As I read the financial oracles' pontifications about the coming year, I notice that there is a generally negative tone to their predictions. From today's Seattle Times alone you can read: "Real Estate Anxiety: What's Next in '08", and "'08 Forecast: food at least 3% higher; gas up 10.7%", and in the business section there is a half-page article titled "How you could ride out a recession". That's negative! Do I necessarily believe all of this pessimism? Not really. As is true in any year, there will be sectors of the economy that do well, and others that suffer, but I'm not quite ready to start stocking MRE's in the garage anticipating a global financial collapse. Here's what seems reasonable to me:
The stock market will continue to be choppy until the subprime lending issue is completely sorted out.
The Fed will continue to jigger with interest rates as the lending situation is resolved and that will scare investors into and out of various financial vehicles until things stabilize. The movement of capital will precipitate the volatility mentioned above.
The real estate market will continue to cool and that will shake out people who got in late and probably shouldn't have been in in the first place. Foreclosures will continue to rise until all of the suckers are dumped by the wayside, shorts in hand, wondering how Carleton Sheets could have been so wrong. This will, however, create opportunities for well-capitalized, experienced investors ready to take advantage of their mistakes.
With the dollar remaining weak it makes sense to continue to diversify overseas. I don't have the time to do the requisite research to find individual companies that make sense for what I need, so I'll continue to use international stock index funds.
Since Berkshire is moving into the muni bond insurance business, it might make some sense to examine munis as a pure asset play rather than as an income vehicle. As their payouts become more certain, their values would increase and the yield would decrease; so remember what you learned in Econ 101 about the inverse relationship between bond valuations and their yield and act accordingly.
Apple will continue to innovate and Microsoft will continue to chase its tail. A lot of chest-thumping has occurred in our area over MSFT's 30 percent run-up in 2007, but Anthony picked AAPL for his portfolio last spring has ridden it from $83.00 to $200 in the same time frame. Why? He and I watched Steve Jobs announce the I-Phone on the internet and he wanted to own one. I told him that he was too young to have an I-Phone, but he could own part of the company that makes them. His face lit up immediately and the next day he was a shareholder. Admittedly, not all of his picks have worked out that well, but the money that he has made with AAPL has more than offset his missteps. For example, early in 2007 he picked SIX (Six Flags Entertainment), because they owned a nearby water park at the time. Unfortunately, their share price plummeted and he learned the hard lesson that not all stocks go up after you buy them. I'm glad he's learning it as 6 and not at 26 or 46.
Maria is very entranced by Disney Princesses so one of her principal holdings this year has been DIS. As a result of her growing DVD collection, we decided that Dreamworks (DWA), might be an interesting one for her to own as well. So she has take one more step toward becoming an entertainment industry mogul as she is the proud owner of 3 shares of Dreamworks SKG.
Their portfolios are rounded out with Costco, Walgreen's, Starbucks, and Target. True, they are overly weighted in the retail sector, but the goal is more about teaching them different ways to save their money than just putting it in the bank and earning 2 percent. We'll teach diversification when they're 8 or 9, I think they'll still be ahead of the curve.
I hope all of you have a very prosperous 2008, no matter what the harbingers of financial gloom might say.
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