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Ben Stein: Buy Index Funds, Real Estate

Wednesday, 09 Jul 2008 04:26 PM

Economist and commentator Ben Stein has some calming words of advice: By any serious definition, we're just not in a recession.

And we might not enter one, either, regardless of the stock market right now, Stein writes in his online column.

Investors should pretty much ignore all the media talk about bear markets and instead keep investing, particularly through index funds and depressed assets like real estate, he says.

Stein points out that bear markets are fairly common. We've had nine by one count since the mid-1960s. But just five actual recessions happened in that same time span.

So, a bear market now doesn't mean recession is a done deal, Stein argues.

"That is to say, the stock market predicts 10 out of five recessions. Not such a great record," says Stein.

"The truth is that while the economy is clearly slowing down, we are not yet in a recession."

Stein cites the general rule of two consecutive negative quarters signaling a recession — which hasn’t happened yet, and might not. The U.S. has churned out very, very low growth, but it has stayed positive so far.

"As I keep saying, if anyone can call anything a recession, the whole subject loses all intellectual or factual meaning. This too could happen — a real recession — but it has not happened yet."

Stein says there are plenty of sectors of the economy that show surprising strength, despite the horrid picture painted by the collapse of financials, U.S. automakers, and the airlines.

The weak dollar has helped U.S. exports boom. Mining and agriculture are getting a lift from high commodity prices. Healthcare and the public sector are chugging along. Military spending is likely to be sustained.

"The government is running an immense deficit, and this is stimulative," Stein says.

But it's the larger world — the growing economies of China, India and elsewhere — that is beginning to really drive things.

"It would be extremely rare for there to be a spectacular worldwide demand for commodities along with a serious fall in demand for other factors in an economy," Stein says.

"That is, it would be rare for demand to be both rising and falling at the same time. It could happen, but it would be rare."

As for what to do next, Stein says buy. Broad indexes of stocks are a good strategy, and keeping plenty of cash on hand, too.

"None of us can control the economy. Thus, we just have to keep swimming in the roiled waters," Stein says.

Economies go through cycles, as always. The headlines will be positive again, soon enough. Buying indexes means investors can ride out the bad news and profit when things turn up.

As for cash, the risk is inflation, Stein warns. In that case, it's better to get into a real asset that’s depressed and thus likely to appreciate.

For instance, insurance giant Prudential has reportedly sold the Chrysler Building in New York to a sovereign wealth fund controlled by the government of Abu Dhabi. The price, according to Bloomberg News, was likely $800 million.

Prudential acquired the building when it took control of an Atlanta, Ga. real estate fund, TMW Real Estate Group. That fund bought the Manhattan landmark in 2001 for $300 million.

Prudential's investors have seen a 20 percent return after taxes on this and other real estate sales in recent years, according to a spokesperson for the company. That gain is despite the decline in New York real estate from last year's peak.

"The best bet usually is what has gone down the most, and that, for now, is real estate," Stein writes. Where people fail in real estate is in failing to buy, he says, citing money manager and friend Phil DeMuth.

Meanwhile, understanding your own reaction to fear — made worse by the media — is the key.

"Know that the headline writers want to whip you up and make you crazy about the economy," Stein says. "They sell fear. Stay calm and stay well to do."

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Economist and commentator Ben Stein has some calming words of advice: By any serious definition, we're just not in a recession.And we might not enter one, either, regardless of the stock market right now, Stein writes in his online column.Investors should pretty much ignore...
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2008-26-09
Wednesday, 09 Jul 2008 04:26 PM
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