Here is what happens when most people consider going on vacation to Florida. They spend countless evenings on the Internet, surfing travel sites, comparing prices, jotting down connections. They weigh a midnight change in Atlanta if it means saving $22 and finally, near the point of exhaustion, they book four tickets at 6:30 AM to Orlando and then repeat the experience to find a hotel and rental car.
When it comes to buying a stock or a bond, something else happens. Their broker calls and says: “I think we ought to get into NUKE,” some company that only rings a dim bell, perhaps one that first chimed during a Super Bowl commercial. In truth, the investor has no idea what the company does, who runs it, or why he should be buying the stock. Usually, a few feeble questions are posed, as in: “Wasn’t that the nuclear waste corporation where the management was indicted last year after they dumped uranium into swimming pools and then covered it up in the annual report?” At this report, the broker scoffs that this is “old news” and goes on to explain how the brokerage firm now rates NUKE “a buy,” and how now is the time to jump in—to the stock, not the swimming pools. The conversation ends with the investor saying meekly: “Well, okay, if you think so.”
In the case of the Florida air tickets, the amount spent is about $288 dollars, after six hours of research. With the stock market, after a brief phone conversation, the investor often parts with $10,000 or $20,000, if not more. Nothing else is heard from the broker until he calls a year later and says: “I think it’s time we got out of NUKE,” which is then followed by an explanation about how the company hasn’t performed “in line with expectations,” which can mean anything from flat performance to bankruptcy.
I thought of these mythic conversations during the last several weeks, when a few friends and business acquaintances have called to ask what I thought was a good investment. I gave some rambling answer about how interest rates are going up and the stock market might go down. But since the questions were posed, I have reflected on various answers, a few of which are expanded here:
What do you think of the US stock market?
I don’t love the US stock market for the simple reason that many stocks have been up during the year, and I fear a rise in interest rates will choke off the feel-good summer rally. Nor do I like the fundamental economic trends of the United States for reasons that are troubling: rising interest rates, budget and trade deficits, dependence on foreign oil, choked interstates, and bubbles in the real estate market. Neither a hurricane in the Gulf nor an occupation of Iraq means recession for the United States, but stimulating an economy with deficit spending, storm relief, national guard mobilizations or home-equity financing is nothing more than putting a country on a ration of food stamps.
Hence for the US investor, I prefer things like funds in distressed securities, short-term well-rated bonds, and cash deposits. I think gold is expensive ($480) for something that is practically a pet rock, and I think the whispers of a recession in the US would choke off the rally in the price of oil. It might also be the time to short the real estate market, although I realize that houses are not as easy to sell short as pork bellies.
What about Russia? Should I be thinking of investing there?
In Europe, the fundamental question is whether Russia plans to embrace the European or the Soviet Union. If President Vladimir Putin continues to attack economic oligarchy, it could scare foreign investors away from Russia, the ruble, and the oil fields. Several years ago, nearly every mutual fund investing in Russia owned, as a matter of routine, shares in Yukos, the oil giant that was dissolved after the Russian government went after the two company founders—as if they were the brothers Karamazov. At the same time, if President Putin allows the Russian economy to become captive to a handful of robber barons, little of the country’s vast wealth will filter into the paychecks of the working classes.
Russia is a tempting investment, because it is so big and has so much oil and gas. But I would stay away from listed shares in this market until you are sure that when you buy them, you will get to keep them. Just because Russia has embraced free enterprise and a market economy does not mean you can make money lending to that market some of your savings.
A friend of mine is investing in a golf course. Is that a good deal?
Traveling around in Europe in recent months, I have met a number of people keen to invest in the golf business. They are interested in hotels, Spanish time-shares, and golf courses. But is golf a good investment? Certainly the demographics are good. Armies of amateur golfers are wandering the world in search of the perfect weekend. In the US greens fees have topped $300 for rounds at elite resorts while in Britain it costs about $200 to play one of the Scottish courses used for the British Open. But golf also generates money through the sale of equipment, stays in hotels, and other ancillary services. Go on a golf weekend sometime and try to come home with change left from your $2000.
What tempts some investors is that Europe has yet to develop some of the integrated golf resort complexes that are so popular in places like Arizona, California, and Florida. For example, the famous Scottish course at Carnoustie, in Scotland, has only one hotel near the first tee, and it looks like an airport Sheraton. But aside from Spain and Portugal, the European climate makes golf a short summer game. What happens then to the hotel between October and April? How many conference centers does the world need?
For the average investor, I would stay away from golf-related investments, which are closer to fashion than cash-flow statements. Study your buddy’s golf bag over the last few years. One year he shows up with a $450 Big Bertha from Callaway (ELY), as that is the club that will save his erratic game. Then a year or so later, he has something else—a Wilson or Titleist—and the Callaway is on consignment for $45 in a driving-range barrel. But he is still not breaking 90. Nor is Callaway, which earned $69 million in 2002 and $46 million in 2003, but then lost $10 million in 2004. So far 2005 looks more promising, proving even corporations get a mulligan.
For institutional investors, I like the idea of creating an elite chain of small hotels located on premier golf courses. People love to travel around Europe and to play golf, but usually this means making hotel and golf reservations one-by-one. Plus the results can be uneven. You can get the golf right, but then the hotel is lousy. But a boutique chain that could insure both first-class golf and first-class accommodation would attract golfers on the loose.
Bank stocks haven’t done anything for a long time. Is now the time to buy?
Because I have worked for banks, I follow their stocks. In the last five years, with few exceptions, banks have yielded mediocre returns. The flavor-of-the-month in banking these days is the selling of retail services: consumer debt, mortgage financing, credit cards, and everything else that begins after you hand the customer a black-and-white TV. A few years ago, everyone was saying that retail branches would disappear, that people would only bank online. Or they were saying that only investment banks, with their large trading books and speculative positions, would make money. As it turned out, merger and acquisition business declined, trading margins narrowed, and the only banks that made money had drive-thru windows. One New Jersey retail bank I follow, Hudson County Bancorp (HCBK), used to sell at a P/E of 10 times earnings, with very little fanfare. Now its share multiple is 29 times its earnings, and everyone loves the stock.
Despite the lack of excitement in their results, other large money center bank stocks still trade at an average premium of 13 times earnings. Many have market-to-book ratios in excess of 2 times, meaning the market value of the bank is more than twice the accounting value. For half that goodwill you have to hope that the bank’s customers will pay back all their loans. Will they? The risk in bank balance sheets is their exposure to residential and commercial real estate. If that plummets, it might not to be the time to put your money in toasters. But if you believe in the banking sector holding up to interest-rate rises or real estate dips, some stocks like Bank of America (BAC) are selling at 10 times earnings and paying a 4.7 percent yield—more than their passbooks. Wachovia (WB) yields 4.2 %, and trades at 12 times earnings. Citibank (C) yields 3.9 percent and has a P/E of 11.
In summary, for those with money to invest, you might consider:
--Sticking with short-term investments in highly rated bonds;
--Selling long positions in gold and other commodities;
--Reducing personal and commercial debt, which will get more expensive as rates rise;
--Investing in funds that acquire distressed securities at a fraction of their initial offering prices.
--Playing more golf, but limiting your bets to $1 a hole.
If you want exposure to Russia, may I suggest Tolstoy?
