by Archie M. Richards, Jr., CFP^®
January 16, 2005

Margaret writes, "I like two stocks, one priced at $83 a share and the other at $18. I can only pick one. Is the lower-priced stock a better value?

No, Margaret, if the stocks have the same price-earnings ratios, dividend yields, and growth prospects, they have the same value.

Uninformed investors assume that lower-priced stocks are more desirable. They're not; they just enable the purchase of more shares, which means nothing in terms of the growth potential.

The higher-priced stock might be a little better buy, for two reasons:

• The price is likely to be less volatile. Reduced volatility makes us less likely to sell when prices fall.

• Since so many people prefer lower-priced stocks, they have to pay up for them. The price of the lower-priced stock is probably a little higher in terms of the growth potential. This makes the lower-priced one less desirable.

Stock prices took a hit a few weeks ago, when interest yields inverted.

Here's an explanation: Lending money for 10 years is riskier than lending it for 1 year, because the longer period has more uncertainty. Therefore, creditors usually want higher interest rates on the long bonds than on the shorties.

But when the Federal Reserve tries to cut down inflation, short-term rates rise faster than long-term rates. When the short rates exceed long rates, the yields, as they say, invert.

In the last 50 years, this has occurred 8 times. More often than not, stock prices fell thereafter. But the serious bear markets occurred during the 1960s and 1970s, when the government's economic policies were poor and tax rates were far too high.

Income-tax rates are now considerably lower, and current economic policies aren't too bad. A severe and prolonged bear market, such as we experienced in the 1970s, is out of the question. Any declines will be moderate. 2006 and 2007 are going to be up years.

Think of investing in terms of sawing wood. If you press on the saw, it binds. You're better off keeping the saw in contact with the wood and letting the saw do the work.

So it is with investments: Let the market do the work. If you try to beat it, you're likely to trade too much and take too much risk.

Instead, buy the market. In fact, buy several markets, with a number of index funds or exchange-traded funds. But then let them alone to work for you, without fiddling with them. Rebalance annually, but otherwise, the more boring your investments, the better the long-term results.

Keep your investments in contact with the market. As the market rises over the long term, your investments will do the same.

To judge the Iraq War, look at the economics. People who live in fear buy gold and jewelry, sew them into their clothes, and try to flee. But people who feel confident about the future buy real estate.

Michael Rubin, Editor of the Middle East Quarterly, points out in the Wall Street Journal that property prices in Iraq have skyrocketed. Decrepit houses in Sadr City, a Baghdad slum, can easily cost $45,000. Houses in upper-middle-class districts of Mansour and Karrada can cost more than $900,000. Restaurant owners spend $50,000 on good-quality generators to stay open during frequent blackouts. In September 2005, the Kurdish city of Sulaymani had under construction 40 buildings nine stories or higher. Five years ago, it had none.

The mainstream media doesn't explain these things because . . . well, why doesn't the mainstream media explain these things?

Big Deal Department: Toyota's popular, gasoline-electric hybrid, the Prius, costs $9,500 more than other comparable non-hybrid vehicles. At current gasoline prices, you'll save about $580 a year. It takes 16 years for the cumulative annual savings to equal the front-end costs. This seems like a lousy deal to me. To make themselves feel politically correct, people are paying through the nose.