Where the Real Returns Are in Life

I take up my word processor to write my last column for RealMoney.com for some time. In summary, here are my parting thoughts.

First, the stock market, especially on the tech side, is still far too high. Earnings in a large part of the tech sector are virtually nil. It will take a substantial time for earnings to appear, if they ever do, in many components of the Nasdaq 100 Unit Trust (QQQ - commentary - Cramer's Take).

If earnings ever matter -- and they must or else the whole concept of a share of stock is meaningless -- then tech is still in a bubble phase. There are surely some exceptions, but tech is still coming off the biggest stock bubble in history. Investing in it may or may not make money as long as bubble thinking, which rewards even companies without earnings, persists. But if rationality returns to the market anytime soon, the techs could still be in for some major correction.

In other words, tech is still risky, and may be getting riskier as skepticism comes to the marketplace again.

Looking for Safe Harbors

The blue-chips, or what used to be thought of as blue-chips (maybe there are no more blue-chips in a world of suspect accounting and rapid technological change that can weaken a company's value overnight) are nowhere near as overvalued, but are still high. For them to yield roughly 2% on a dividend basis and about 4% on an earnings basis -- when corporate bonds are yielding above 7% at investment grade and government-agency riskless (for coupon) bonds are yielding above 6% -- seems to me to show a highly overvalued Dow Jones Industrial Average.

When short-term CDs yield 3% without risk and short-term tax-free bonds can yield almost the same, maybe those are good harbors until we see more sane price-to-earnings ratios. Again, the bubble aspect of the Dow is nowhere near what it is for the techs, but there's still very large overvaluation in the Dow. When earnings revive, I think the Dow will be fine, but earnings have fallen so dramatically in the past year that it may take years for them to recover to 2000 or 1999 levels. This may imply a long-term swoon or stall for the Dow.

I do see value in short-term bonds, both taxable and tax-exempt. I see fantastic value in owning your home or reducing its mortgage, both risk-free ways of realizing high rates of return on capital in the form of tax-free imputed rent, subsidies on capital gains, subsidies on the deductibility of mortgage interest and the sheer joy of owning a home you love.

I started off this series of articles by saying that I think it is extremely difficult to pick stocks. But I still believe it's possible to make what the gurus call "excess returns" by buying at historically low P/Es and selling at historically high P/Es -- over very long time periods.

People who want to communicate with me about this after I leave RealMoney can email me. I welcome sensible comments and get a ton of them. Those unhappy few hate mailers can find someone else to torment.

The Importance of Diversification

But I'd like to make another point. Yes, I find it hard to figure out ways in this market to make surefire returns free of large risk. And I do reproach myself for spending so much time thinking about it.

It would be much smarter of me, and maybe of you, to spend less time seeking to know the unknowable -- how to beat a market that is still in a bubble -- and more time with our children, friends, spouses, charities or parents, more time looking at the ocean at sunset or over a great city's lights at midnight with the one you love. "The world is too much with us; late and soon / Getting and spending, we lay waste our powers," wrote William Wordsworth.

He was partly wrong. It is pleasant and enlightening to spend a certain amount of time trying to make money, and it's also necessary. But at some point, it's time to say, "Enough for now." We can only do what we can do with something as immense and as hard to gauge as the market. Then maybe it's better to just get into bed with a good mystery, a good dog or a good spouse and put on the headphones and listen to Mozart. Investments in people we love, in relaxation, in appreciation of the beauties of nature and art all yield surefire, tax-free returns. I, for one, hope to make more of them.

I will always be obsessed with the market, but I hope to have some love and some beauty as part of a more diversified portfolio of life.

Thank you for reading and for writing, and I wish you all well. It has been a pleasure.

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Benjamin J. Stein has been a trial lawyer, a White House speechwriter for former Presidents Nixon and Ford and a campaign speechwriter for Reagan. He has been a columnist for The Wall Street Journal and written for publications including Barron's, New York magazine and Los Angeles magazine. He is a novelist, a nonfiction book writer and a screenwriter, and he has been an expert witness on financial fraud. He studied economics and finance at Columbia University, where he graduated with honors in economics in 1966. He studied finance at the graduate level at Yale while he was a law student there and served as an economist with the Department of Commerce before commencing his work as a trial lawyer. His work on ethical issues in finance has been widely published, especially as it related to the Drexel Milken junk bond scheme and to the problems inherent in management buyouts of public companies. He has also written frequently about the problematic nature of mergers and acquisitions of public companies and about the deep ethical problems of accountants of public companies. His book on Drexel, A License to Steal, addresses many of these issues. He speaks frequently to financial and lay audiences about issues in finance and ethics, usually from a humorous perspective. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. At time of publication, Stein had no positions in any of the securities mentioned in this column, although positions can change at any time. While Stein cannot provide investment advice or recommendations, he invites you to send your feedback to Ben Stein.