Update--August 15, 2001

Depressing Realities Of The Financial Jungle

I promise this will be the last time that I write about last year's Internet bubble and technology mania. But when Sir John Templeton was recently interviewed by Forbes magazine, he called it a period of "temporary insanity" on the part of investors. Forbes then indicated that Sir John profited about $100 million by recognizing that many investors had lost touch with reality. So after focusing on the importance of connecting with the realities around us rather than the delusions within us during my last several Updates, it is time to summarize what we should have learned, make a confession about past depressing realities and move on to more enriching times.

Before retiring recently, my best friend was an extremely busy executive who ran the world's largest law firm and chaired the board of a major ministry. He typically scans the day's news by checking Internet summaries each morning. While that is undoubtedly the most efficient way for him to glimpse the realities of the previous day's events, I often tell him that it's not the most effective way for me to do so. For assuming you read them in a counter-intuitive way, the ads and cartoons missing from his summaries are most enriching financial indicators. In essence, counter-intuitive means that since the days we lived in caves, our intuitions have quickly told us to run when we've heard the roar of a lion. But over the decades, this guide in the financial jungle has seen a lot of profits eaten by such quick reactions. So my job as safari guide is to help those hunting profits to avoid their initial instincts to run for the cave so they can remain still until their heads catch up to their racing hearts. Then portfolios won't resemble dead meat.

That's essentially what my books did as investors ran for T-bills and gold coins during the federal debt and Y2K political and media stampedes. Then my 1999 year-end Update scouted that the cover of Time magazine had just named the founder of Amazon.com as its man of the year. But providing Americans with another way to shop was hardly working for world peace or wiping out disease. So I offered the counter-intuitive suggestion that it might be wise to sell--or actually short as Sir John was doing--technology stocks rather than run to buy them as most investors were doing due to roaring magazine covers, such as Money's that said, "Everyone's Getting Rich In Tech! Here's How To Get Your Share." Similarly, at the peak of Internet mania, my Update for the first quarter of 2000 referenced a full-page ad by Sun Microsystems, a king of the Internet jungle. It featured a Tower of Babel style building soaring above the clouds and a cartoon-like headline that growled, "The Incredible Growing Business." The sub-title roared, "In The Net Economy, The Sky Isn't The Limit. It's A Ridiculously Low Expectation!" Its shareholders have since learned that pride is particularly deadly in the financial jungle.

Yet a client may have sent the opposite kind of counter-intuitive indicator a few weeks ago. It was a cartoon called Foxtrot that poked a little fun at former dot.com billionaires and magazine covers. In the first graph, a man with a broom tells a hip looking fellow, "You look really familiar." The second man replies, "You probably saw my 60 Minutes interview. After my dot.com went public, I was named billionaire of the year by most of the business press. Forbes put me on their cover six times." The first man replies, "Wow." The second replies, "Yup." The first says, "Ok, so grab a uniform and I'll show you where to mop." The second replies, "You got it boss."

Seems humility has returned to the technology jungle as Internet stocks have slowed to a more realistic pace. If you were ever tempted to shoot for fleeting profits in the tech jungle--and I'm not as yet as I prefer targets that are easier to see--it might be time to do so. But of course, after receiving almost nothing but inquiries to go shooting at Internet stocks and technology laden mutual funds during late 1999 and early 2000, I've not received a single inquiry now that stock prices are 70 to 90% lower. Such is the difficult reality of being a guide in the financial jungle.

Now for a confession: That reality was a major reason this experienced but aging guide just fought his first real battle with mental and spiritual depression. It's not of the clinical type referenced by the Times but a lesser hormonal type that runs in my family. But I was surprised by it as I've always helped investors look on the bright side when the jungle has seemed a very dark place. And after medication for thirty days a few months ago, things have looked brighter to me. But the past year and a half has been a time of chopping through dense undergrowth, not only in my vocation but in my avocation of helping spiritual investors shoot at becoming wise stewards.

The year began with my having just lost the retirement fund of a trophy church as my recommended funds had declined to participate in the technology mania. I lost elderly widows to Northern Trust as it was running daily ads roaring about the past performance of its technology fund, which has since fallen into a pit. Heads of ministries entrusted money to the Janus funds symbolized by a two-headed pagan god, and now realize that may have implied they should have looked in another direction before pulling the trigger. The treasurer of my church lectured me that it didn't matter whether a technology gazelle did anything useful or profitable as long as its stock was racing ahead. At the annual meeting of the firm that clears my securities business, I tried to caution inexperienced brokers against expending too much ammunition on Internet and tech stocks. They nearly sank the firm when those stocks turned on them and they ran out of ammunition just when they had far more promising shots. (My clients should understand the failure of my clearing firm would have complicated my life but wouldn't have affected your holdings as it doesn't custody our securities. Everyone should understand that Internet analysts at some of America's largest investment firms probably came as close to killing even them as limited partnerships and junk bonds did during the eighties.)

I then resigned the endowment committee of a major ministry as the committee's chairman promised he might increase the endowment fund ten-fold during the coming five years by firing away in the "new economy" jungle. (I was just asked to rejoin the committee as the endowment fund has bagged as few profits as I feared it might.) An old friend from college told me that despite having dedicated his life to God not long ago he still nearly put himself in a mental ward by running around tracking tech stocks. The eighty-two year old mother-in-law of a minister friend and client lost about half of her nest egg when a Merrill Lynch broker threw it at tech heavy mutual funds.

And to cap the temporary insanity, after millions of conservative Christians spent the 90's hoarding T-bills and gold coins due to paranoid books about Desert Storm, the federal debt and Y2K, the leader of an evangelical ministry tops The New York Times best-seller list by writing that God will increase our portfolios if we'll simply pray The Prayer of Jabez. No need to bother with getting in touch with economic reality, replacing fear and greed with prudence, or investing wisely and ethically. Just pray an obscure prayer. Theologians have rightly ignored it for centuries as it dangerously turns the famous prayers of Solomon, who was blessed as he prayed for wisdom rather than riches, and Jesus, who prayed for daily bread rather than increased territory, upside down. While a culture that worships money is bound to mistake magic for religion, millions of Christians may now be disappointed that their aggressive growth funds didn't soar due to their prayers. Those realties of the jungle would surely depress devout optimists like our friend Robert Schuller. They were devastating to this devoted realist.

So how do we refocus on realistic game? Very simply, stay the course described in recent Updates. As I've said many times, I don't believe the odds of a stock market crash or economic depression are that high. But Japan's situation remains difficult and it may take years for U.S. corporate profits to rise to the point of justifying America's stock valuations. In particular, stop targeting so many of those elephantine growth companies that investors have in their sights due to guides like John Bogle of Vanguard advocating S&P 500 style mutual funds. Refocus on some of the stocks of small value companies that I've been recommending. The smaller the better with about 15% of your portfolio. Though you may not recognize them when you first sight them, the stocks in the micro-cap value fund in my IRA are up 37% year to date. Yet its price/earnings ratio is still half the S&P 500 and a fraction of technology funds. Those stocks have been in a major bear market and may prove rewarding for years to come. While not as trophy-like as Internet companies, they still need our financing if they are to make useful products and employ our children.

Mutual funds investing in the stocks of low p/e, high dividend paying companies have done quite well and are no longer cheap. I now rate them a hold rather than a buy but strongly prefer them to popular but disappointing S&P 500 index funds. As game diminishes, profits are bagged by rifle shots at stocks rather than shotgun blasts at stock markets. Real estate investment trusts (reits) soared 21% last year but selected ones still look good. As there's increasing talk of a deflationary depression due to Japan's problems, I'd prefer the most conservative forms of reits, such as "triple net lease" reits. If we have deflation, the 7-8% tax-advantaged income from my favorite ones might look real good. On the other hand, if Alan Greenspan primes the monetary pump and inflation takes off, the properties might appreciate over the long-term due to increasing inflation. Over 6% monthly income from government-guaranteed Ginnie Mae's still looks good assuming neither extreme of deflation or high inflation occurs. Foreign bond funds look even better as they might appreciate if the Chinese curtail their massive purchases of our mortgage-backed bonds and our dollar therefore weakens. (See attached article about the irony of poor Chinese financing more homes for us than our banks and insurance companies.) The 5% of my portfolio that I have in a developing markets fund has lost half as much as the S&P 500 this year but Sir John has just taken a couple of shots at those markets again so the worst may be over.

Bottom line: Be humble; be patient; be diversified; and be skeptical of any investment a magazine cover, advertisement or neighbor is roaring about. And particularly join me in being happy that our money culture is finally getting back in touch with reality. The most recent Money magazine compared the growing movement for churches to again talk about the spiritual dimensions of money to the civil rights movement. I've just completed an interview with Charles Osgood about spiritual investing that will air nationally in a few days. Even the September issue of Christianity Today will contain an article that will enlighten conservative Christians about the biblical case for ethical, socially responsible or values-based investing. It was written by a young friend that I've mentored for years. I checked the draft for accuracy and found it to be a passionate case for even evangelicals to refocus on financial realities. Had it been a cover story, I might have roared Hallelujah! Instead, I'll say a quiet prayer. For the trend may have more time to run.

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