Stones and Gold

Stones and gold; that’s practically all I ever invest in. I buy stone structures in Europe and I stash away a few gold coins here and there…no matter what happens, the stones will still be there.

I’ve reflected on the apparent nuttiness of this and assured myself that it is less nutty than it seems.

“Why would I buy stocks,” I asked myself. “In order to buy the things I want,” came the answer. “What things do I want,” we continued the questioning. “Old stones and gold coins!”

Some people have a weakness for old, stone houses. Others cannot resist a pretty face. Still others are prey to good liqueur or bad whiskey.

But put a pretty girl in front of a stone château, with a glass of Armagnac in one hand and a Krugerrand in the other, and I practically fall apart. I drop down to my knees in delicious agony and reach for my wallet. I offer neither excuses nor apologies for this behavior. Nor do I recommend it to others.

Still, it has its advantages.

“I don’t believe in stocks,” said a friend at lunch yesterday. “I mean, I own stocks. But not many. And I think the average guy really is better off in real estate.”

“Yes, I know there’s a real estate bubble in many areas,” he went on. “But when a guy buys a stock — unless he’s Warren Buffett, he has no way of knowing what the business really is, or whether it makes sense or not. That’s why you get these huge swings in the stock market. One year a stock may trade for $50…the next, it goes for $100. And it’s the same stock, of the same company, doing the same business it was the year before. But the average stock buyer doesn’t do any analysis…he just buys stocks he hears about or reads about.

“Real estate is different. He can see it. And he can do the math. If he buys an apartment building, for example, he knows it will cost him so much to operate…and he knows how much rent he’ll get. In other words, he really does understand the underlying business…just like Warren Buffett understands the businesses he gets into. That doesn’t mean he won’t make a mistake, but it means he’s much less likely to make a spectacularly stupid mistake like buying one of those tech stocks that had no earnings.”

Real estate investors may be doing the math, but the math itself may be misleading. If your property is rising between 10% and 40% per year, it makes sense to borrow at 6% to buy it. But that doesn’t mean that interest rates will stay at 6%, or that property will continue to rise. Even at 6% there are costs to holding real estate. Upkeep, taxes, insurance. Many real estate investors seem to be losing money every month — while betting that their property will go up in price.

So far, they’ve been right. On both coasts, property prices are soaring. Even here in Baltimore, where real estate, in real terms, sank for most of the last 75 years, there is a boom underway.


“You mean, because prices are finally rising in Baltimore…?” we asked another friend while walking down Charles Street.

“No, ‘hallelujah’ because they finally cleared the riff-raff out of the old Stafford Hotel. It was Section 8 housing…you know, designed for poor people. But it ended up being a place where all kinds of drug dealers and riff-raff hung out. I talked to a policeman who works around here…he said that 80% of the crime in the area came from that single building…

“But now the Peabody Conservatory — the music school — bought it. They’re going to put their students in it. And you know, they’re all Korean or something.”

“What did they do with the people who lived there?”

“I don’t know, but they should have taken them out and shot them.”

What’s going on in Iraq? Hardly anyone mentions it.

“I read your commentary,” began a conversation with a Dear Reader the other day. “And it is kind of funny. I mean, this is a war that is costing, what $100 billion…and nearly 1,000 American lives. But people don’t really talk about it. They don’t really know anything about it, and don’t know what to say.

“The war was probably pretty stupid from the very beginning. But most people trust their leaders…and they don’t know anything about al Qaeda or Iraq. When 9/11 came, they just wanted the government to do something. So, the government did something. Everybody was more or less in favor of it. Even Hillary [Clinton] and Kerry voted for it.

“It kinda makes sense that most people…the people you refer to as the lumpen…would want to go and kick somebody’s butt. America’s supposed to be the biggest military power on earth. It just didn’t make sense that we couldn’t even protect ourselves from a group of guys with box-cutters.

“Of course, that’s the thing about a Republic. You’re supposed to elect people that are smart, sober and calm. And these guys are supposed to sit around in solemn debate at times like this. They’re supposed to carefully weigh the merits of various arguments and decide what is best for the country. They’re not supposed to be swept along by mob sentiment. They might do something dumb.

“But now you’ve got CNN and the Internet…and everybody gets whipped up at the same time…and the politicians just go along with whatever is getting high numbers in the polls. That’s not the way it is supposed to work, but that’s what happens…and it’s just what — who do you keep referring to — de Tocqueville…warned about. Or maybe it was George Washington. I think you had the quote in an article…’I leave you a Republic…if you can keep it.’

“Well, it turns out that we couldn’t keep a Republic any better than Rome could. Now, we have a circus in Washington and a clown in the White House. And I agree with you…Kerry wouldn’t be any better. In fact, he might be worse.

“You had a good line the other day…what was it…oh…that America will be great as long as she is good. I think that was from de Tocqueville too. But like ancient Rome, it looks to me that we stopped being ‘good’ a long time ago. Good people don’t go bombing other people just because they think they may be up to something. And they don’t let other people pay their bills for them either — but that’s another issue.

“But getting back to my point…I think most people still think that the war against Iraq was a pretty good thing. It got Saddam out of there. And we didn’t know what threat he posed…but at least we found out…and now he poses no threat at all.

“The scary thing is that almost no one was against the war for the right reason…and that’s still true today. People argued that it wouldn’t work. But almost no one said it was wrong to go kill people. If the war had gone well — almost everyone would be happy with it. That’s what I mean about America not being good. Everyone wants it to be great…and no one seems to care if it’s good or not. Maybe it was always that way…I don’t know. You reach a certain size and a certain power…and maybe you can’t help but throw your weight around. I think you’ve been saying something like that. Anyway…it’s only because it didn’t go well that people are now against it. Heck, I guess it’s better that it didn’t go well. If it had gone well, we’d be in Damascus by now.”

Bill Bonner [send him mail] is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21st Century.