Into The Minefield

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-foreclose d 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.