected books, the business pages of the New York Times or Wall Street Journal, and a couple of magazines like Forbes, Businessweek, Kiplingers, or Smartmoney. If you must, review the weekly commentaries of the brokerages to see what the current story being sold to retail investors is. This reading probably won't help you at all in the long run, and can be ignored entirely with index investing, but it does give you the sense of what the conventional wisdom or mood of Mr. Market is. Reading market-related blogs could be helpful if every single one didn't conflict with all the others. Everyone has an opinion, it appears, including me.

7. Stay away from technical analysts. If you read financial blogs and the internet sites, you find that they like to talk to each other in their own complex jargon. Lots of it. They use charts and lots of screens with flashing numbers. It all looks so scientific. But science has been unable to confirm their theories on why stock prices move the way they do, nor can science bear out their claims to use charts of past stock performance to predict future movements in the price. To me, the idea of technical analysis resembles the promises of phrenology ("Look, I know you're an angry person because of heightened nodules on the perinatal lobe here"). Which would be harmless if their schemes didn't require a lot of trading to maintain. But they do sound convincing. Always.

8. Write a small memo outlining the goals and methods to be used in picking stocks and managing the retirement portfolio. This will allow you to retain knowledge gained by reading investment books and magazines without being burdened by the difficulty in remembering what you thought at the time you came up with it. Revise it as events prove it wrong, but note what went wrong so you don't find yourself proposing the discarded theories as new theories later on.

9. Managed mutual funds can provide you with allegedly better stock picking skills than your own, but the manager's fees will cut into returns. Only invest in one if you think (because of course you can't know) the manager will substantially outperform the S&P over the long term. Keep in mind that if the fund isn't held in a tax sheltered account, the fund's turnover has to be kept low if you don't to surrender a large share of your gains to the government through taxes every year.

10. Treat the stocks you hold the way a head salesman treats employees of a successful company. It's not enough that they grow if the S&P is growing as well. You could always go out and hire an average salesman like the S&P to do the sales job, and without the risk of having made the wrong choice. What the sales department expects is for a company to do better than average. Problem is, most companies, like most salesmen, are going to have trouble meeting their numbers from time to time. Then is becomes a question of whether the company is in a temporary slide because of a bad divorce or torrid love affair, or because it's just lost the skills it needs to succeed in whatever market is in existence it the moment.

11. Consider whether the skills of successful stock picking, assuming such a thing exists, are not distributed unevenly through the population. We are told by brokerage houses, magazines, newsletter writers, and authors of very successful books, that anyone is capable of picking out the good from the bad. Why not make big money, the subtext reads, simply by the exercise of a few brain cells from time to time? Yet if we look around at other skills possessed by people, beyond a few basic ones like breathing and going to the bathroom, talent in each isn't something that everyone shares. Pro basketball players make millions of dollars because they can place the ball into the net while complying with the rules of the game. That's a skill which we all don't share. I can't dunk. I can't shoot. I can't dribble. A similar situation occurs with chess. Or solving complex math problems. Singing and acting. Interpretive dance. Fishing. These are all activities where people with great talent can find a career and make good money. But we all don't expect to become great chess players, dancers, or fishing guides by the simple process of reading a few books . We wouldn't even consider the possibility. But because stock picking is a mental process and holds a certain element of chance, we assume that we're capable of applying our skill to it to become wealthy, simply because we've seen or heard of other people doing the same.

A couple of months ago I read a book on investing that laid out the principles of investing according to Warren Buffet. According to the book, Mr. Buffet isn’t just some guy playing half-assed Caribbean music to a bunch of drunken thirty-somethings in Hawaiian shirts, he’s also known as one of the world’s most successful investors.

What? . . . I’m confusing Warren Buffet with Jimmy Buffet? Hmm, okay. So Warren Buffet is the old guy with glasses from Omaha, Nebraska. Jimmy Buffet is the old guy with the guitar and baseball cap and the talent for relentless self-promotion. Glad we got the sorted out.

In any case, Warren Buffet has certain things he’s looking for in a company. In the interests of avoiding copyright infringement, I’ll summarize what the book says in as summary a fashion as possible. Warren says to:

1) Look for a company with a business model that’s simple and understandable, which has been shown to produce real profits in the past and which is likely to do so in the future.

2) The managers of the business must be sound, must be candid with their shareholders, and must resist something Warren calls the “institutional imperative”, a term which I can’t define since I returned the book to the library without noting down what it meant.

3) Ignore the earnings per share and instead focus on the company’s return on equity; you want to see big profit margins. Warren also says to calculate “owner earnings,” which sounds like an important measure of profitability, but, again, I don’t know what it means (Hmm, I may have to go back to the library to find out). Also, for every dollar retained by the company, make sure the company has created a dollar’s worth of market value. Which I assume means that if the company goes out and spends a million dollars to buy another company, the purchase should increase the company’s market value by at least a million dollars.

4) Accurately calculate the value of the business, and only buy the company if the company is trading at discount to its true worth.

5) Focus on buying fewer stocks rather than a big, highly diversified portfolio. Owning 10-15 great companies, Warren says, is better if you’ve picked companies with great prospects.

6) Examine the probabilities involved: what is the probability that you’ve miscalculated the profitability of the business? What are the chances you’re making a mistake trusting management? How certain can you be that management will return profits to investors?

7) Think long-term. Be patient. The market is not always efficient or rational over the short term, but eventually it recognizes value.

So there you have it. That's all very simple, isn’t it? Everything you need to know to invest the Warren Buffet way, straight from Warren Buffet himself.

Don’t be bothered by the fact that literally thousands of professional investors are familiar with Warren’s methods and we not able to do what he has done. Or that Warren often invests in companies by buying them outright after teams of very sharp people have gone over every available item of relevant information like starving peasants looking for grains of rice in the dirt (sorry about that analogy- was watching CNN International this morning). Basically, all you must do is assume that the financial acumen that Warren Buffet possesses his latent in all of us.

Frankly, I wish that I had Warren’s genius for investing, but I don’t. When he's evaluating a company, he brings to the table a wealth of business experience that I lack. He probably understands people better than I do. And he knows people who know stuff about the company that isn't generally known by the rest of us. Forget following Warren Buffet. Even following Jimmy Buffet is beyond me. I can't play a guitar. I don't have the self-possession to write mediocre songs about partying the Island way. So I am truly screwed.

So we come to the true point of this piece: Do not expect to replicate Warren Buffet’s success just by following the advice in his book. And don't annoy people by telling them how great Jimmy Buffet is in concert, or how people who aren’t parrotheads just don’t “know how to have fun.” Yes, I’m talking about you, Camilla. You work in an office, not the fry shack down at the beach in Saint Thomas. I’m tired of the sound of Jimmy Buffet coming over the cubicle wall. Knock it off, already. Would it kill you to listen to the Sex Pistols or the Ramones or Nirvana or, well, just anybody else once in a while? Try something bleak for a change.

Millions of low-technology jobs, from textile production to corporate call centers, have migrated to Asian countries like India and China in recent years. Now, though, high technology is increasingly coming up for grabs, and no company illustrates the speed at which corporate America can replace high-priced American talent with cheaper foreign brainpower than Conexant Systems.

(from Now, High-Tech Work Is Going Abroad, N.Y. Times, 11/17/05)

We spent the '90s watching low-skill, lower middle class jobs go overseas. So now we're going to spend the '00s watching the high-tech jobs go overseas. At what point does this trend begin to hurt our own growth?

I'm not an economist, but I have difficulty seeing how we maintain our economic strength by focusing our economy on the housing market and retail sectors. It's tough to export houses and shopping malls and doctor's visits and landscaping. How long before every job that doesn't require the employee be in the immediate area of the customer gets shifted to India, China, Singapore, Eastern Europe, and wherever else the local schools are churning out educated workers for whom a dollar an hour sounds like a very good wage? Some of the profits off these workers come back home, but there's no denying that there's less money in the hands of a large block of American consumers who used to, well, consume.

Seems to me that the rest of the world is growing while we're just standing still, waiting for them to catch up. I don't doubt that eventually China and India will see their labor costs rise. But between now and then, keeping all ones assets tied to the United States seems like a risky proposition. Mutual funds are a good option here. And because some of the foreign markets aren't as efficient at pricing stocks as our own are, investing in foreign stocks through an actively managed fund might not be a bad idea. Leastwise, that's what the conventional wisdom says.

Scientists working with mice have found that by removing a single gene they can turn normally cautious animals into daring ones, mice that are more willing to explore unknown territory and less intimidated by sights and sounds that they have learned can be dangerous.

The surprising discovery, being reported today in the journal Cell, opens a new window on how fear works in the brain, experts said.

New York Times, Nov. 18, 2005

So now we find out that the difference between a coward and a hero is as little as a single gene flowing through the blood and viscera of our bodies. Takes the moral aspect out of it altogether, doesn't it? The more work our scientists do with genes, the less we all seem to creatures of true rational thought. Everything is guided by biology rather than reason, and maybe we're nothing more than a collection of inbred responses tempered by experience.

In investing, we already know that some of us are less willing to take risks with money than other folk. Now we know why. It's all the blood. And you can't destroy your blood. Stab at it with a knife, all it does is bleed, right? Best you can do is be aware of your gut instincts and try to use reason to mitigate any bad effects caused by your genes.

Okay. We've seen Google shares break the $400 mark. As I've made clear in earlier entries, I passed on the stock a while back because I thought its prospects were limited. Now every increase in the share price is the source of intense psychic pain to me. But screw it. There is literally no cost to sticking to my guns, so to the guns I shall stick. Google is now worth more than E-Bay and Yahoo combined, which is ridiculous given the number of eyeballs looking at both those sites.

I hereby reiterate my earlier position: Google will tank. But if the Financial Times has the story right, almost nobody in the stock business agrees with me:

Google's stock has risen about $100 since it dazzled Wall Street with unexpectedly strong third-quarter earnings a month ago. Since then, analysts' average estimate of next year's earnings has been raised $1.12 to $8.44, according to IBES, which monitors analysts' predictions. While earnings estimates have risen about 17 per cent, the shares have jumped more than twice as fast.

Despite a rapid ascent that echoes the euphoria of the dotcom boom, most analysts continue to be strong supporters of the stock, arguing for it to rise further. Of 34 analysts who have ratings on Google, 25 recommend that investors buy the shares and eight rate it a "hold", according to data from Bloomberg.

So 74% of analysts are now pushing Google. That sure explains the rapid movement of vast amounts of cash into the stock. Remember these guys and their rosy predictions. When Google tanks -- and it will tank when everyone's expectations on future earnings come back down to Earth-- remember that most analysts covering the stock didn't give their clients a shred of warning. Useless, they are. Except maybe for this guy:

Philip Remek at Guzman, the lone analyst who is bearish on Google, said the bullish predictions failed to reflect the greater competition that Google will face in future, particularly from Microsoft. "Google's niche was overlooked for some time by big companies, and that's ending," he said. Microsoft, which has launched its own search engine, is expected next year to add its own online advertising service, directly rivalling Google and Yahoo.

There isn't any question that Google will continue as the dominant player in online advertising, but competition inevitably means lower margins as all three players compete for the same ad dollars. Lower margins would mean lower earnings, making it hard for Google to grow earnings fast enough to justify that sky high multiple it's trading under now.

Then again, this is the ignorant investor talking here, and what do I really know about Google's business anyway? Ask me about movies. I watch a lot of those.

"Let's start with the first fact. Woodward knew key information about the leak and was probably the first person to receive the leak. And yet this is the first we're hearing about it, more than two years later.

I can't see where there's anything wrong with this."

I usually don't talk about political issues on this blog, but I saw this line by journalist Josh Marshall on the popular Talkingpointsmemo blog and just can't get it out of my mind. It shows you everything that's wrong with the business of journalism.

Put aside republicanism or democratic hatred of the Bush regime for a moment and focus strictly on the concept that the job of journalists is to inform a reader of significant news. I'm not talking about some pie-eyed journalism school code of ethics here, either. I pay 50 cents or a buck for a newspaper, I expect to know what the reporter knows. That's the unwritten contract between newspaper and reader. There isn't any disclaimer at the top: "We'll tell you only part of the story- you're not inside enough to know better."

So here sits Bob Woodward, holding back a significant part of one of the major political stories of the day. Why? Because he got the information from a source inside the White House, and Bob doesn't want to risk burning his contacts for future scoops. In essence, if he talks now, no one will talk to him in the future. Gasp. Imagine that. We'll be deprived of third-hand, unattributed gossip aimed at manipulating the political process. Woodward won't be invited to intimate tete-a-tetes with government officials. Invitations to the best White House and congressional cocktail parties would dry up. He might have to do legwork to talk to people lower down in the food chain. How cataclysmic for news coverage in our nation's capital.

This obsession with retaining access to insiders in large organizations is common in business journalism, which is why 95% of the stuff isn't worth reading. Now we know that political journalism runs the same way. Josh Marshall shouldn't be defending the practice. Allowing the sources to control the flow of information just turns the power of disclosure over to them. It's emasculating to the journalist, and it seems as though more and more D.C. journalists are choosing emasculation over news reporting.

I imagine Washington's choirs must suffer from a surplus of sopranos.

Looks like professionals are continuing to pile into REITs even as individuals are starting to pass:

Investor demand for REITs was strong in August, especially among institutional investors flocking to the four real estate ETFs.

Collectively, the iShares Cohen & Steers Realty Majors (ICF), Dow Jones U.S. Real Estate Index (IYR), streetTRACKS Wilshire REIT Fund (RWR) and the Vanguard REIT Index Fund (VNQ) saw $478 million of inflows in August, compared with an outflow of $374 million in July, according to TrimTabs Investment Research.

Meanwhile, regular mutual funds, which are where individual investors are more likely to put their money, saw just a $3 million inflow, roughly unchanged from July.

What this shows is that "individuals are not chasing prices and the professionals are," says Carl Wittnebert, director of fund flow research with TrimTabs.

http://www.thestreet.com/_yahoo/funds/nicholasyulico/10240810.html?cm_ven=YAHOO&cm_cat=FREE&cm_ite=NA

I'm sorry I missed the boat on commercial property REITs, and I've been thinking of dropping money into the sector for the long term. But they're trading at a significant premium over the market value of the properties they own, and the estimated yields on these ETFs are at a bond-like 5% or so (I say estimated because apparently actual yields on REITs depend on end-of-year accounting and won't be known until January 2006 at the earliest). In other words, they're pretty darn expensive, we likes to buy our preciouses when priceses are low when compared to historical averages.

And it's not like the pro's aren't known to dive out of sectors as quickly as they've piled into them. You got to wonder about the upside potential versus the risk involved. Then again, that's what I've been saying for about three years as everyone has made a ton of money on these. Then again, it's not a real gain until you cash the sucker in.

(P.S.-- The link is long because the easy-to-use #%&@* blogger software won't display the link for some reason.)

There's a story in last week's business week that I read today. You see, we here at ignorant investor HQ favor reading old news over any other kind. It doesn't surprise us and present us with a risk of a bad case of the vapors, by and by.

The story is that India is having trouble recruiting enough skilled workers to handle all the growth in it economy. Thankfully, Uncle Capitalism has stepped up to the plate and encouraged the workers to demand salary increases. Wages for "semi-killed workers in the textile factories of Coimbatore are up 10% this year, while supervisors' salaries have risen by 20%. Pay in the banking industry is up 25% in the past year and has more than doubled in hot areas such as private equity. Overall, Indian salaries will rise by 12.8% compared with inflation of 5.5% . . . with more Indians able to afford cars, tractors, and refrigerators, the countries favotires are expected to need 73 million workers by 2015, 50% more than today."

The faster places like India and China enter the modern age, the better off we are as Americans. Politically, we may end up having to share some of our hyperpower as they grow wealthier. But at least we won't see as many American jobs go overseas because these folk earn 10-15% what their American counterparts do.

One aspect of the job market not mentioned in the article is working conditions. I will bet anyone up to one American dollar that some form of unionization is just around the corner in places like India. It always is once the capitalists start running factories hard at a time of labor shortages. Next up: Indian workers demand healthcare, vacation benefits. Maybe start start pulling the old "I'm at my desk but I'm not really thinking about work" trick.

That's going to be sweet.

There are times when brevity is favored in our culture. Not just in line at the movie theater, where you're not supposed to chat with the ticket clerk other than to say, "Two for 'Star Wars' . . . thank you." Or when you go to the doctor complaining of an ache in your wrist and she looks it over and says, "It's probably nothing- come back in two weeks if it still hurts" before moving onto the next patient on her list. Or when you get fired from your job and you come back to the building the next day with a handgun, and everyone is like "Omigod- don't kill me...." and you're like, "Duh- I'm not here to kill anyone, I'm just waving around the gun because I want the police to shoot me because I've got no job . . ." and then they all run away like you've said something really weird and they won't spare you the time of day. That's the culture we live in, I guess. Nobody has the time to share a moment any more.

So in talking about bonds I'll make this quick. In my last post I discussed the benefits of owning bonds. Besides earning interest, if interest rates fall the value of existing bonds goes up because the old bonds earn more interest than the new ones (seems reasonable, right?). In times of falling rates, a bond fund manager can sell some of the high-earning bonds in his portfolio and pick up a nice fat wad of capital gains for his clients, and we likes our capitals gains.

But what happens when interest rates rise? Well, the opposite happens. The old bonds now earn less than the new ones, which makes them less valuable to any buyer. As bond prices fall, capital losses can wipe out a years worth of interest payments. In Vanguard's long-term bond index fund, for example, this happened twice: once in 1996, and again in 1999. So long-term bonds are not completely insulated from either losses or volatility.

It's a different story with short-term bond funds. The bonds they hold expire at a much faster rate, freeing up cash to be re-invested in new bonds at the now higher rates. It's not impossible to get tagged with capital losses in a short-term fund, but the magnitude of capital losses in any given year aren't likely to wipe out most of a year's interest payments.

Now to the future. The past ten years have been good to bond investors as interest rates slowly climbed down from their highs of the 1980s and early 90s. Absent some kind of severe deflationary spiral into a depression, we're not likely to see them go much lower. Add to that the risk that we may be entering a period of higher inflation, and the magic eight ball says all signs point towards at least minimally higher rates. According to conventional wisdom, the only thing holding long term rate down now is the desire of Asian bankers to lend the U.S. treasury massive amounts of cash. It is axiomatic in America that Asians are inscrutable, so nobody here can really know when this lending may stop. When it does, rates will start to climb. Or so I'm told. Keep in mind, I'm the ignorant investor. Economics is not my bag, baby.

Short form: Long term bond funds typically offer higher returns in the long run, particularly because they offer greater capital gains than short term bond funds. But in investing bigger gains usually require taking on greater risk. Short-term funds offer less risk of capital loss in the near term, but there's a chance that interest payments will lag the rate of inflation over extended periods. Basically, if you don't need the money any time soon, conventional wisdom points towards long-term bonds despite the increased volatility. I agree. Maybe.

Bonds haven't gotten much credit in my house over the years. Who cared about getting interest during the 1990s when stocks were rising in the double digits? I had a bond fund or two in my brokerage account, but I didn't pay any attention to it. It put out 8-9% a year, but I didn't really care. Basically, the bond fund was the plain girl in the nightclub of my portfolio. She got no respect at all.

But recently I've come to regret the way I treated her. She may not be flashy or glamorous like the shares of stock with their dividends and capital gains, but she's nicer than they are. She doesn't tank in value. She doesn't cut her dividend to buy herself a new company jet or invest in some harebrained acquisition or goofy new product that nobody wants. She just sits at home buying up bonds and earning interest, just waiting for me to call her up when the stock market dumps all over me.

"Come here, baby," I told her the other night, "Your sweet interest means so much to me- come here, baby...you know I didn't mean it when I said the stock market was better than you...you're fine, baby, so beautiful . . . paying five, six percent when the stock market has treated me like a dog . . . Mmmm, yeah baby, I love the way you get those cute little capital gains when interest rates fall ... Can I touch them? . . . aaaah, oh yeah- that's so nice....."

Hmm, is it me, or did this just get too weird?

I've been working on a post about investing in bonds but haven't been able to make it work, so instead I'm going with this little nugget from Investors Business Daily:

Banks continued to loosen their standards for making residential mortgages even as they reported weaker demand over the last three months, said a Federal Reserve survey of banks' senior loan officers.

The findings follow recent reports of slowing growth in mortgage debt and a drop in applications for new mortgages, as higher interest rates keep more home buyers on the sidelines.

This cannot be good. Bringing more bad loans into the system at a time when a lot of current borrowers are exposed to rising interest rates through adjustable rate mortgages seems like a recipe to increase the default rate on mortgage debt. The question is, just how many loans going bad does it take to send a massive shock through the financial system from which we would all suffer?

According to the Wall Street Journal, big money is pouring into timberland. The reason?

Apparently there’s a lack of outsized returns on other types of investments like stocks and bonds. Too much money sitting around in the drawers of pension funds, central banks, hedge funds, oil-rich nations and corporations with surplus cash and no good place to put it means people have to go looking in places they never wanted to look before. Cash is, after all, the enemy of the investing class. Sitting by itself in an account someplace, the best cash is going to get you is the rate of inflation, and these are professional risk takers we’re talking about. They’re not satisfied by the puny returns guys like me are happy to get:

“Industry insiders say $10 billion more U.S. timberland will come to market over the next year or two, and that investors are lined up to buy it. The result of this fervor is that prices have climbed, in some cases doubling in five years, despite weakness in prices of the lumber the forests produce.”

This is where the logic behind the investment breaks down. Why buy an asset that makes lumber when the price of lumber is going to go down? Part of the answer may lie in the leverage they get by purchasing land with borrowed money:

“With bond yields puny and stocks flat year-to-date, timber offers a shot at stable returns in the high single digits, mostly from long-term growth in the value of the land and its trees. Low interest rates make it cheap for an investor to borrow cash to magnify a bet on timber.”

So basically, they’re planning on taking a litte cash, borrowing some money at 4-5% to add to their stakes, and then using the combined pile ‘o gold to buy woodland that can return about 9% (net of the expense of borrowing the money? The article doesn't say).

A snippet from a 2003 article from the Motley Fool written by Mathew Emmert lays out the case for timber a little more succinctly than the Journal does:

"One of my favorite financial authors is Paul Sturm, who has a regular column in SmartMoney Magazine. A couple of years ago, Mr. Sturm wrote an article detailing the benefits of adding timber to one's portfolio, and he made compelling arguments around why this asset class deserved attention.

For starters, a diversified timber portfolio would have returned 13.3% annually over the past 40 years -- not bad. And timberland is a remarkably low-risk asset, with levels of volatility resembling bonds more than stocks. Even better for our purposes, timber tends to perform best when stocks and bonds suffer, and it moves fairly independently of other REITs."

First off, congrats to Mssrs. Sturm and Emmert for their prescient viewpoints on timber back in 2003. The Plum Creek Timber REIT mentioned in the article has gone up about 80-90% since then, but recently growth in the share price has petered out. In 2002 it had earnings of a $1.25 a share, and those have grown only about 40% to an estimated $1.79 per share in 2005, meaning that the share price has outstripped earnings growth. Dividends have remained stable since 2002 as well, and it now with the higher stock price it yields only about 3.9%. Back in 2002, PCL was yielding about twice that. So it’s not as attractive an investment as it once was. Seems like I missed the boat on this beast.

So will I soon be kicking myself for not buying shares in a timber REIT? Yes. Probably. But that comes with the territory of being me, and I'm cool with that.

Every couple of days, the AP or Reuters or Bloomberg runs a story like this on the latest economic statistic to emerge from D.C. Now, put aside for the moment the growing suspicion you see in the blogosphere that the numbers are rigged; if the government's statisticians are deviously playing with these numbers you're probably not going to take the time to figure out which statistics they've diddled. At some point, you have to trust somebody's numbers, even if that trust may be betrayed somewhere down the line.

WASHINGTON - Consumer spending turned higher in September and incomes grew briskly, suggesting the economy is holding up well to the double blows of Hurricanes Katrina and Rita.

Forget the narrative and the explanations when you read these things and look at the numbers. For example, the numbers in this paragraph:

The 0.5 percent rise in consumer spending came after spending fell by that amount in August, reflecting the hit from Katrina, the Commerce Department reported Monday.

So consumer spending fell in August by .5% and rose .5% in September. So in other words, it returned to near its level in July. But since these numbers are based in real dollars rather constant dollars, the level of consumer spending was actually a little lower in September than it was a couple of months earlier. Short version: consumer spending weaker now than it was before the hurricane.

Americans' incomes, meanwhile, increased by 1.7 percent in September, the largest gain since December 2004, boosted in part by post-hurricane insurance payments.

This I don't understand. Insurance payments that compensate for lost property count as income? I guess this means if I want to make more money, forget a good education- all I need to do is crash my car or burn down my house.

So what does this story tell you? Basically, nothing of importance. It's a report on the month to month changes in a pair of statistics, and each of those statistics have value only when viewed as part of a longer trend over several or more months. Don't worry about stories like this on the way to the TV listings or sports section. In fact, I command you: SKIP THESE STORIES AND READ SOMETHING ELSE.

A better source for this information is the government itself. Or there's probably a web page out there that gives you all the important statistics put out by the Commerce Department, the BLS, and BEA, oil production and imports, etc. in a summary form. I haven't found it yet, but maybe I'll go look for it now....