“You are always telling readers to avoid getting into housing, stocks and hedge funds,” began our harshest critic yesterday. “But what are they supposed to do? It seems to me people who buy things – whether it be works of art (which you seem to like to make fun of too) or shares in companies, or real estate – are really doing the right thing,” my wife Elizabeth continued.
“Otherwise, what do they do? Hold money? What is money? That’s the thing… it’s nothing. I don’t want to hold it. What I want is what money can buy… not money itself. And we all know that money buys less and less all the time. It’s losing its value every year. Stocks and real estate aren’t losing value; they’re going up in value. So, the people who are making mistakes are the people who are holding cash – because the government is creating more and more cash… it’s not creating more and more land, for example. So, I’d rather own land.
“You don’t have to be an economist to figure out that the value of the currency has got to go down. Then, all the people who were holding money in money market accounts are going to wish they had bought stocks and real estate… because those things at least have a chance of preserving your wealth.”
Elizabeth’s point is that since today’s funny money itself is a poor store of value, a person is better off buying something else. She is certainly right.
But imagine that instead of trying to increase the size of your wad over the next 18 months you’re trying to figure out how to leave something of value to your grandchildren, say, 25 years from now. Hmmm… what do you leave them? Shares in General Motors? Shares in Microsoft? U.S. Treasury Bonds?
Looking ahead a quarter of a century, none of these investments seem very sure. General Motors will probably be out of business. Microsoft is almost sure to be knocked off by newer, faster, better technology. And U.S. bonds? Well, the U.S. dollar is now losing purchasing power at a rate of about 3% – compounded annually.
Since Alan Greenspan first took the post of Fed chairman (he only stepped down last year), the dollar has lost about half its value. And during that time the total of financial obligations of the institution that controls the dollar’s value – the U.S. government – has soared by, who knows, probably at least 25 trillion. The dollar has become like an IOU from a man who owes far more than he can pay… and who can decide how much his IOU is worth anytime he wants. Who would take that kind of paper? Who but a cynical crank would want to leave it to his grandchildren?
Land, you say? Real estate? Well, at least land won’t go away. But the trouble with real estate is that it requires attention. And often, its’ costly to own. There are taxes, maintenance, insurance… plus the regular expenses of owning a place… utilities, furnishings, this and that.
Property is especially appealing to Europeans. They’re not as trusting as Americans. They’ve seen more disruption and change – both politically and financially. The French, for example, devalued their franc in the ’60s. Out went 100 old francs for every single new one. Then, a generation later came an entirely new currency -the euro – and a new system run by the European Central Bank. So, the French often leave property to their children and grandchildren rather than government bonds.
But it isn’t easy. We have a friend who rents out an apartment. He hasn’t gotten a dime in rent in the last six months. But getting out bad tenants is a nightmare, even for a lawyer.
Other friends had a house in the country that they were keeping for the next generation. But thieves kept breaking in. Finally, they gave up and sold it.
And even if you put aside all the practical problems of owning real estate, you still have the risk that – as a financial asset – your property may go down in price. Over the 100 years, from 1896 to 1996, the average property in America only kept up with inflation. Fine enough. But that means that about half of them didn’t do even that well. And some of them went down substantially.
Our U.S. offices are in downtown Baltimore. The city was once one of the richest and most thriving metropolises on the planet. Immigrants streamed in from the Old World with money and energy. Trains and canals connected the city with the interior. Huge factories lined the harbor, where huge ships unloaded their cargo… and little bay skiffs unloaded oysters, crabs, fish… as well as farm produce from the Eastern Shore. Skyscrapers rose downtown. Row houses spread out in every direction. Theaters, restaurants, clubs and bars served up meals, drinks and entertainment. H.L. Mencken loved the place; he couldn’t imagine living anywhere else. And there were probably plenty of people who couldn’t imagine a safer, surer way to leave wealth to their grandchildren than to pass along property in the center of town.
One of those properties was a beautiful mansion once owned by Theodore Marburg, America’s ambassador to Belgium in World War I. Marburg was a friend of Woodrow Wilson. The two of them were said to have drafted the original League of Nations charter while sitting in the library, a room with leaded-crystal bookcases and cherubs painted on the ceiling.
In today’s money, the house would have been worth about $2 to $3 million, back when Wilson was elected. But by the time we bought it, in the mid-’90s, the price had sunk to $500,000 – and there were no other bidders in sight.
Markets and Money