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American Morning

'SmartMoney' Writer Discusses Consumer Confidence

Aired June 27, 2002 - 09:14   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
BILL HEMMER, CNN ANCHOR: It seems just about every day now we're hearing about another costly mess rocking the corporate world. And for those of us who are not getting insider information, how do we protect our assets?

Let's talk about that and more with "SmartMoney" magazine's Lauren Young, back with us, answering some e-mails, too, in just a bit, here, too.

I am willing to bet the greater majority of folks watching the show, myself included, if you look in the balance sheet, you're trying to figure out the finances, you're pretty much clueless. I mean, you do not know where to start or where to look.

You have three bits of advice. We'll put them up for our viewers right now. The first one is check the mountains of debt. You also say look at footnotes in annual reports, and check for fake revenue. Those three things are great advice, but tell us how this works and how you do it.

LAUREN YOUNG, "SMARTMONEY": Well, these are red flags to look out for, and where you're going to find them is in a company's annual report. So you need to find that. You can usually get it from the company or get it on the SEC's Web site. It's right there. All the quarterly reports, all the information is right at your fingertips -- you just know how to dig. Now, debt is really important. Debt can saddle a company. It's what brought down Enron.

So you want to look at long-term debt, and you want to compare it to a company's annual revenue. Now, I'm talking about all these terms, and trust me, if you start looking for them, you're going to become familiar and figure it out. Now, if a company has the same amount of long-term debt, a ration of 1 to 1 with its annual revenue, forget about it. It's probably in trouble.

HEMMER: I have to think this takes a lot of homework. Do you find that people are willing to do the homework?

YOUNG: It take a lot of homework, and certainly, our readers are willing to do the homework. We know that, but I think a lot of people are afraid, and you should not be. You just need to get started. There are so many resources out there that were not available five years ago. The Internet really is a beautiful thing. And even without the Internet, annual reports are key. You should be reading an annual report of every company you invest in, if you own the individual stock. In a mutual fund, it might be hard.

HEMMER: Just a week ago, before all this stuff hit, a good friend asked me what do you think I should do about my 401(k)? Should I move it into other areas? How do I find out about those areas? Is there a place where an investor can go to look up the mutual fund ratings to figure out where, indeed, things are good and where things are average or bad?

YOUNG: Well, you raise a really good point, and you know, so many people are very nervous right now. But I have to tell you that if you're diversified -- and I know I've said this over and over again, and we talk about it all the time -- but...

HEMMER: Yes, we have.

YOUNG: ... we did a study. We went back 76 years and looked at a portfolio of small company stocks, large company stocks, international stocks. That portfolio only lost money 1.1 percent of the time over a 76-year period. So, if you're a long-term investor, you can go to morningstar.com.

HEMMER: Morningstar.com.

YOUNG: Excellent Web site. They are, by far, the authority in the mutual fund industry, and they've got all the information: performance, who the fund manager is, what kind of stocks they own. And if you plug in the holes, if you diversify, and you do different things with your asset allocation plan, you will be OK.

HEMMER: I want to get back to that word, "diversification," in a moment here. A couple of e-mails, too.

First of all, Pat writes in and says, "I have a WorldCom bond. What do you think with happen? Will I lose money?"

YOUNG: The good thing about being a bondholder is that if a company does goes bankrupt, you are basically better protected than a stockholder. They're at the bottom of the food chain. So depending on what kind of bond it is, you may get some of your money. Maybe it's 60 cents on the dollar, because that's the way these bond people talk about it. You probably will lose money, though. I mean, it -- WorldCom is a sinking ship. But the good news is you probably won't lose as much money as a stockholder who's pretty much guaranteed to get nothing.

HEMMER: L.G. says, "I have a substantial portfolio, and I've lost a bundle. I have lost faith in the market and my broker. I am now considering closing my account and reinvesting in real estate and other safe commodities. What is your opinion on this?" You hear a lot of that, today.

YOUNG: Absolutely. This person, J.J., needs to go out and do an asset allocation plan. You can find them all over the Internet. We have one on our Web site. Fill out the worksheet. It will really help you determine where your money should be. Probably, maybe some of it's in too much risky stuff. And real estate is a fantastic investment. In fact, it's been the best over the past five years. But you don't want to put all of your money -- all of your eggs -- in one basket -- ever. You really need to diversify.

HEMMER: And lately, people are talking about real estate more than they ever have.

YOUNG: Oh, absolutely.

HEMMER: Judy writes in. She says, "I have just reached my 65th birthday. I'm now a widow. My IRAs that I've had for many, many years continue to go down fairly rapidly. I've waited so long to liquidate that I will assume some pretty big losses. Should I convert them to cash or hold on and watch them continue downward as more corruption is uncovered and investor confidence continues to erode?"

YOUNG: And Judy is absolutely right. I mean, I think investor confidence is pretty low. In fact, it's at an all-time low -- and that we are going to see some more disturbing things in the market. She does need to have some money in cash. But she still needs to have some investments. She's only 65-years-old, and women are living, today -- they say that a baby girl, born today, is going to live to be 100. So nine out of ten women manage their money at some point in their lives. And Judy's, you know, found out pretty young, 65, that she needs to start taking care of these things.

HEMMER: Listen, we're out of time, but two things I want to get to. I talked with Andy about this two hours ago. At some point, as an investor, usually have to look at the numbers and say, you know what, eventually, I just have to say, I trust the numbers. I have no other option but to say this is what I'm presented with here. Who knows what's behind the curtain? But I have to take it at face value.

YOUNG: I think that there are some bad apples out there. But ultimately, corporate America is pretty solid. I mean, we have better disclosure here than anywhere else in the world.

HEMMER: See, and that's something that investors need to hear.

YOUNG: Well, we'll say it again and again, but you know what, until company -- until earnings start to turn, until some better things start happening -- the war in the Middle East, maybe we get peace, you know -- I won't hold my breath for that. But until there are more positive signs in the world, people are going to continue to be nervous, but stay the course. Don't pull out.

HEMMER: Thank you, Lauren.

YOUNG: You're welcome, Bill.

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