Smart Investing

Investors continue to get bombarded by headline bad news. On one day alone last week some of the headlines included "Shanghai Market Becoming Bearish," "Riding U.S. Debt Must Be Contained, Buffet Says," "Fed's Unfinished Business, Bernanke Called Hero, But Crisis Far From Over." And let's not forget about Hurricane Bill. Let me dissect each one of these and let you know what I feel when I read these.

Shanghai market: On this story right below the headline was "Asset bubble feared growing in China." The Shanghai index is now down 20 percent in the last two weeks and stories are coming out about how this will affect our market. My feeling is I don't believe it will. China is not the United States; it still has a lot of makings of an emerging market country.

Just last week I heard that there was some concern that some of the sales being recorded by businesses may not have really been sales at all. People that know me know that I don't have any money invested in China. Why? I depend on the financial statements of the companies that we buy, and with the oversight of the SEC, GAAP and FASB along with other watch dogs, the numbers are pretty reliable. Not so much in China and this will lead to wild swings in their markets.

How does it affect us? China does buy our debt and we do buy a lot of its exports, but unless you have your money invested in Chinese stocks, the effect in the United States should be minimal.

Buffet on the rising U.S. debt: Of course he's right -- debt can be destructive to the long-term growth of a company, country or even a person's own net worth. The government has spent billions upon billions to avoid a depression and it has worked. But like everything in this world there is a price to be paid, or in this case, repaid. I believe this will be repaid, but it will take years; to put a number on it, I would say five years would be a good estimate.

Why do I think it will be repaid?

We are starting to see signs of improvement in the economy -- it's nothing that shows a boom is here, but there are improvements, which I mentioned last week in my column. But as far as paying the debt down, as we see unemployment decline, more workers will be paying taxes on their wages.

Businesses large and small will see an increase in profits and will pay more in taxes. Last Thursday I saw that AIG stock was up 30 percent and more than 100 percent in the past month. Who owns 89 percent of AIG? That's right, the U.S. government. It also owns a lot of Citigroup and has preferred stock with many financial companies that are paying back loans with interest. Over time this will help reduce the large debt. The problem: The government must resist the temptation to increase spending for the next five years.

Fed's unfinished business: Yes, we have come out of the dark days of concerns on another great depression or a severe recession, but make no mistake -- there is still a lot left to do to rebuild a strong economy. The Federal Reserve has to maintain a balance of keeping the economy going forward without allowing runaway inflation. It also must ensure that banks continue to loan money without reducing their capital to levels that would cause a closer of that institution. While in my opinion, Mr. Bernanke has done a great job and I would award him a letter grade of A, he still has a lot left to do to prevent the economy from slowing down without letting it overheat and grow too fast.

Since the beginning of the year I have worked harder than ever before, managing my client's assets and digging deep into the companies we are invested in. But as hard as I've worked, it is nowhere near as hard as the Fed chairman has worked. From what I've read he has only taken two days off this year for his son's wedding and has worked every weekend. While I'm glad to hear that, I can't imagine the stress he is under and how little he must sleep at night.

Hurricane Bill: Nothing against weather forecasters, but it almost sounds like they get enjoyment out of talking about how bad the hurricane will be. I heard one the other day predicting that yes, this will be a category five, and the damage it may cause. I've also heard a few weeks ago some other hurricane that died out and it sounded like the weather person was disappointed.

Hurricanes can and will happen. And when disaster strikes it's terrible. Unless the hurricane is threatening your own backyard, why listen to what could happen? All it will do is raise your bad emotions and prevent you from making good investments, or it may even cause you to feel bad and sell a current holding that is doing well.

So be realistic about what you read or hear, and by all means, don't just read the headline. Be sure to read the entire story and think about what will really happen, if anything.