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December, 2003


Although in Personal Finance for Dummies, by Eric Tyson, we are told that one should not expect liquid assets to go up more than about 10% a year on average, since the end of 2002, the Wilshire 5000 Index, a proxy for the overall U.S. stock market, has risen over 25% (effective 12/12/03 ). Meanwhile, the earnings yield (the reciprocal of the price/earnings ratio and a measure that permits ready comparison between stocks and bonds) of 500 of the nation's largest companies (the S&P 500 Index) is only 4.6% (below the yield of long-term treasuries, whose principle is assured when held to maturity). Alarmingly, in view of the markets' recent renewal of exuberance, our national debt (government, corporate, and consumer) is at an all-time high in relation to revenues and earnings, currently three times our gross national product (GNP). The average stock's dividend, while not at unprecedented lows, is however less than half its historical average. Indeed, by many significant measures domestic equities are again overvalued.

Stock market prices do not remain indefinitely at their extremes in relation to value. At some point the pendulum will swing back the other way, prices will again be much lower vs. earnings, dividends, free cash flow, sales, or book value, and millions will once more be licking their wounds after trillions of dollars in market worth will have evaporated.

The brilliant and world class investor, John Templeton, warns that our country's debt levels are unprecedented for a major developed nation and unsustainable. He indicates both stock and real estate prices in the U.S. are extremely vulnerable. He thinks the 2000-2002 period did not bring the bear market to an end and points out that major bear markets do not reach their lowest point until home prices fall substantially along with those of stocks. With our huge debt levels, a drop in home prices of 10-20% will result in many more bankruptcies as well as further falls in the equity markets.

Warren Buffett is concerned that, given both our high debts and trade deficit, the dollar will be dropping significantly relative to the money of countries with more frugal fiscal policies. For the dollar to regain strength, domestic interest rates will likely need to rise, putting further pressure on bonds and stocks.

Meanwhile, as the devalued dollar makes our assets more attractive to foreigners with relatively stronger currencies, investors from other nations will tend to purchase our real estate and corporations. U.S. profits could thus be heading overseas.

Nobody knows when the strains on a rather tenuous stock market situation will become severe enough that just one more crisis will burst the new bubble, nor the nature of that catalyst. Perhaps there will be another major terrorist attack. Maybe a great earthquake or other natural disaster will shock the financial system. We might find ourselves in a deflationary spiral as the competition with cheaper goods and services produced elsewhere drives down our prices and wages. A deadly virus might sweep through the U.S. population in the way that SARS affected the Far East and Toronto not long ago. Or there could be something else, completely unforeseen, that collapses our confidence and leads to an accelerating sell-off on Wall Street. Sooner or later something like this will occur. As Gilda Radner said, "It's Always Something."

The prudent investor, then, may find it wise to take some of his or her recent gains off the table, awaiting better investment opportunities. Using overvalued assets, whether in real estate or stocks, to reduce debt will put one well ahead in this game. And if one already has sufficient reserves for emergencies and has paid off most indebtedness, it may be worthwhile to consider exchanging some U.S. equities or equity mutual funds for foreign or global assets available at better value for their price than most among this country's securities. If some of one's holdings have already had a good run-up, consider selling them for others that now better meet strict value or contrarian investing criteria. If one does purchase additional domestic stocks or mutual funds, they should have an inherent margin of safety. It can be useful too to have holdings that benefit from the potential rise of gold prices in times of significant market uncertainty and/or that take advantage of currency fluctuations at the expense of the U.S. dollar's relative worth.

Overall, I am thus not particularly sanguine about U.S. investments at this point. While they well may go up substantially again in the new year, the risk of loss is getting greater. But for those seeking worthwhile fresh ideas, in spite of the red flags on our fiscal horizon, such cautionary considerations as the above have gone into this list of stocks or mutual funds that now seem attractive to me for 2004:

Stock or FundSymbolRecent
Tweedy Browne Global Value FundTBGVX$19.33
Prudent Global Investor FundPSAFX$13.16
American Century Global Gold FundBGEIX$12.65
Clipper Fund, Inc.CFIMX$86.98
Longleaf Partners FundLLPFX$29.30
Berkshire Hathaway, Class BBRK/B$2734
AT&T Corp.T$18.73
SBC CommunicationsSBC$24.94
Duckwall-Alco Stores, Inc.DUCK$15.35
T-3 Energy Services, Inc.TTES$6.24

If still seeking additional investment suggestions for the new year, you might also check out the top picks from 50 of the best market analysts at "Wall Street with Fortune."


Larry is not a professional. Don't take him seriously!

Actually, the investment article provided here is for general information only and should not be considered as professional advice, a solicitation to buy or sell any security, or the Word of God. Investors are encouraged to do their own research while considering their personal goals and circumstances, or consult their own professional financial advisors, before making investment decisions. Neither Larry nor LARVALBUG will be liable for any losses sustained by any visitor to this site.

(Disclosure statement: Larry and Val have holdings in some of the suggested assets but do not "make a market" in any of them and do not derive any direct benefit from recommending them, except perhaps for a bit of smug self-satisfaction.)

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