Is Real Estate the Best Investment You'll Ever Make?

Perhaps, but let me begin by stating: the ideal that everyone in America should own a home is as flawed as the messianic ideal that everyone in the world should be Christian, capitalist and live in a democracy. Everyone in this country has the right to own a home, but there are many people who- given their nature, age, lack of integrity, maturity and socio-economic means are either not able or unwilling to make the commitment and assume the (usually) long term obligation that comes with having a mortgage.

While I do not have the data to support this, I rest my argument upon the rapidly unfolding "sub prime" fiasco. I concede that renting is, from an investment standpoint, just throwing money out the window, but there are many people in the USA who rent their homes and who are happy. My 82 year old father is one. I am another. One of the great advantages of renting a home is that it is liberating- I sleep better at night because I know I can serve notice to my landlord at any time and move someplace else if I want to.

I have owned both an apartment in New York City and a nice house in Greenwich, Connecticut. While both turned out to be pretty good investments I speak from experience when I say that the house was every bit of a money pit as I had feared it would be. The adage about "The 2 happiest moments in a boat owner's life..." applied to me and my house. I was elated when we sold it- not so much because we made a nice profit, but because the Sisyphean endeavor (improvements, renovations and maintenance) was finally over.

And despite the prevailing "wisdom" that your best investment is your home, or real estate in general- it all comes down to location and to timing. Pick the wrong location and get the timing wrong- and you will loose money on property. I believe that the Empire State building was built (completed in 1931) for around $25 million. Add that to the value of the land, and the total cost was $41 million.

The building was not profitable until 1950. It was sold a year later- 20 years after it was completed for $50 million. Now of course it is arguably a billion dollar piece of real estate. Obviously there is a huge difference between investing in residential and commercial real estate, but consider this: the so-called "lost decade" in Japan (the 1990's). Between 1985 and 1990 real estate prices in and around metro Tokyo tripled. I do not have the break down between residential and commercial property markets here, but indulge me.

These prices then fell steadily over the next 13 years to where- in many cases they retraced to 1985 levels. Land values alone plummeted 84% from their peak in early 1990 until 2003 (source: Bank of Japan, Financial and Economic Statistics Monthly; Ministry of Public Management, Home Affairs, Posts and Telecommunications, Consumer Price Index; Japan Real Estate Institute, Urban Land Price Index.) So is real estate the best investment you will ever make? Ideally it should be part of a diversified portfolio of investments- but if your house constitutes well over 80% of your assets, that is a very large bet on a single asset class.

The Wisdom of the Financial Sages

"We're all learning that leverage works both ways..."

John Mack, CEO & Chairman of Morgan Stanley, in an interview with CNBC's David Faber on October 16, 2008

Permit me this 1 irreverence: "Duh!". Is this patronizing? Contrite? Or what? Here we have the CEO & Chairman of one of the most powerful and "storied" investment banking firms the world has known, confessing that he now realizes leverage works both ways. Forgive the comparison, but that is almost like a veteran card shark working the tables at Las Vegas suddenly announcing, "Gee whiz! You mean I can actually loose money here?"

And how much was John Mack paid last year? I don't not have the figure handy, but what does it really matter? It is so far beyond what he is worth, given the magnitude of his errors as helmsman at Morgan Stanley,and what this has cost shareholders- and after all, the buck should stop "there" and not with the board or with the nouveau scapegoats, the "compensation committee". Even if we cut John Mack some slack, and assume he was treading carefully in an interview- to suggest that he / they didn't understand what the pitfalls of leverage implied (as in

40:1 leverage) is to impugn his very ability to be where he is in the first place.

This is the way of "the Street"; has been for years and despite all the tribulations of the present will be the "way it is" for as long as greed remains the driving force on Wall Street: when you "score", you get all the credit and then can appear magnanimous in parcelling out money and "perks" to the underlings that serve you and the franchise. When you screw up, you can always parcel out blame to the board, the compensation committee, "the man" and to the regulators who should have known better than to trust you, and let you do what you did in the first place.

The Most Important Election in Living Memory?

I take issue with the editors of the New Yorker, who in the first paragraph of their most recent "Talk of the Town" editorial (October 13, 2008) state:

".....When have so many Americans had so clear a sense that a Presidency has - at the levels of competence, vision and integrity - undermined the country and its ideals?"

Try 1974. Nixon's adventures in Vietnam, the secret bombing of Cambodia and of course Watergate were far more serious transgressions than anything Bush has done. We had a constitutional crisis in 1974. In the final paroxysm of the Nixon Presidency, there were fears - well-founded fears that Nixon would refuse the Supreme Court's order that he surrender the "secret" tapes he has harboring.

Had he done so, we would have been living in a de facto dictatorship. The editorial begins by asking rhetorically:

"Never in living memory has an election been more critical than the one fast approaching - that's the quadrennial cliché........And yet when has it felt so urgently true?"

Well as far as important elections are concerned, I agree that 2008 is the most important election we have had in many years.

To suggest that it is the most vital Presidential election in "living memory" however is hyperbole: 1932, 1940, 1960 and 1968 were far more critical election years- 1932 because of the Great Depression and the specter of social anarchy in the USA; 1940 because of the depredations of fascism in Europe and Asia and the specter of world war; 1960 because the Cold War and the specter of nuclear holocaust were very real threats to our republic and to the very survival of the human race; 1968 because the country was tearing itself apart over Vietnam.

Need I remind anyone, least of all the editors at the New Yorker? 1968 was also the year Martin Luther King Jr. and Robert Kennedy were assassinated, and the year of the epic riots in Chicago during the Democratic National Convention. Talk of the Town continues:

“The incumbent administration has distinguished itself for the ages. The Presidency of George W. Bush is the worst since Reconstruction…”

Here is another inaccuracy in the editorial. The worst Presidency since Reconstruction? Aside from Richard Nixon's Presidency, that would include the Presidency of Herbert Hoover, who presided over the Crash of '29 and Act 1 of the Great Depression- catastrophes by any measure. Google “Hooverville” or check it out in Wikipedia. There was a rather large "Hooverville" on the Great Lawn in Central Park. As far as “most critical elections” are concerned, I was not going to reach back as far as the Civil War, but the New Yorker brought up Reconstruction, so; the election of 1864 is "ancient history" by many Americans' reckoning, and obviously does not qualify for "all-time important Presidential elections" using the New Yorker‘s "living memory" test.

Yet the New Yorker editorial poses the question, "And yet when has it ever felt so urgently true?" Perhaps it's a fine point but the reelection of Lincoln in the midst of the Civil War is but another example of a far more important election than 2008. And if I need explain or defend that statement, then I refer you to the history books.

Jim Cramer Part 2

Famous Cramer Quotes:

"No! No! No! Bear Stearns is fine.....Bear Stearns is not in trouble.....Don't move your money from Bear. That's just being silly. Don't be silly." (CNBC, Mad Money, March 11, 2008.)

"It's time to buy, buy, buy!" (CNBC, Mad Money, June 13, 2008)

"Whatever money you may need for the next 5 years, please take it out of the market right now, this week." (NBC, The Today Show, October 6, 2008)

And this from the New York Times on September 30, 2008:

"...Mr. Cramer later told his TV audience to buy Wachovia, calling it one of only a few potential 'winners' in the $700 billion bailout...."

Jim had his "buddy" Robert Steel, the CEO of Wachovia, on Mad Money and pronounced that the $10.71 price of the common stock was a bargain. Within 2 weeks it was $1.81 (source New York Times, October 19 2008). Cramer has defended his rant about Bear Stearns by clarifying that he was not referring to the common stock, but to withdrawing money from Bear Stearns brokerage accounts, presumably due to SIPC protection. Yet SIPC protection only goes up to $500,000 for cash and securities (with only $100,000 in cash protected); and to state that Bear Stearns was not in trouble....well.

Mark To Market Accounting

With all the controversy swirling around "mark to market" accounting these days, it is interesting to note that Jeff Skilling and other senior officers at Enron lobbied aggressively to be able to use this method for doing their books. The SEC approved and Arthur Anderson signed off on it. Essentially this allowed Enron to book future (i.e. "imaginary", "theoretical") profits from deals immediately after they were signed; which meant that as far as the public was concerned, Enron's profits were whatever Enron wanted them to be and said they were.

In the definitive documentary film on Enron's demise, "The Smartest Guys in the Room", Skilling is seen in conference with other Enron officers jesting about switching from market to market accounting to HFV; in Skilling's words, "hypothetical future market value" accounting, enabling the company to add "...a ka-zillion dollars to the bottom line." In effect he was having a private laugh at the accounting stunt they had just pulled off on the SEC and on the investing public.

Ha-ha. Well we all know how Enron worked out in the end. Yet since the demise of Enron, major financial institutions on "Wall Street" have created investment and trading vehicles so complex that no one- including the people who cobbled them together, really knows how much they are worth. The days of "whatever we say they are worth" died with Enron, and accountants the world over saw what happened to Arthur Anderson.

So while the financial wizards on "Wall Street" have pressed for their more exotic assets to be "marked to model", their accountants and the Treasury have been insisting that they be marked to market, forcing these institutions to take massive write downs. It's ironic how this accounting method helped Enron create new businesses such as trading bandwidth and generate obscene, albeit phantom profits has also been the undoing of so many Wall Street firms in the past few months.

Yet just as it was reckless in the extreme to allow Enron to book future profits as if they had already been realized, so too is it reckless to force so many companies to mark their investments to market at what amount to "fire sale" prices. One has to hope that this is being done on a case by case basis; that the toxic sludge on corporate balance sheets is being written down or off, but that the legitimate investments companies have made that have simply cratered along with the rest of the market will be recognized and allowed to recover.

The smartest guys in the room? That's also what people said about the principals at Long Term Capital, which imploded just over 10 years ago.

Jim Cramer

I hate to be late to the Cramer bashing party, but I thought I'd take my turn anyway in spite of, or perhaps because of all the financial carnage around us. I have just found him so consistently irritating, so consistently wrong, more harlequin than investment professional and such a shameless self-promoter. Is "Mad Money" about educating the public, or is it an infomercial designed to promote the Cramer cult, to sell books and to amuse the "slack-jawed troglodytes" out there who tune in after playing marathon sessions of Dungeons and Dragons?

Cramer is not someone you can rely upon for sound investment advice. The record will show that he has been both cheerleader in bull markets (1 year ago) and neurotic fear monger in down markets (now). His recent alarmist utterances about descending to the depths of another "Great Depression" are deeply irresponsible. It's one thing to call Fed chief Ben Bernanke names and to carry on like a wild man, shouting "They know nothing!", and to gleefully paste (sorry...split infinitive) corporate CEOs up on his "Wall of Shame".

It is quite another to keep saying that we are on the verge of another Great Depression and are about to go back to subsistence farming and living in caves. Funny as this may sound, one of the main reasons we are seeing the wrenching volatility and massive point swings on the Dow, credit markets locking up and the yields on Treasuries going negative is because of panic. Most Wall Street watchers concur that when you could hear that giant sucking sound of money leaving money markets a week or so ago (bound for safety deposit boxes or the redoubtable mattress) we were witnessing a 1930's run on the bank, "Y2K" style.

So thanks Jim, for pouring gasoline on the fire. Just as Harry Reid should be castigated for making that totally irresponsible remark about a major insurance company being on the verge of bankruptcy (last week), Cramer should be told to "...put a sock into it". What value is Cramer adding by warning that we are near Great Depression part 2? This borders on yellow journalism and only serves to cause more people to panic. And panic, after all is one major reason financial markets are in a catatonic state.

What everyone needs to do now is pause for breath, and maintain their composure. I grant that Cramer can be entertaining, in a "Bo-Bo the Clown at the state fair" kind of way. He gets credit for his enthusiasm and for getting so many people interested in the stock market. Without a doubt, millions more Americans are involved in our financial markets due in large part to Cramer's Mad Money show on CNBC and to his many books on the subjects of trading and investing.

That he has played Pied Piper, however and led his flock of lemmings off of a few cliffs in the last few years is beyond dispute. Perhaps this is one reason he will not publish any kind of an index of his recommendations is somewhat suspect (I know, I know.........the lawyers); but still. He was nearly rhapsodic about such stellar companies as: Crocs, E*Trade, Sirius and a host of other stocks that have gone "ker-flooey" since he turned somersaults recommending them. Oh, and then there's Google (GOOG).

Last year, every time GOOG would hit yet another high, Jim would say it was going higher. If it hit $600, then it was going to $700. When it hit $700, well then it was going to $800. At that rate, the stock would be at $3,800 by now........that is if it weren't for this little crisis we are going through. Granted, Jim was not the only Google cheerleader on the Street last year. I just wonder how scientific his recommendations are or have been. To that I am sure he would counter, "Hey! The trend is your friend."

Well then who needs Cramer? If all you need do is follow a prevailing trend, I mean: a monkey could do that........................speaking of which, what ever happened to the monkey on http://www.cramerwatch.org/? I have been tempted to time his show, Mad Money, in order to see just how much real analysis and advice he gives up in the 60 minutes allotted. I haven't had the time or patience, but I would venture this guess: when you subtract the commercials, the countless "boo-yahs", the frat house buffoonery and the shameless book "promos" you are probably left with a 20 minute show; if that.

I have no doubt that people have made money trading with Jim. I also am certain that people have lost a lot of money by acting on his advice. If you watch his show for comic relief- and these days that is just what we all need- then OK. If you watch his show looking for sage investment or trading guidance I'd suggest watching Fast Money instead.

Italy - The Paragon of Business Ethics?

Plucked from the "pages" of www.nytimes.com today:

"On Saturday, Gordon Brown, the British prime minister, said the crisis 'has come from America,' and Mr. Berlusconi bemoaned the lack of business ethics that had been exposed by the crisis."

Oh! If only business ethics here in the USA could one day rival those widely embraced by the Italian business community.