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       ECON 101: WHAT’S GOOD FOR NATURE
    IS GOOD FOR BUSINESS

October 2005

                                

           Some people subscribe to the notion that there is something vaguely left-coast about tree-huggers and snail-darter-savers who stand in the way of the business of America, which is business — a notion which couldn’t be more wrong.  What’s good for General Motors is not necessarily good for America, contrary to what GM’s then-CEO Charlie Wilson famously alleged in 1955.  But what’s good for the environment is ultimately good for business, the economy, the health of the country, and the individual health and well-being of every American.  Responsible stewardship of the land and the health and safety of one’s neighbors is not namby-pamby, tree-hugging, or un-American.  Indeed, it is very American and very good business.  No lawsuits, no boycotts, no EPA fines -- sounds like good business to me.       

MARKET TIMING — A LONG AND WINDING ROAD

 

          (February 2005)              

                     

                      There are those who will tell you “market timing” has no place in your investing                            strategy.  “No one can time the market,” they intone ponderously, so “just buy and hold.”  To which I say: Bullfeathers.   You must -- must -- engage in secular timing if you are to be a successful investor.  Those who tell you otherwise are repeating worn-out platitudes. 

           I’m not talking about day-trading or weekly trading or system trading or technical trading -- or any other kind of “trading.”  There are a few stocks I may own for 20 or 30 years.  As long as they continue to increase their earnings and dividends and I can’t find any better issues to replace them with and I want to maintain some portion of my portfolio in common stocks, I’ll hold them.  But, by and large, there is a time to be 100% invested -- and there is a time to be somewhere between 0% and 90% invested, depending upon your temperament and risk profile.  Doubt it?  Think back a scant 5 years -- if you had sold 100% of your Nasdaq index funds then and taken a vacation from the market, you’d be up some 60% more than you are today.
       The Dow Jones industrial Average hit an all-time high on Jan. 14, 2000, closing at 11,722.98.  Just about every single guru, talking head, cub reporter, and alleged business editor were stumbling over each other to predict the next stopping point.  12,000?  Piece of cake.  15,000 was the number most bandied about.  18,000 was on the lips of many.  And a book with predicting Dow 36,000 was a best-seller.  Of course, whenever that many people become true believers, the game is over.  Why?  Because, anticipating Dow 18,000, they’ve already invested most or all of their available funds.  Who’s left to buy?       

           At the close on January 14, 2005, when I began this article, the Dow was still 10 percent below its high of 5 years ago. If you bought the Dow 30 stocks, you’re “only” down 10% for your patience over the last 5 years.  The S&P 500 and Wilshire 5000, both far more indicative of the stocks most people own than the 30-stock Dow, are down, respectively, 22% and 19% from their highs of March 2000. And the Nasdaq?  It's down 59 percent from its peak, which means it has to more than double from here just to get back to even!       

           To be a successful investor requires independent thinking, the time to do your research, and a willingness to go against the newspaper headlines, the talking heads on CNBC, and your peers around the water cooler.  And it requires that you consider asset allocation and secular timing first -- before you even begin to think about stock selection.      

           The reason why asset allocation and secular timing are more important is because of the please-commit-it-to-memory notional chart I now include every issue on page 3.  Over time, in any capitalist economy that rewards entrepreneurs (like the US of A) the trendline of publicly-traded stocks will trend upwards.  But a trendline is nothing more than the average of all the points in time that occur along the way!  There can be, and, repeat after me, there will be, some scary ups and downs along the way.  As John Maynard Keynes noted when someone told him that in the long run it would all work out, [Yes, but] “in the long run we are all dead.” 
           It does you no good to know that stocks have returned an average of 10.4% a year for since 1926.  That makes ”buy and hold” sound pretty good. But there's no guarantee that you'll actually make that return, unless you measure your returns in decades or centuries. If you got in at the Dow's 1929 peak, you had to wait until 1954 just to break even. Stocks may have produced 10%+ profits on average since 1926, but the market can go down and stay down for 25 years of that time. On average, you do great. In the real world, where you and I live, you can lose 50 or 60% of your net worth if you need to sell for college expenses, retirement living expenses, buying a house, or whatever, during a bad market .       

           It is typically a long and winding road we take to any kind of success in life.  Few are heirs to the right parents or have the unique talent to be born with a silver spoon in their mouth.  That’s why I also stress intelligent asset allocation.       

       Energy stocks will absolutely exemplify the trendline I discussed.  But I think there will be plateaus and pullbacks along the way, during which time your investments in my favorite industry will be dead money or worse.  During those times I might reduce our energy exposure from 30% to 10% of the overall portfolio.  Or I may keep it at 30% but shift from aggressive drillers to conservative pipeline companies and royalty trusts.  This investing stuff requires a keen eye, a clear mind, and a willingness to sometimes go against the flow.       

           Part of our asset allocation strategy is that we look for dividend-paying stocks.  20-somethings who have 40 years of investing ahead of them may denigrate the boring dividend-payers in favor of the latest cool!! Wow!!  Hi-tech marvel!  They do so at their investing peril.  Of that 10.4% return from stocks over the past 79 years, about 4.3% came from cash dividends, and 5.9% came from share-price increases.   If we are to keep up with the historical rate of return this year -- and there is no guarantee that we will this year or next or any single year -- we’d have to see about an 8.4%  share-price increase.  That’s because dividend yields are down around 2% right now.  So, to the extent I can identify high-quality dividend-paying firms that also have room for growth (which is why we call our primary model portfolio the “Growth and Value Portfolio”) and get, say, 4% in secure dividends, our reliance upon the growth component alone is reduced significantly.       

           We will continue to practice secular market timing based upon our proprietary indicators.  We will continue to stress asset allocation over stock selection.  And we will continue to try to identify the very best companies for you to invest in.  Like those on the following pages...   <  >

           For years, local, state, and national politicians have chased the mantra that growth is good no matter the long-term cost.  “Create jobs today and I’ll get re-elected,” has been their only approach, with nary a thought to the fact that jobs bring people with families who will need schools, roads, utilities, sewer lines, etc. -- all of which will need maintenance forever, whether the jobs are still there or not.  So they allow developers to build willy-nilly, as local authorities turn a blind eye to environmental devastation, and as the fe’ral government, held in thrall to lobbyists’ money, does the most incredibly stupid things -- like taxing Americans in Omaha and Chicago and Dallas to subsidize dirt-cheap flood insurance so other Americans can build on the coasts, secure in the         

knowledge that hurricanes, flooding, tsunamis, et al pose no economic threat to them since the rest of America will subsidize the rebuilding of their home and business time and time again. 

           Can anyone (OK, anyone outside the Beltway) really be stupid enough to believe that these owners would re-build time and again if they had to pay,out of their own pocket, the real market rate for private insurance?  Hurricane Katrina showed clearly that destroying the natural barrier wetlands and reshaping the Mississippi to make it easier to bring goods downstream saved some businesses maybe $5 or $10 billion over the last century and brought maybe another $5 or $10 billion into the Louisiana (Florida, North Carolina, etc.) tax coffers, so it was good for business, and therefore good for America, right?  No.  Estimated costs for cleaning up the toxic mess look like they’ll be right around $200 billion.  That’s just bad business. 

           When I first visited Florida as a wee lad, there were mangrove trees gnarling the coastline, inviting birds and fishes to enjoy their sanctuarial roots.  The coral reefs were strong and healthy, protecting us once, twice, three times against hurricane surge.  Then came the developers.  Rip out them mangroves, pump sewage onto the reefs, and create more real estate to sell by dropping dump trucks filled with unstable sand where mangroves and ocean used to be.  You want to talk business and profits?  How much did Hurricane Andrew cost all Americans? (Hint: until Katrina, it was the most expensive natural disaster in US history.)  So every American taxpayer ponied up tens of billions to take care of Andrew’s victims, while a few developers, just a few years earlier, had pocketed a few million more each.  Must be new math, ‘cause I don’t get it: a few developers get a few million then all Americans pay tens of billions -- and those same developers move on to ravage some new area and, over martinis and well-aged steaks, sell starry-eyed local politicians on the idea that the damn tree-huggers can’t be allowed to stop “growth and progress.”  Destroying mangroves and barrier islands, re-directing rivers, and otherwise messing about in things we still don’t understand is not progress -- it’s bad for business.      

           Mother Nature bats last.  And when she hits a grand slam — as Katrina has shown — it’s a doozy.  What's good for wildlife, wild plants, and wilderness is good for America.  We are part of nature.  I hope Katrina stimulates voters to insist upon better pollution controls; to protect our wetlands, sand dunes and barrier islands even if it means the lower floors of the condo can’t see where shore meets sea; and to abolish flood insurance welfare.  Finally, I’d like to see a government agency that knows how to respond like the US military does, but I’m not sure I can dare to dream that high when politicians appoint top “leadership” based upon their campaign contributions and party affiliation.  See inside for who will profit from cleaning up this mess — now that’s good, honest business ...  < >

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2005

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