WASHINGTON, Aug. 1 (UPI) -- "Put not your trust in princes" says the King James version of the Bible (Psalm 146, verse 3). As an investor, put not your trust in numbers, either, whether government statistics or corporate financial statements.
Did you know that, according to Generally Accepted Accounting Principles, the U.S. Federal budget deficit in the year to September 2001 was over $500 billion?
I thought not.
On the figures everybody knows about, the budget last year was in surplus, to the tune of $127 billion. However, that's based on government accounting principles, which don't, for example include accrued pension, healthcare and environmental liabilities, as private companies have to do. On the Generally Accepted Accounting Principles (GAAP) used by your corner grocery store, or by General Motors, the government was in deficit to the tune of $514.8 billion. You can look it up -- on www.fms.treas.gov. It's all quite genuine, if disturbing -- the difference is largely the recognition for the first time of the lifetime value of the government's military health liability obligations, a cool $388.6 billion.
You'll also be unsurprised to learn that the Federal government, under GAAP accounting, has a net deficit position of $6,458.8 billion, which has also increased more than $500 billion from the previous year. This is, remember, in a year in which the government was supposed to have run a surplus.
This does not prove, as some websites would claim, that the entire Federal government is run like a bankrupt dot-com, although certainly some of former Enron CFO Andrew Fastow's liability-hiding tricks seem oddly familiar when you look at the GAAP Federal budget in all its horror. Nor does it mean, necessarily, that the government's going to be bankrupt by 2010. After all, if it needs money, it can always print more of the stuff (inflationary though that is), and you have to believe that most other countries, not just the Brazils and Argentinas of this world, are in this kind of state if you do the accounting properly. Germany's unfunded pension liabilities are, after all, a matter of constant cocktail party chatter whenever international economists get together.
It does however prove that you can't trust the numbers you read, either from government or private business. The report from the EU court of auditors on the EU's accounting Wednesday, which stated that "no account has been taken of generally accepted accounting standards, mainly double-entry bookkeeping" is another case in point. Probably you wouldn't have trusted figures coming out of the EU anyway, but some people do.
In the private sector, of course, entire forests have been felled detailing the accounting misdeeds of fallen 90's superstars. What is more alarming, is that even in universally respected companies, such as GE, there is a great deal of "flexibility" in the accounting, particularly again in the treatment of pension contributions, where for a number of years in 1997-2001 GE was recording negative employee pension contributions as a boost to profits. Presumably GE won't be able to do that in 2002; the hit to earnings will be considerable.
The moral of all this is that you should not pay an excessive premium for apparent stellar earnings growth, or accept an excessively low yield for bonds issued by a company whose balance sheet you don't understand, or in a currency whose government is pursuing unsound financial policies (that means all of them!)
So, if you don't trust anybody's numbers, what do you buy?
-- Stocks of companies that pay good dividends, and have a history of paying them in both good and bad times, and of increasing them from time to time. Whenever you get cash, you get the chance to choose again; much better that a company give you back some money every year, so you can either spend it or, if you prefer, choose to put it somewhere else. It keeps everybody honest. Needless to say, with today's yield on the Standard and Poor's 500 Index stocks being around 1.6 percent, it's very difficult to find stocks that pay worthwhile dividends -- another reason to believe the stock market is still overvalued.
-- Bonds of fairly short maturity, with a yield that's worth having. Diversify issuers, maturities and, if you can, currencies, but don't compromise on quality of issuer. Credit ratings are meaningless on bonds with more than 5 years to run anyway, because of the chance over a long period that a company may become technologically obsolete or managed by a megalomaniac (and even worse things can happen to countries!) Index linked bonds (where principal and interest are linked to inflation) are worth having for some of your portfolio, but you should remember that their return is linked to the Consumer Price Index, yet another number that can be and has in the past been fiddled.
-- Gold and silver. There's a reason French and Indian peasants hold part of their wealth in precious metals -- they don't trust governments. Nor should you. Maybe some day currencies will return to a Gold Standard basis, so that you can have some assurance that their value will be maintained, but not in the next few years. Indeed, with the Fed likely to cut interest rates still further to fight the recession nobody admits we're in, highish inflation must be quite a possibility in the next few years, so gold should be well worth a flutter.
-- Stocks of companies in "emerging markets" -- countries with cheap labor, apparently decent governments, and not too much dependence on the U.S. Oh, and low stock prices. You can find Indian companies trading on 7 times earnings today, with earnings audited internationally and the companies listed on London or New York. Sure, the earnings may be dubious, but so they can be here. The price is lower, so the risk is less, particularly if you buy Indian stocks through a diversified fund, such as Jardine Fleming's India Fund (NYSE-JFI) or Morgan Stanley Dean Witter's India Investment Fund (NYSE-IIF). Of course, India and Pakistan could start a nuclear war next week, but at least it's a DIFFERENT risk from the others in your portfolio.
Diversify. Buy cheap. Don't trust figures. Don't trust salesmen. Look for investments that pay steady cash returns. These are the rules to remember when trying to preserve your assets and get a decent income from them.
(Wing Collar is a weekly column of personal finance advice, expected to appear Thursdays. It intends to give readers the solid financial advice, tailored for today's financial needs and markets that a wing-collared bank manager would have given, back in the days before bank managers were salesmen. Wing Collar owns modest holdings of the Indian funds mentioned, and of put options on the S&P 500 Index.)
