Welcome to the New World of Investing

02/20/2009 5:39 pm EST

Focus:

Ed Finn

Editor and President, Barron's


Attendees at The World Money Show greeted our keynote speakers with enthusiasm and hope that their words would help them prepare for a new cycle of investing. And they weren’t disappointed!

WHAT'S AHEAD FOR STOCKS, BONDS, AND THE ECONOMY?

Edwin Finn, editor and president, Barron's; chairman and editorial director, SmartMoney, told investors this has been the worst of any market he has seen in his 32 years of covering the markets. And he congratulated attendees for remaining interested in investing, stressing the importance of not giving up.

He predicted that America will continue to see job losses, but at a slower rate in the coming months, and also estimated that the economy would make a turn for the better between the middle of the year and year end.

Mr. Finn reminded investors that the stock market is a leading indicator, and stocks generally turn around three to six months before the economy. He disagrees with others who are currently forecasting another 50% slide in stocks before the rout is over.

He also discussed dividends, and gave attendees a few tips in determining the safety of a company’s dividend payout ratio.

As for specific investments, Mr. Finn said Asia will begin to quickly grow again. He also noted that he is interested in South America, especially Brazil, stressing that diversification is key.

Moving on to commodities, Mr. Finn suggested that oil prices probably won't dip below $30, and will probably end up somewhere in the $50 to $70 range over the next five years. He also addressed the importance of holding some gold, particularly since the expansion of government spending will likely become inflationary.

Lastly, Mr. Finn discussed the current state of our economy, financial sector, and the stimulus programs that have been put forth by our new president, saying that things have improved but he has concerns about the spending bill and we will have to watch Washington very closely. And he predicted that real estate would continue to fall—a lot.

He closed his talk by emphasizing that personal success is what has made America great both for investors and individuals and consumers whether it's in science, in technology, entertainment, or finance, saying that he believes that spirit of entrepreneurialism will continue.

INVESTING IN A CHANGING GLOBAL ECONOMY

John Rutledge, PhD, chairman of Greenwich, Connecticut-based Rutledge Capital, expressed his belief that there is tremendous investment opportunity in North Korea.

He also continues to believe in the China growth story, commenting that the country’s entire stimulus plan is devoted to constructing infrastructure, as compared to the 5% the US is targeting for that sector.

Dr. Rutledge commented that he wanted attendees to take away one point from his talk: Economics from the old school don’t work anymore.

He spoke against the politics of fear, noting that fear doesn’t guarantee anything, and in fact, has taken the bottom out of the economy, with folks hoarding cash. Just since July, 2008, Americans have taken more than $70 billion out of their bank accounts. Instead of allowing fear to drive you, he suggested that if investors just relaxed, they can find extraordinary bargains and values at this time.

Dr. Rutledge noted that the greatest tragedies in history occur when people get fearful and start witch hunts everywhere. He said that fear is a powerful weapon and if it is used, you’re not a leader, and he cited the case of Russia’s Putin, as an example.

Dr. Rutledge is known for comparing investing to the Second Law of Thermodynamics, which basically says that when you put heat and cold together, energy flows from one to the other. It is the only law in the world that has never been broken.

Hid point is that energy drives all activities on earth but when at equilibrium, nothing happens. But once out of equilibrium, opportunities—such as arbitrage—occur. And that’s where investments in China and India become attractive—one nation trading their surpluses to others—‘arbitraging’ their strengths.

Dr. Rutledge used this comparison to discuss additional scientific concepts, such as how accelerating change creates turbulence, and how this notion can be applied to investing strategies. For example, he commented that the current economic crisis that is undermining the system is a form of turbulence, and the best you can do, is wait it out.

He discussed the economic crisis in depth, noting that he’s still waiting to see which of the two Obamas—the healer or the divisive one—will ultimately win out.

In closing, Rutledge recommended investors protect themselves with cash, short-term bonds. He recommended against buying directly into emerging markets unless you understand them. Instead, investors can get exposure by buying dividend-paying stocks of large American companies.

NEW PRESIDENT, NEW CONGRESS, WHAT HAPPENS NOW?

Steve Forbes, chairman, CEO and editor-in-chief, Forbes Magazine, gave attendees his assessment of what went wrong with the economy and markets, and shared his ideas for turning them around:

In his optimistic, but realistic talk, Mr. Forbes acknowledged that our current economic troubles were created by bad policies, but stated that he believes we can pull ourselves out of this situation pretty quickly.

He noted that from 2003-2007, the growth of the American economy exceeded the entire size of the Chinese economy. But the policies that the Federal Reserve began in 2004 came back to haunt us: printing too much money, keeping interest rates artificially low, and weakening the dollar.

Mr. Forbes also took the regulators to task for the well-hated mark-to-market accounting rule, saying that it has considerably contributed to the economic crisis by causing banks to decimate their assets—sometimes very good—assets on their books.

He is not a fan of the stimulus programs that are underway, saying that they will create a spending binge in the name of savings.

But the good news, Mr. Forbes said, is that the world is not coming to an end.

He had several suggestions for ‘What do we do now’. Mr. Forbes recommended that we again make a long-term, strong and stable dollar a priority. Additionally, he slammed the gargantuan, onerous, and costly tax code, suggesting that a flat tax code would be much more equitable. And lastly, he discussed health care, and gave suggestions for overhauling—not nationalizing—our nation’s health care policies.

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