The Accidental Investor

“You got a very good deal,” said Maitre Boulzaguet. “You bought at the very moment when prices hit bottom. Good move.”

Maitre Boulzaguet is the ‘notaire’ who organized the deal when we bought our farm in France. I saw him on Saturday night at a dinner party organized by Blanquita, a woman from Venezuela who is married to a local Frenchman.

“But you can’t worry about prices,” said the notaire. “You never know if they’re going up or down. You just have to buy something you like. If you worry about money… well… you are doomed to be miserable.”

By way of further introduction to new readers, my family and I moved to France a few years ago. Our intention was to come for the summers, while I was trying to develop business in Europe. But without ever really intending it, we found ourselves making a much bigger investment – in both time and money – in our French property. The house is a huge chateau-style agglomeration from various epochs and various owners – which was in desperate need of attention when we arrived. We have been working on it, and spending on it, for the last 4 years.

Maitre Boulzaguet is the kind of man you want to know when you enter a new area. He knows everyone…and everyone’s business. If there is a local deal to be made, chances are he is in on it.

“Cuba is great,” he said suddenly, changing the subject. He and his wife had just returned from a vacation. “But people are so poor. I gave the woman who did our laundry a 50 cent tip. But she gave it back. She said it was too much money.”

Maitre and Madame Boulzaguet travel frequently. Their children are grown. They take advantage of their free time and excess money by touring the world.

“One of the best trips we ever took,” he said, his eyes lit up with the pleasure of recalling it, “was when we went to the U.S. We rented a car in Phoenix and then drove all over the Southwest. We went to Santa Fe and Taos. Taos Pueblo… c’est fantastique.

“But you know,” he confided, his grey head bending in my direction, “you never know. Sometimes the trips you think are going to be the best turn out to be not so good…and often, those that you take without much expectation turn out to be your favorites.”

So much of life is ruled by chance, dear reader, I feel it my duty to call it to your attention. Thus, I pass along this little memoire for no other purpose that showing you how some people cope with uncertainty.

When you marry a woman of 25 you can scarcely predict what she will look like at 50. When you get off the plane for a vacation, you cannot be sure whether your time will be well spent or not. And when you make an investment, you cannot know at the time of purchase whether the asset price will rise or fall.

Yet, you have to make choices. You have to decide to do one thing and not another…to buy one investment and not another… And, important decisions are almost impossible to hedge. When you marry, for example, if you try to keep your options open after you tie the knot you are almost certain to wiggle the knot loose.

“You know what my wife and I do, though…” Maitre Boulzaquet continued, “we decide in advance, before we leave the house, that we’re going to have a good time, no matter what. And guess what, it works. We’ve been to some rotten hotels.. Even in America, we stayed in… what are they called… the Motel 5…”

“Motel 6,” I corrected him, “where they leave the light on for you.”

“Well, I wished sometimes that they had turned the light off. Some were pretty good, but some were not. But it didn’t matter because once we decided that it was something we wanted to do and that, good or bad, we were going to enjoy it. Well…we did.”

The Boulzaguets had decided to make the best of their trips – in sickness and in health…whether at the Four Seasons or Motel 5…they were going to have a good time.

Could there be an equivalent in the investment world?

Also at the party was a older gentleman, with a youthful face, but hair the color of snow and a pronounced forward stoop. I did not catch his name, but he helped me understand a little more of the French rural mentality.

“I think it is so nice what you have done with Ouzilly,” he said. “So often, when a grand old property passes out of a family’s hands, it goes downhill. It may have been in the family for centuries, but the new owners don’t really have any attachment to it. Usually, it is on the market again in a couple years – after they see how much work and expense it is to keep it up. Then, it is flipped around, broken up…and is never quite as nice as it used to be.”

“But you seem to have stepped right into the previous owners’ shoes,” he continued.

“Yes,” literally, I thought, as someone left a pair of slippers up in the attic, which I have used from time to time, “they were broken by the weight of it. And now I am being broken down by it too.”

“Oh la la,” added Maitre Boulzaguet, “I bet you wouldn’t want to add up all you’ve spent on the place.”

“But it’s a good thing you did,” replied the white-haired gentleman, “because it was on the edge of ruin.”

“Yes,” I couldn’t help myself, “and now it is I who am on the edge of ruin.”

But we are all going to be ruined in one way or another. At least here I can enjoy my poverty in genteel circumstances, like the previous owners.

“But at least the land has gone up in value,” Boulzaguet reminded us.

At the time we bought the farm, property was at the bottom of a cyclical low. At about $700 per acre, it was the cheapest farmland in Europe…and about a tenth price of land in Maryland.

It was also about a tenth the price of farmland in England or Holland which attracted a number of foreign farmers willing to master the complex farm subsidy system.

Whether it was the marginal buying by farmers, or an upturn in the French economy, I don’t know. But between 1995 and 2001 prices of French farmland have doubled.

Of course, it doesn’t matter. We’ve decided to enjoy the place. For better or for worse.

Bill Bonner Ouzilly, France February 19, 2001

*** Nortel dropped a bomb on Wall Street Friday. In addition to the usual admission that sales and profits would not be as great as investors had hoped, Nortel’s CEO told the street that the problem was likely to persist through the 4th quarter of this year!

*** As far as I know, this was the first time a New Economy company has recognized publicly that the current malaise could be more than a very short-term slowdown.

*** Maybe the slump won’t be V shaped after all. Maybe the rising slopes on the other side of the recession valley are farther away than they appear.

*** Nortel announced that it was laying off 10,000 people and that earnings had been cut in half. Investors knocked the stock down by a third.

*** Nortel was not alone. Most of the Big Techs seemed to suffer on Friday as the Nasdaq fell 127 points. The damage was most severe in the fiber optics area – where JDS Uniphase lost 20% of its value.

*** “When you add up the big names mentioned you get more than $100 billion in revenues,” writes William Fleckenstein “so ladies and gentlemen, this is significant stuff. These are not itty-bitty companies that are having problems. This will definitely back up the food chain in technology…” (see: Second Half Rebound D.O.A. )

*** The other thing that hurt stocks was the latest PPI report, showing wholesale prices rising at 1.1% during the month of January. This was the biggest increase in 10 years, and completely unexpected. Economists had projected an increase of only 0.3%. Now, they’re calling the January number – which included big increases in natural gas costs – a fluke.

*** Maybe. Maybe not. “Inflation is not dead,” said Sung Won Sohn, chief economist at Wells Fargo. On the other hand, prices are probably not rising at 13% per year either – as the January number might imply. To the extent that the number reflects something real it is telling us not to expect any improvement in corporate earnings any time soon. The PPI measures the prices corporations pay for their materials – energy, resources, and so forth. Corporations are getting squeezed.

*** Uh oh…a young man in a business suit just barged past my daughter Maria. What on earth?…

*** 20 minutes later…it turned out that he was from the local tax office. They noticed that there was an antenna on the roof, but that I had not paid the television tax. “Of course, I didn’t pay it,” I told him, “I don’t have a television.”

*** We had gotten a number of bills – including one by registered mail – but had thrown them away since we didn’t have a TV. Well, it turned out that a VCR player is regarded as a television…so I ended up writing the guy a check for 1,200 francs to get rid of him. Back to work…

*** That’s the trouble with working from home… interruptions. Through the window, I notice that Mr. Deshais seems to be rooting out some lilac bushes (he hates flowering plants for some reason)…I should stop him…but you come first, dear reader…

*** So, Friday was not a great day for investors. The Nasdaq ended the week down nearly 2%. Otherwise, there was little to show for a week’s worth of work on Wall Street.

*** In fact, there’s little to show for the whole millennium – stocks are about where they were on January 1st. And the Dow, as I pointed out on Friday, has made no forward progress in nearly 2 years.

*** Two years ago, when Dow stocks were selling at record prices, it was obvious they couldn’t continue going up at that pace forever. One might have predicted that the return on such assets would have to be lower in the future than it had been in the recent past. Otherwise the symmetry and order that nature requires would be lost. The economy was only adding wealth at a rate of about 5% per year. How could stocks – which represent ownership of the means of creating wealth – increase at three times that rate? Well, they couldn’t for very long.

*** Now, in order to get asset prices back in line with the real economy, stocks have to fall by at least 50%…or remain stagnant for another 10 years or so while the economy catches up.

*** Alan Greenspan, however, sees it differently. “Productivity has elevated earnings expectations and created a permanently higher level of asset values,” he told the Senate last week. “We are only partway through one of the most remarkable periods of technological advance which is crucial to productivity growth…it is just a matter of time before the malaise dissipates and the system comes back.”

*** The system does come back…but only after the inflationary liquidity caused by the central bank has been wrung out.

*** Fannie Mae increased mortgage commitments by 35%, December to January. Mortgage payments reached a record of 6.35% of disposable income in the 3rd quarter of last year. But the taxpayer-backed (implicitly and eventually) lenders continue to expand.

*** The real estate market is still hot, but consumer sentiment is cooling. It dropped to its lowest level since ’93 last month, after falling for the 4th month in a row.

*** “One of my favorite ‘big lies’,” writes Lynn Carpenter, “is the weird notion that a whole nation of Americans acting as one complacent mob roared right through the ’20s… completely unaware that anything could go wrong. The Great Crash wasn’t a blind-side rout. A lot of smart, sophisticated people managed to escape unscathed. But as I compare the events of our day to that time, I can’t help but think: We could be in trouble.”

*** “Everyone’s looking at the stock market,” Lynn continues, “factory orders, inventories, earnings reports and dozens of other statistics trying to see where we are headed. But the truth is, people – families in particular – are far more important than corporations or governments in setting the nation’s course. And, right now the balance sheet of the individual isn’t looking too good.”

*** Gold rose $2.90 on Friday. The dollar, which almost always goes in the opposite direction, fell. The euro rose to nearly 92 cents.

*** Loews Cineplex ‘went chapter.’ Following a huge binge in theatre investment, almost all the big chains are in trouble. Too much capital, no matter where it is invested, loses its value. “Money is like manure,” someone once said, “pile too much up in one place and it begins to stink.”

*** Elizabeth and two of the older children went back to Paris last night. They’re packing up so that we can move to another apartment. I have not seen it yet. All I know is that it is a lot more expensive.

*** Today is a holiday in America. It is the day set aside to remember people who are best forgotten – U.S. presidents such as Rutherford B. Hayes and William J. Clinton.

*** But here in France, the crew of the Daily Reckoning rarely takes a holiday and hardly sleeps…