The Investment U E-Letter: Issue # 478
Monday, October 17, 2005 Why Steve Forbes Blames Inflation and Taxes for Stock Market Woes
By Dr. Mark Skousen, Chairman, Investment U
Dear Investment U Reader,
In Thursday's Investment U E-Letter, we looked at the first half of my interview with Steve Forbes, editor and publisher of Forbes, the nation's leading business magazine. My long-time friend commented on the bull market in oil and gold, the Fed's spending problems, and why he believes many of the country's problems could be solved with a flat tax - the centerpiece of his new book, The Flat Tax Revolution. In Part 2 of our discussion, Steve attacks the Sarbanes-Oxley securities law, helps us to understand the floundering stock market, and tells us what he thinks of the war in Iraq. He also reveals the most important lesson he's learned in life… so let's get right to it. Interview with Steve Forbes, Part 2 Mark Skousen: The stock market has been floundering while foreign markets have really been strong. Can you address why you think the U.S. market has not done well? Steve Forbes: Part of it is the Fed raising nominal rates, creating uncertainty, and not dealing with the monetary situation. Inflation is beginning to move up. Another factor that hasn't gotten much play is taxes. All of the Bush tax cuts expire in 2008. Here in the market, that's not too far away… Sarbox [Sarbanes-Oxley financial reporting legislation] has hurt small and medium size businesses. GM can deal with it, even with their straight finances, but for a small company, a couple of million bucks for no reasonable purpose? That hurts. Mark Skousen: Was Sarbanes-Oxley even necessary, given what Forbes and all the other publications did in exposing the frauds at Enron, WorldCom, etc.? Steve Forbes: No. It's fine to put in reforms requiring that you must have a certain number of directors, etc. That's all fine. But fraud has always been illegal. And maybe a lot of paperwork will make it harder to commit fraud. But determined souls will always find a way to beat the system. Sarbanes-Oxley has cost billions of dollars. The biggest inhibitor, the biggest disincentive for committing fraud, was Bernie Evers [former WorldCom CEO] getting 25 years in the slammer. Boy, the prospect of that ain't worth a candle. That is how you fight fraud. Punishment for perpetrators. That'll do it. Mark Skousen: What about the war on terror and the war in Iraq? Is this a never-ending war? Are you supportive of the president? Steve Forbes: I'm supportive of the thrust of the war against Islamic fanaticism. I think we've made a number of mistakes, and now they have elections this month - to approve the constitution. The parliamentary election is in December. The key now is training and developing the Iraqi security forces to make this thing work. There's so much we can do. I think the military itself has done brilliantly under very difficult circumstances, far better than we did in Vietnam. I think it's very telling that most of the insurgents now are from outside Iraq. The lethal violence is happening in a handful of areas - directed against the Shiites and Kurds - to try to foment civil war and civil strife. It's been a long time since the country's oil has been knocked out by insurgents. It's been a while since electricity has been knocked down because of insurgent terrorist attacks. There has been some progress. You can lead the horses to the water, but will they drink? You can only do so much. And part of the fight against this fanaticism - a form of totalitarianism that we've been fighting since World War I - is engaging in the battle of ideas, which I think we did very effectively in the Cold War. Maybe we've been a little slow off the mark here. And also, going to economics, our foreign economic policy has been antigrowth. The IMF is a disaster. It's pro-tax, pro-inflation, and doesn't promote property rights. Mark Skousen: You live in and work in New York City. Do you fear another terrorist attack? Maybe not a 9/11, but a subway attack, something that would close down the stock market? Steve Forbes: It's the kind of thing where, sadly, you know it can happen. But life has got to go on. So you move ahead. You can't paralyze yourself by going through all the what-ifs. And what's amazing about human beings is that even in difficult circumstances, they find a way to continue, find a way to move on. Even in Israel, at the height of the suicide bombings, of course it destroyed the tourism, but the high-tech economy continued to function. You have to adjust. It doesn't mean you're passive about it. You fight it. You pay a price for it. The economy does not do as well when you have to fight external threats. After all the money we spend on police, fire departments, defense… it'd be nice to be able to spend those dollars elsewhere. But it's like insurance: You pay for it and hope you don't have to use it. Mark Skousen: I know you've always religiously avoided adding your name to the Forbes 400 Richest People in America, whether it belongs there or not. The minimum to make the list is now up to $900 million, and next year, if the stock market holds up, it'll probably be a billion dollars to make it. Years ago, everyone agreed your dad probably qualified, but would you qualify today? Steve Forbes: No, because I have four siblings. We have nine in what we call G4, the fourth generation, and we're now starting to get grandchildren, which we call G5. Mark Skousen: The Waltons, children of Sam Walton, founder of Wal-Mart, are still on the list, but they're splitting up a massive fortune. And I noticed the Hunts, descendants of oil magnate H.L. Hunt, aren't on the list any more. Steve Forbes: Proponents of the death taxes say we are going to perpetuate an aristocracy. Well, today it's not the land portion, it's paper assets. It's intangible. What the death tax did was create a lot of brains to figure out how you preserve this from the tax collector, which meant putting it in trusts, not letting it go directly into the hands of the heirs…putting it in the hands of people who are prudent. If you didn't have the death tax, you'd have more direct bequests and by golly, it will get recycled very quickly. And most of the heirs are not as entrepreneurial, have that knack, or are going to succeed at what you did. So they're going to invest and spend. And if they do have a knack to grow it, well, that benefits everybody because you put the money productively to work. But human nature being what it is, it will get recycled faster when you don't have brains trying to figure out how to keep it together. Mark Skousen: For you, being both a businessman and investor for many years, what is the most important lesson that you have learned from an investment point of view that you could pass along to our readers? Steve Forbes: Well, first of all, forget about being Warren Buffett. There's a reason why there's only a handful of Warren Buffetts in the world. If you want to make real big money, you have to run your own business and structure it in a way that's successful. For investors, I'd follow the advice of an advisor in Connecticut who told me that unless you're a true expert, invest as you should play tennis: Concentrate on putting the ball over the net, and you'll do okay. You're not going to be the pro and you're not going to Wimbledon. In investing, don't try to be Warren Buffett and hit a home run. Try to apply discipline and go for the singles and the walks - the dividends. Be disciplined. We all say we're disciplined until the market goes down, and then we panic. We all say we're long-term investors until the market goes against us, and then we start making mistakes. So, diversify. If you can't devote full time to it, bring in the advice and management of others, but baby-sit your money, and remember the value of compounding interest and compounding gains. By golly, over time, it works. But if you try to make it fast, you'll lose it fast. Discipline. Easy to say, but most people emotionally have a hard time with it. Mark Skousen: Ben Franklin said the three virtues are industry, thrift and prudence. If you save a lot, use the money productively and prudently, you're going to be successful. Steve Forbes: And the worst thing for sound investing is going to a cocktail party or barbeque and listening to people you know who are dumber than you regale you with stories of how much money they've made in the markets. Mark Skousen: On a broader perspective, having lived a long life, what is the most important lesson of life that you've learned? Steve Forbes: At the end of the day, you have to have that strong sense of right and wrong, and not get caught up in whatever the fashion or the fears of the moment are. Because it's your soul or your conscience that you answer to. The pharaohs learned that you couldn't take it with you. So if you've been true to your core values, you have a chance at real happiness. Otherwise, it's like a drug: You get the fix, and destroy the soul. I guess the other thing is, if you suffer a setback - and if you live life and take risks, you will suffer setbacks - pick yourself up and move on. Don't let the past poison the future. If you nurse grudges, and nurse grievances, you're just going to end up doing yourself in. Yogi Berra is right: It's not over 'til it's over. Ray Crock was in his '50s before he stumbled onto McDonald's. So keep going. Mark Skousen: Thank you, Steve. Today's IU Cribsheet - Check out Steve Forbes' latest book, The Flat Tax Revolution.
- Read Part 1 of the interview: Interview with Steve Forbes: Why He Thinks Oil Prices Are Going Down…
Good trading, AEIOU, Mark Related Articles: Investment U Archives | 
