The Ignorant Investor

Doesn't this sound grand:

Bestselling author David Bach shares his no-budget, no-discipline, no-nonsense system to help people achieve their financial goals -- and then some. With motivational stories, easy-to-follow tips, and advice based on proven financial principles, "The Automatic Millionaire" is a must read for anyone who wants to make -- and save -- more money. "The Automatic Millionaire" appears every other Tuesday, exclusively on Yahoo! Finance

I haven't read this guy's columns yet, but if the process of becoming a millionaire could be automated, we'd be churning new ones out in this country in big, fat truckloads. Why do I have the feeling that his secret to becoming a millionaire is probably similar to Groucho Marx's cure for insomnia: "Find winning investments that nobody else sees and stick with them!"

Natural gas prices have shot up in the wake of the hurricanes. Now, says the New York Times:

Americans will pay an average of $400 more for their natural gas this winter than last year, with average bills jumping to $1,130, according to estimates by the Department of Energy. But these estimates might prove too low and are likely to get updated when the government issues its winter outlook next month.

I heat with oil rather than gas, but it doesn't make much difference. Both fuels are going to cost a lot more this year than they did last year. Between rising gas prices and the cost of heating my home, I'm looking at having at a thousand or two dollars less change changling in my pockets over the next year. It's all going to energy companies. I hope the energy folk spend it all in this country. Maybe on bigger homes. They won't need mortgages, obviously. Just plop down the price in cash.

The money we all give to energy companies also means their's less discretionary income floating around to invest. You kind of wonder whether this will mean that workers start putting less money into 401Ks. Which brings less money into funds to buy stocks. Which means more supply, less demand. Which leads to lower P/Es and a falling market.

Man, but it's tough not to be bleak right now. Yet the Dow doesn't seem to have caught the chill in the air at all. It's even up today. Mr. Market seems pretty confident about the future, I guess.

Sounds like the party is now into the wee hours of the morning and people are starting to put on their coats:

WASHINGTON -- The number of people in the U.S. past due on their credit-card bills rose to a record in the second quarter of this year, the American Bankers Association said yesterday. . . "The last two quarters have not been pretty," said James Chessen, ABA's chief economist.

And under a headline Mortgage Lenders Tighten Standards:

After years of easy money, some mortgage lenders are beginning to tighten their standards. . . Lenders have rolled out a raft of new mortgage products in recent years that have made housing purchases more affordable and allowed many people to extract cash from their homes' equity without boosting their monthly payments. . .
Now, in what could be the first signs of a reversal, some lenders are starting to raise the bar on making these products available to new borrowers.

Investing over the long term is a slow process. A matter of averages. Whatever big score I make today will probably be tempered tomorrow by an unforseen loss. The temptation is, however, to always be active. To keep looking for opportunities and to keep shifting money around in search of returns.

But there's a thing called friction whenever you move down here on earth. In heaven they strum harps and float effortless in the clouds. Investing up there must be easy. No commissions, no bid/ask spread. Instant trades. Zip in, zip out. But it's not like that down here. Trading stocks costs money for us, and that cost has to be counted against returns from new investments. On average, it takes a much bigger bite that people think.

So sometimes doing nothing is the best policy. A big-cap stock that is underperforming today may outperform tomorrow. And the stock that is the subject of whispers and the big rage has a tendency to run out of steam as the years go buy. Over 10, 15, 20 years- I suspect most of the blue chips end up in the same place. With the small cap stocks, you buy ten in 2005, maybe by 2015 four or five are in the penny stock class, the others have seen big gains. What's the result when you average the two groups- probably in nearly the same range as the big caps.

Or maybe not. Maybe I'm just misinterpreting my own laziness as a viable investment plan.

According to today's Wall Street Journal:

Federal Reserve Chairman Alan Greenspan, drawing on new research he has personally supervised, said American consumers have become enormously dependent on borrowing against their homes to fuel their spending, and that a rise in mortgage rates could trigger a spending pullback.

Mr. Greenspan's new data show that borrowing against home values added a stunning $600 billion to consumers' spending power last year, equivalent to 7% of personal disposable income -- compared with 3% in 2000 and 1% in 1994.

Keep in mind, this is coming from the guy who was advocating adjustable rate loans at a time when a fixed-rate 30-year mortgage rates were are their lowest in decades. And who is only now pointing out the danger in a trend that started a couple of years ago. It's classic Greenspan. Do everything in your power to create a bubble, then vaguely warn that something bad just might come of it when it's too late.

We will be better off when this man is gone. Unless his replacement is even more of a blithe, politically-motivated cheerleader. The odds of which happening are, given who will be appointing him, somewhere in the range of 99-1.

You kind of wonder when news like this:

BAGHDAD, Iraq - Roadside bombs killed three U.S. soldiers Monday in two separate attacks and 16 Iraqis were killed elsewhere, including five teachers and their driver who were shot to death in a classroom by suspected insurgents disguised as policemen.

Will begin to jibe with news like this:

WASHINGTON - Defying expectations, sales of previously owned homes rose in August to the second-highest level on record with home prices rising at the fastest pace in 26 years.

To buy a home in this market requires an optimism that borders on the absurd. Meanwhile, we're spending billions using an army -known primarily for its skill in blowing our enemies up- to build a modern democratic state in a place where insurgents are angry enough to shoot some hapless teachers to death. Hmm, in both cases could we be seeing the same form of irrational optimism? Our government with it's mideast adventure and American homebuyers and their gargantuan, no-principle mortgages?

Maybe the two stories do go together, after all.

Anyone can see what's coming. If you want to make money off of Katrina, invest in companies with the best connections to people in power, because the faster the contracts get awarded the less scrutiny they'll get. If you look at Halliburton's profits since 2000, it's a story that just keeps getting better and better, and that won't change until the politicians in charge down in D.C. change. We've got a political system dominated by southerners, set to rebuild southern states, using southern-based corporations. I can't see a single factor that argues against massive wads of federal cash flowing into a relatively few southern pockets:

WASHINGTON, Sept. 25 - Topping the federal government's list of costs related to Hurricane Katrina is the $568 million in contracts for debris removal landed by a Florida company with ties to Mississippi’s Republican governor. Near the bottom is an $89.95 bill for a pair of brown steel-toe shoes bought by an Environmental Protection Agency worker in Baton Rouge, La.

The first detailed tally of commitments from federal agencies since Hurricane Katrina hit the Gulf Coast four weeks ago shows that more than 15 contracts exceed $100 million, including 5 of $500 million or more. Most of those were for clearing away the trees, homes and cars strewn across the region; purchasing trailers and mobile homes; or providing trucks, ships, buses and planes.

More than 80 percent of the $1.5 billion in contracts signed by the Federal Emergency Management Agency alone were awarded without bidding or with limited competition, government records show, provoking concerns among auditors and government officials about the potential for favoritism or abuse.

Already, questions have been raised about the political connections of two major contractors - the Shaw Group and Kellogg, Brown & Root, a subsidiary of Halliburton - that have been represented by the lobbyist Joe M. Allbaugh, President Bush's former campaign manager and a former leader of FEMA.

Time to identify those companies best positioned to take advantage of federal spending in this area. Just like it was time to buy defense contractors in 2002. Much as cronyism in government contracting may disgust us as citizens, as investors there's no reason not to take advantage of it.

We all know Google. We all know what it's done for searching the internet and all the ancillary businesses it's bought over the past couple of years. For one thing, Google allows its users to post blogs like this one free of charge, using a program so simple and automatic that even someone as lazy as I am can manage to easily get one up and running. So around the main headquarters of the Ignorant Investor (cubicle no. 12, by the copy machine), we generally have good things to say about Google.

Yet recently I found a wrinkle in the warm fuzzy blanket of my feelings for the company. After using their search engine for years, I realized that its basic functionality hasn't changed from the user's perspective for years. Has it been that long, I asked myself. To which myself answered, Why are you asking me? I don't know. That's why you asked the question in the first place.

The conversation then turned dreary and very metaphysical, and I won't bore you with the details, but the point I want to make was that although Google has increased the amount of information that a user can retrieve with its programs, it hasn't increased the user's abilility to filter through that information. Basically, a google search is still a very simple key word search, despite the millions of dollars the company is burning through in acquisitions and other research projects.

The company now offers satellite maps, blogs, picture editing software, and God knows what else to its users- but the technology underling Google's core business, the internet search, appears stagnant. And isn't that a little like General Motors deciding that they don't need to make a well-designed, reliable car so long as they offer it with a really good stereo or leather seats or bigger tail fins? Ask yourself how that attitude worked out for GM over the long term, then look over at Google's $280 share price and wonder if it's worth all that that money.

So the company known as the current wundkerkind of Silicon Valley seems to be relying on the same piece of software it was using five years ago. Maybe the company isn't doomed, but for a tech company five years are like 50 years in dog years (if you want it people years divide that figure by seven).

The market has spent two days heading downward, and it seems like the traders didn't like Mr. Greenspan and his posse saying they're going to keep raising rates to fight inflation. Forget all the talk about market efficiency and free enterprise and the merits of good old fashion American capitalism. Traders just love it when the government lends them a hand by pumping money into the system.

Yet for all the bellyaching the fed move generated, I don't see it as a real surprise to anyone. My guess is that what is really making the market anemic now is just pessimism over earnings in 2006.

I don't often like to make predictions, but since I'm the only one who reads this stuff, I can't see the harm making one here (I'm curious to see how it turns out): By the end of the first week in October, the DOW will be just below 10,000.

If that doesn't sound like a very bold prediction, sorry to disappoint. It's my first prediction, dammit. I'm still inclined to be cautious.

It's axiomatic that airlines make terrible investments. Here's an example of why. JetBlue has been one of the bright stars in the industry for investors. Along with Southwest, it's one of the few airlines that actually seems to turn a profit. But this quarter may change that:

JetBlue's string of 18 consecutive quarterly profits since its inception "is in jeopardy" as concern about Hurricane Rita boosts oil prices, CEO David Neeleman said yesterday.

JetBlue's profits have been declining for a while, and the company blames the rising costs of fuel, which is the second biggest expense for the airline after labor costs. Jet fuel prices have risen 24% this quarter alone, and all the airlines -not just JetBlue, say the cost is killing profits.

Now the solution seems stunningly obvious: raise prices. But the industry seems determined to keep airfares artificially low. I don't know the source of this obsession with cut-rate fares. It's not like cars or trains or ships offer much of an alternative to the jet aircraft for long-distance travel in this big country of ours. But whether it's the effect of bankruptcy laws that lets weak, struggling players stay in business, or some kind of government interference that's distorting market pricing, something is very, very wrong in an industry when an expense like this can't be passed onto the customer. It's a sign to stay away. Far away.

I read an article in the Wall Street Journal called “New Tools to Hedge Your Home” today. This rather silly article begins with the premise that now that Americans have built up large stakes of equity in their homes, they need to find some way to protect that should housing prices fall significantly. One method cited by the author:

Amid warnings from economists that real-estate values in some parts of the country may drop eventually, there is a nascent movement to offer new investment products designed partly to hedge against falling property prices. The goal: Offer limited protection against the risk of riding real-estate prices back down again after the record run-up in recent years.

Translation: buy options that pay off if home values drop. Problem is, 1) you have to pay to get the options, and 2) the options expire. Once, twice, three times you buy them, never knowing whether you’re actually going to need them and hoping you never do. These are expensive toys to play with, and to my conservative way of thinking no ignorant investor in his or her right mind would go near them.
The article flirts around various other methods- locking in a low interest rate, selling the home to lock in gains, but it never really addresses the point everyone should understand: there is literally no sure way to protect gains in home equity, any more than there is to protect gains in any other asset class. You can turn real estate into cash, but if inflation roars back then cash loses its value. Put the cash in the stock market? Your portfolio drops if the market suffers a big downturn. Put it back into property? You risk higher rates and fewer buyers and maybe a deflating bubble. It’s the financial equivalent of a game of rock, paper, scissors: every investment has some critical weak point that the future may someday penetrate.

Diversification across asset classes can minimize the risk of a loss from any single asset class, because often when value in one asset class drops sharply, the value of another doesn’t. A section of the article evidences this fact when it talks about the performance of stocks versus home prices over the past few years:

Since 1999, Americans' equity in their homes has soared 68%, to nearly $10 trillion in this year's first quarter, according to Federal Reserve data. During the same time, the value of stocks and mutual-fund shares held by households and nonprofit groups has declined 18% and also equals about $10 trillion.

But watch the way one investor takes this information and derives exactly the wrong lesson from it:

Tom Atkin, a 58-year-old marketing consultant, nine years ago paid about $335,000 for a three-bedroom ranch house in the San Fernando Valley near Los Angeles. He figures it is now valued at well over $1 million, and has thought about selling his home now while the market is hot and moving to a less-expensive area. One problem, he says: "I wouldn't know where to put all the cash [from the sale] that would earn as good a return."

Notice that Tom looks at how much his home is worth now and assumes that 1) the rate of return will continue to be better than stocks, and 2) that the value of his home only grows. Tom is still bullish on real estate even as home prices are well above their historical average growth rates of 6% a year over the past few decades (barely 2% above the average rate of inflation in the same period). To me, that’s betting against the fact that prices tend to regress to the mean. He may be right, I may be wrong. But I’ve got history on my side. Could be that both stocks and houses are in for a period of levelling out, absorbing the higher than average gains we've seen in both asset types over the past ten years. Or they both could be headed for a significant fall. How's that for a comforting thought?

Here’s the point the article should have made: If you’ve seen tremendous growth in the value of your home, there really isn’t anyway you can protect it without taking on additional risks that none of us can estimate with any certainty right now. The history of investing shows that we've had periods where losses are widespread but not permanent. What I do is, I assume that if I’ve made 100% over the past five years, maybe I won’t keep all that gain. Or maybe I will. Who knows? But don’t ignore other assets classes like cash, stocks, bonds, gold, etc. Diversify. Eggs in separate baskets, etc.

I can't help but talk about General Electric's earnings again. Earnings are to the stock market what marble countertops, stainless steel appliances and family rooms with high-ceilings are to the housing market. Forget about all the happy talk about how a company does great things for the community, how they're bright and innovative there, how the workers love management. What the stock market is thinking about is how much money the company is going to make. Making money is, after all, what companies are supposed to do. It's the reason they exist. In fact, it's the only reason they exist, and it isn't possible to understand the stock market without understanding just how much earnings reports and estimates drive a company's stock price.

For GE, according to information available at Stockselector.com, here's was the company earned in each of the last nine years on a per share basis:


1996- $ .73
1997- $ .83
1998- $ .95
1999- $1.09
2000- $1.29
2001- $1.38
2002- $1.64
2003- $1.76
2004- $1.96

Put that in the category of what we know happened. We also know that in the first six months of 2005, the company reported earnings of $.82. All of this information as been "priced into" the stock, that is, traders have used the information to decide what price they'd be willing use in buying or selling a share of GE. Since all these earnings have come and gone, they're far less important to the investor than these estimates of future earnings:

2005- 1.82 (est.)
2006- 2.06 (est.)
2007- 2.29 (est.)

Notice that Wall Street now expects GE to do a little worse this year than it did last year, but to then bounce back in 2006 and surpass it's 2004 earnings by about 5%. Because GE is a multi-faceted company broadly involved in many sectors of the company, I'd argue that it's not a bad surrogate for how Wall Street perceives the economy right now. Despite some voices out there in bloggerville and CNBC arguing that the economy will run out of steam in 2006, the estimates indicate that Wall Street as a whole sees 2006 as more of the same: slow, unexciting steady growth.

Also note that the company increased earnings at a varying rate during the booming 1990s, but rarely grew earnings by more than 15%. For a while during the late 1990s the share price grew faster than 15% a year, but it later slowed to a more pedestrian rate and now basically is treading water. To me, that slowing indicates that while a share price might soar above its earnings growth rate for certain periods, eventually it stops to let earnings catch up over the long term.

Funny thing is, even if the 2007 estimate turns out to be accurate, we still don't know what GE shares will cost then. P/E ratios vary by the mood of the market, and what the share will cost will depend on what multiple the market is placing on large industrial stocks in 2007. Will it be 10? Will it be 25? Nobody knows. But assuming that GE's p/e ratio is somewhere within that range in 2007, on earnings of 2.29 the share price could be as low as around $23 (a 30% or so drop from today's price) or about $57 (a 60% rise). All depending on the mood of investors.

The Census Bureau's annual report came out least week, and according the Wall Street Journal the report had this to say:

Although the U.S. economy grew robustly last year, the income of the median household slipped a bit, wages of full-time workers fell, the number of Americans living below the poverty line rose and more Americans went without health insurance, the Census Bureau said in its annual report on consumer income.

The snapshot suggests that the recovering economy, while adding jobs and showing productivity gains since the recession of 2001, isn't paying dividends to everyone. The economy grew by a healthy 3.8% in 2004, but the new Census Bureau report underscores that one unusual feature of the recovery has been sluggish gains in income for many, particularly at the bottom and middle. The share of all income going to the top fifth of households rose slightly to 50.1% last year, matching the 2001 high and well above the 45.2% reported in 1984, the bureau said.

Summary: Good economy overall, but more of the profits of this big economic engine we call America are going to the top fifth percent of the workers. I don't know what effect this movement will have on the nation over the next couple of decades, but from a personal standpoint, it's bad for people like me. I'm very middle class, and it seems like there's a relentless downward pressure on wages that is going to hurt a lot of people unless something changes soon.

Sometimes it's worthwhile to think about what you really get when you invest your money in a company. I'll use the example of GE, a company in which I have held stock since about 1991, which told the market today what to expect when a new earnings season rolls around early next month:

FAIRFIELD, Conn. (AP) -- General Electric Co. reaffirmed its earnings outlook for the third quarter and the full year on Wednesday, saying the company expects to achieve double-digit percentage profit growth despite the impact of Hurricane Katrina.

The Fairfield-based industrial, media and financial-services conglomerate said it still expects earnings per share of 43-44 cents in the third quarter and $1.80 to $1.83 per share for the year.

So if you had paid $36 for a share of GE in January of this year, what you will see on your investment is net earnings of $1.80, some of which will be returned to you in the form of a cash dividend of 88 cents (according to estimates on Yahoo Finance), and the rest of which will be retained by the company to use as . . . well to use for something. Maybe something like buying another company, introducing a new product line, R&D, or just banked in cash. The key thing is, they'll have ended up with more money at the end of the year than when they started, which is a good sign. A much better omen, in my book, than a loss.

If that 1.80 figure turns out to be right, that means that at a price of $34 a share (which is where it's sitting now), GE is trading at 18 times current earnings. Is that too high a number? Well, it depends on what everyone else who's buying stocks thinks. There's no set P/E ratio for any company. It all depends what everyone else is willing to pay for a share in the company's earnings. GE's 18 is a little higher than average for a huge industrial company in today's market, which means the stock might be trading slightly higher than it should be given GE's not-very-exciting growth rate.

Looking ahead, one way to estimate GE's share price next year is to think about what earnings growth will be, then multiply that by the anticipated P/E ratio. If earnings are up 15% next year and the P/E ratio stays around 18 (not a bad guess), the shares will go up to about $37.25. If earnings drop 15%, the stock will drop to about $27.50. So what everyone would really like to know is: What will GE earn in 2006?

Wish I knew the answer to that one. Me and everyone on Wall Street.

As I was reading today's entries at Barry Ritholtz's market-oriented blog, The Big Picture, the following paragraphs caught my eye:

The DOW has made higher lows and is now in the process of pulling back to its trend line. This is consistent with a minor retracement from modestly overbought levels.

Note that if Traders get a sense that the Fed may not pause, or figures out that Oil still remains pricey, we may see more giveback of the rally.

Ritholtz is a Wall Street market strategist, and I don't have a beef with what he writes. But these lines struck me illustrative of that language known as "marketspeak," the often needlessly opaque argot of the international brotherhood of traders. I'm not a member of that club, but I will attempt a translation into the language of the ignorant investor here:

Traders have been optimistic enough lately to push stock prices higher than they probably should be, and if they start thinking the Federal Reserve won't pause in raising short term rates or that oil prices are going to stay high, they're going to turn skittish and start selling off some of their positions, dropping us back down to where we started a few months ago.

Sounds like a reasonable prognosis to me, assuming I didn't misunderstand him. It's not information that helps someone who isn't trading the the short term, but it isn't it always nice to try to reading a foreign language?

Watching the news tonight, it seems like some of the early forecasts of doom may have been a little too doomy. Death count lower than expected, water receding faster than expected. Port open and beginning operations. Can't be all bad news, I guess.

Fox news reports:

Although estimates of Hurricane Katrina's staggering toll on the treasury are highly imprecise, costs are certain to climb to $200 billion in the coming weeks. The final accounting could approach the more than $300 billion spent in four years to fight in Afghanistan and Iraq.

I'm having a tough time reconciling this figure with what I'd expect. The damage outside New Orleans seems to be about what we'd expect from a decent-sized hurricane, and that usually runs from about $15-30 billion. We have some good numbers on that because these destructive hurricanes come about every few years. So probably the massive cost we're talking about here should be thought of as the cost of repairing the flood damage to the city of New Orleans.

Now, my math will get very imprecise here. Assuming about 1.2 million people from New Orleans were displaced by the flooding, spending about three hundred billion dollars to rebuild the city is spending something on the order of $250,000 a person.

That's an awful lot of money. Maybe, on second glance, it's what we should expect. The cost of replacing all the destroyed houses, lost income of workers, and the infrastructure of much of the city is bound to be expensive. Most of the time, the expense of building houses and infrastructure is done with borrowed money, amortized over a period of 30 years or more. It generally happens over decades, if not a century or more. To replace it using some kind of lump sum over a period of a few years will be extraordinarily expensive, particularly when we have to worry about rebuilding the burst levee into something impregnable to future hurricanes. You have to wonder about who is going to bear the cost of that. Will it just be taxpayers from other states, or will current and future New Orleans residents bear the brunt of it?

Which brings me to an important issue: given these costs, would it make more sense to give up on rebuilding most of the city and just pay people not to go back? If this sounds callous, remember the people whose homes are destroyed by events that don't get wall-to-wall news coverage. Victims of smaller floods, people whose homes are hit by lightning, fire, or people in small towns whose lives are destroyed when the local factory moves offshore to China- everyone in America seems happy enough to let these folk fend for themselves when the hard times hit. If they weren't smart enough to have insurance, we say, they shouldn't just deal with the costs of that decision.

So what do we tell these people now and in the future when we seem about to drop hundreds of billions on the folks in New Orleans? That we're sorry, but their own personal disasters just weren't big enough to win our sympathy? That doesn't seem right to me. We should have one rule for all disaster victims.

One of the articles of faith on Wall Street is that a person can identify stocks that will rise faster than the market overall. The methodologies used by professionals to identify these stocks differ: analyzing the fundamentals, buying the fastest growing stocks and hoping to bail before they run out of steam, studying charts of stock prices. In Wall Street's eyes, it's all good so long as the end result is an increase in the value of the portfolio.

Many finance professors, most famously Burton "Random Walk" Malkiel, disagree with Wall Steet folk. These professors say we can mostly disregard the methods of the professionals, saying that because the variables underlying the changes in price of an individual stock or the market overall are so complex and so reliant on unknown events in the future, nobody can reliably and consistently predict what the stock's price will be in a month, let alone six months, a year, or five years from now. Timing the market's rises and falls, they say, is impossible, and throwing darts at the stock pages are as an effective method for stock picking as anything else Wall Street might come up with.

Well, you can imagine how the theories are received over on Wall Street, where so many jobs are based around identifying the good apples in the barrel and tossing the rest aside. Who would pay the huge bonuses the pros get to do that job if the job was impossible to do? To Wall Streeters, the professors are ignorant meddlers.

This disagreement leaves investors like me in a bind, wondering whether it's better to try to pick stocks, either by ourselves or by giving our money to a mutual fund manager to invest, or whether we should just save a lot of time and effort by investing in a low-cost index fund. I've taken all three routes in the past couple of years, so I can honestly say that I don't know who is right. I sure like the idea of some hugely educated, highly talented fund manager picking winning stocks using his or her finely honed investing skills, but two questions continue to gnaw at me.

First, if Wall Street fund managers are so sure they can pick winners from losers, why do they insist on getting paid out of percentage of assets under management rather than just a share of the annual profits? If they really believe they're going to pick winners, moving to a pure, performance-based compensation system shouldn't bother them at all. Yet year in, year out, they take a flat 1-2% of the assets under management.

Second, why do so few professional managers beat their benchmark averages over the long term? Superior skill, if it exists, should return consistent results. Yet the same managers who kick ass one year with their portfolios usually come back the next year and get their butts whipped by the indexes. I've read many explanations for this phenomena that don't involve luck, but so far no one seems to have a solid answer I can take to the bank.

Don't get me wrong. I would greet the news that mankind had the capacity to consistently pick winning stocks with great joy. Were I to encounter such a fund manager, I would fall to my knees and worship that manager the way evangelicals worship Jesus. Believe me when I say this, for it is true, my brother.

In the end, I suspect there's no way to know whether stock picking really works. My own beliefs on the issue are of no consequence. I'm in the class of ignorant investors and am as incapable of arguing the point conclusively with the professionals on Wall Street or Harvard Business School as I would be arguing theology with the Pope. Right now it's all about what an investor believes is the truth. A matter of faith, really.

I admit that I can be cynical. I don't want to be cynical because most people consider cynicism an unattractive quality in a man. For example, it's rare to hear a beautiful woman describe her new boyfriend by saying, "He's not handsome or rich, but he is just so cynical I couldn't resist him." So being cynical has its downside, and it's not something I generally recommend to anyone. Yet if a person is going to invest in individual companies and a new earnings season is just around the corner, cynicism is the place to be.

We know, for example, that when some companies get closer to announcing earnings they get a little nervous. Poorly managed companies or companies in industries with bad long term prospects (think about a manufacturer of whale oil soon after petroleum started gushing up from the ground) know that if they come out with a report showing weak earnings, Wall Street is going to punish them if it thinks those weak earnings weren't an aberration. The price of any stock, after all, largely depends on what people think the company will earn in the future. So a company that can show that a single bad quarter or year will be followed by years of robust growth in earnings won't see its stock price plummet. Everyone else? They're going to be in the doghouse.

Enter Katrina. Now this is an excuse of the kind that executives love. It's a freak event, horribly destructive, and everyone on the planet has heard of it. We associate Katrina with destroyed cities and the disruption of our oil supply. If a company's managers tell us that it had a bad quarter because of the effects of Katrina, our natural inclination is to believe them. We all get blindsided by forces we could not predict occasionally, and there's no question that some companies are going to see losses from this hurricane (think about the insurance companies that will be paying out all those claims). But the excuse is too useful for some executives- let's call them the "evil" ones- to resist.

Remember the Krispy Kreme Donut saga? Krispy Kreme was a regional donut maker with profitable operations in the south. As they began a massive expansion into other areas of the country, they became a darling of Wall Street. The stock shot up, and glowing news stories about them were splashed all over CNBC and newspaper. But the expansion wasn't run properly, and the company later ended up suffering some serious losses as a result. Instead of owning up to these losses, the company's management blamed the populatity of low carbohydrate diets for the poor performance of many of their stores. Keep in mind, this was in America, a country that was built on donuts. Making people fat is the one industry in which we are the world's undisputed leaders. But Krispy Kreme - selling donuts smothered in so much sugar that I almost choked the one time I tried one- they suddenly couldn't make a profit because too many Americans were on Atkins. Amazing. Meanwhile, competitor Dunkin Donuts was still selling about a gazillion donuts a week. Need I add that Krispy Kreme stock was soon in freefall?

So I'm making a note to myself here to treat the upcoming Katrina claims with a grain of salt. If a company invokes Katrina, take a look at its nearest competitors to see if they got hit, too. Ask if the explanation for why Katrina hurt the company is overly complex or sounds a little too convenient. This is the one time where cynicism is a virtue, even if the women don't often fancy it.

I noticed that I let the blog slide for the past few weeks. I've been distracted by an August vacation, a busy time at work, and good weather here in New England. More recently, coverage of Hurricane Katrina made posting to an investment blog seem unimportant. I was surprised when one economic blogger who I enjoy reading appeared to say that writing about economics in the face of a catastrophe like the destruction of New Orleans no longer held much attraction for him, at least in the short term.

I hesitate to disagree with him, but it seems to me that no matter what happens in the world, it's okay to worry about what happens with one's investments. Contributing to charity, praying, giving in to despair - these are understandable reactions to events like the Iraq war and Katrina. But a big part of investing is dispassionate analysis of events beyond one's control. There's no contradiction between feel pitying for the victims of Katrina at the same time as one evaluates Katrina's effects on the economy. People who saw the damage and immediately ran out and invested in the stocks of Lowes and Home Depot may sound ghoulish and greedy, but they're also acting rationally. And if I have the choice between rational investors and irrational investors, I'll take rational ones every single time. This is America we're talking about. Whether we're republicans or democrats, whether we think it's a good system or a flawed one, there doesn't appear to be any disagreement that currently in this country, how much money you have largely determines what kind of life you're going to live. The current system places a tremendous amount of responsibility on individuals to provide for themselves in retirement and in times of personal crisis. That's not a responsibility that can be shirked, any more than a farmer can shirk the responsibility to feed the cows, pigs, and chickens in the barnyard. Nothing that happened in New Orleans changes that.

So I say it's okay to take a few moments to put aside the dread one feels about what happened to New Orleans to rationally consider the future. I haven't yet paid much attention to commentary on the economic effects of Katrina. It's still early. No one really knows how brutally the storm damaged the refineries or oil platforms in the gulf region. The Congressional Budget Office predicted a loss of 400,000 jobs over the near term, but that strikes me as an early guess. Incurring the cost of rebuilding an entire region of the country cannot be a positive for the economy in the short term, and it's doubtful that it will result in any structural changes to our economy that will provide benefits over the long term, either.

If anyone knows how the hurricane will affect corporate profits over the next couple of years, please let me know. No matter what happens to regular folk in the real world, corporate profits are going to drive Wall Street. So think it over. Don't make any sudden moves. That's what I'm doing, anyway.