TIME: Almanac 1993/TIME Almanac 1993.iso/time/091090/0910206.000

Text File | 1992-08-28 | 10.3 KB | 223 lines

                                                                                BUSINESS, Page 60

Into the Minefield


Pondering the pitfalls facing investors in a period of economic
turmoil, TIME's Money Angles columnist offers guidelines for
financial survival

By ANDREW TOBIAS


    "What should I do?" my friend Randy called to ask last week.

    "About what?" I asked Randy, who is not someone with a lot
of money -- well, not someone with any money, really -- and
who, though highly talented in other ways, has absolutely no
understanding of the financial markets. I once lent him some
money -- to eat, as I understood it -- and found out later that
he used it to buy options on a stock someone had told him
about. Needless to say, the options expired worthless.

    "Well, you know. What should I do about my money?" He was
concerned about the Middle East, concerned about the small
stake he'd finally been able to build at a savings and loan --
was it still safe? yes -- and, as best I could tell, he was
mainly concerned that there were some easy ways to profit from
the gyrating markets and that he was missing out on them.

    Truth to tell, I was concerned about exactly the same thing.

    "What should you do about your money? Nothing! You don't
have any money. Just keep it in the bank, safe."

    But, oh, could you have made money last month! The first
thing to have done was to sell stocks short -- any stocks --
and buy puts, little bets that stocks will go down. (Selling
short means selling shares you don't own -- by borrowing them
-- in hopes they'll be cheaper when you buy them back.)

    You could have made a huge return shorting the stodgy Dow
Jones average, which fell from 3000 to 2500 between July 17 and
Aug. 23. But that was the least of it. Most stocks dropped much
more than that. Boeing was down from 60 1/4 to 42 1/2. Disney
was down from 131 1/4 to 95 1/8. Golden Nugget, from 37 3/4 to
20 1/4.

    In July you could have bought IBM October 100 puts for $25
each and sold them for $560 when the Middle East tension was
at its height a month later. Twenty times your money in a
month!

    The Thai Fund, which invests in Thailand -- a country not
even remotely within striking distance of Iraq -- dropped from
24 3/8 to 14 1/2 in three weeks. Days later, when it appeared
that Iraq would not defeat the entire world after all, it had
bounced to 19 3/8. Imagine the profits you'd have made shorting
it at 24 and then buying it at 14.

    Fear and greed are abroad in the land -- as usual -- but in
an agitated state. And so we ask: What should we do about our
money? Should we buy stocks or real estate at today's bargain
prices? Or is this our last best chance to get out of the
markets altogether?

    There are (always) three scenarios.

    THE END OF THE WORLD. Oil prices run up even after Saddam
is Trumped (for, like the Donald, he has clearly outreached
himself). The U.S. economy slides into the deepest recession
since the D word, the budget deficit balloons to half a
trillion -- but raising taxes in a weak economy would just make
everything worse -- the financial order collapses here, in
Japan (where the banks are even shakier) and thus everywhere
else. Confidence is destroyed. Money is printed to try to get
things going again but serves only to unleash hyperinflation;
wars break out over resources. The only people left with a
smile on their face are you and I, because we shorted stocks
and bought puts and gold. Well, and maybe certain nimble
commodities traders; the people of Papua New Guinea, who don't
care too much about all this and who sit atop substantial oil
reserves of their own; and Ravi Batra, author of that awful
book The Great Depression of 1990, who will be able to say he
told us so. (His one haunting thought: that economies collapse
when the concentration of wealth becomes too great -- when the
rich get too much richer and the poor, too much poorer.)

    A GREAT NEW BEGINNING. The end? Oh, please. There's plenty
of oil in the world, with or without Iraq, and gasoline prices
in the U.S., adjusted for inflation, are dirt cheap. Sure,
prices will gradually rise (if only because we will finally
have the good sense to raise the gasoline tax), but so will
fuel efficiency. More immediately, the resolution of this
crisis will actually have served to bring the world closer
together, reasserted America's ability to succeed and
demonstrated the competence of the Bush Administration. It will
have shown that the two superpowers (if you still count the
Soviets) can work together. And it will have left the Saudis
and Kuwaitis owing us some big favors, even as, one hopes, they
are spurred by all this toward greater democracy. The promise
of world peace, greater stability, lower defense budgets and
the incredible magic of technology will all work to make the
world a far better place. You and I, who bought stocks and real
estate this week at bargain prices, will look very smart.

    WE MUDDLE THROUGH. This is always the most likely, if least
dramatic, scenario.

    The world doesn't usually end, in part because the folks in
charge see the same problems gloom-and-doomers do and usually
act to avert disaster. It mostly comes down to confidence. If
that comes unglued, as it could, everything collapses. If not,
we'll gradually work our way out of most of our problems, with
some pain along the way but not enough to kill the patient. The
sun will come up tomorrow, which will not be too different from
today.


    Here's what to do with your money.

    -- Don't panic. Unless you're a professional investor or
trader, if you make an investment decision in a hurry, it's
generally one you'll regret. When you're really scared is the
time to buy, not sell -- but few of us have the nerve or can
afford to take the risk.

    -- Don't speculate. The markets are likely to remain
volatile, tempting casinos. But you have two huge strikes
against you if you play. First, you're an amateur matching your
wits against pros. But even if you're just as savvy as the
full-time trader with his big computer and instant access to
the market, the commissions and spreads you have to pay to play
will kill you.

    -- Don't do the obvious thing, whatever that happens to be
at the moment. Once it's obvious, it's too late. You will lose
money. Should you buy oil stocks, because oil prices are
"obviously" headed up? Or short the auto companies? Oil stocks
are already up dramatically over the past couple of years (and
auto stocks are down), and you and I are not the first ones to
think of these things. Better to do something less obvious,
like buying an apartment in New York City. The only reason I
can think of to do it, at some fire-sale price, is that no one
right now has the nerve to buy an apartment in New York -- it's
so obviously a risky thing to do. This may not be reason
enough, but it's a reason. Likewise condos in Dallas -- or
wherever else the huge inventory of government-foreclosed
properties blots out all hope of price recovery.

    -- Invest in personal energy conservation: an auto tune-up,
home insulation and, when you need new ones, the most efficient
appliances and vehicles.

    -- Pay off your high-interest loans. Debt is not a great
thing to have in uncertain times, and high-interest debt is not
a good thing to have any time.

    -- If you want to hedge against disaster, buy puts on stocks
you think have further to drop, or on market indexes as a whole
(your  broker will be falling all over himself to explain this
to you). Don't short stocks. Unless you're a very seasoned
investor, it's just too risky (and it means you have to pay
dividends, on top of commissions, not earn them). Buy puts only
on days when the crisis seems to be over and the market has
boomed -- and assume that whatever you do spend on puts is
money you'll never see again. Because you probably won't. This
is insurance, not a way to get rich.

    -- If you already are rich, keep your eye on
general-obligation municipal bonds (GOs). They're tax-free and,
being "general obligations" of a state, city or county, they
are highly unlikely to default. It may be too early to buy them
-- the level of interest rates may rise, and the financial woes
of cities and states are not yet banner headlines -- but if the
top federal income tax bracket is raised, they will become more
valuable. Just remember that the high cost of trading municipal
bonds means they should be bought and held.

    -- Think twice about buying annuities. GOs are probably
safer, and their yield is not just tax deferred, it's tax free.

    -- If you have some throwaway money, consider stocks in
utilities that have suspended their dividends and show no hope
of recovery. They almost always recover.

    -- Some of the mutual funds that invest in stocks of a
particular country, like the New Germany Fund, which
immediately shot up to a 70% premium over its intrinsic value
when it was launched last year, may make sense now that
euphoria has turned to euphearia and premiums have turned to
discounts. I bought a little of the Turkish Fund, traded on the
New York Stock Exchange, when Saddam Hussein invaded Kuwait,
not because I know the first thing about Turkey but because it
was trading at a 35% discount and I thought Turkey might
somehow benefit from its newly recognized importance in world
affairs.

    -- Some junk bonds may . . . wait! What am I doing?! This
is exactly the sort of thinking you should not get sucked into.
It's crazy for you to buy junk bonds or the Turkish Fund based
on a story in TIME, or to start moving your money around based
on the latest recommendations on Wall Street Week. Each move
costs money!

    Instead, you should have a long-term plan and stick to it,
shifting your assets as little as possible. Those lucky enough
to have a substantial hunk of truly don't-need-it-for-decades
dough should entrust much of it to a small handful of no-load
(no sales commission) mutual  funds, where professionals can
manage it.

    We could be in for some very rough years, so this may prove,
with hindsight, to be a terrible time to own any stocks or real
estate. I do know that you make money buying when the world
seems risky and lose money buying when the world seems safe,
so I'm hanging in there. But I have some puts.