<FOOLISH FOUR PORTFOLIO>

The Pig in the Python
Are you part of the pig?

by Ann Coleman
(TMF [email protected])

Alexandria, VA (March 26, 1999) -- I read a strange little book recently that has greatly increased my level of optimism about the market. It doesn't predict when the market will top 20,000 or even predict much of anything concrete, which I probably wouldn't believe anyway, but it does offer a pretty compelling reason to believe that the market is likely to continue to be generally strong over the next decade and that we are unlikely to suffer any kind of severe, 1973-74 style, bear market.

The book is called The Pig and the Python, and it is by David Cork and Susan Lightstone. (Picture a snake that has swallowed a pig -- That's us, folks, the baby boom generation working its way through the entrails of the US economy.)

I should warn you it is written as an allegory, a kind of dialogue between Harriet Homemaker and Dr. Demographics. I found the Pilgrim's Progress style a bit off-putting, but it didn't distract too much from the message, and I certainly don't envy the authors the difficult task of making demographics something one can identify with. After all, we (speaking for my entire generation!) like to focus on what makes us unique, not the ways in which we are like everyone else. But those similarities are what the authors think will make the next decade a wonderful one for investing.

Simply stated, the authors show that the needs of the baby boom are what have driven most of the major economic trends since the boom came along. The two instances I found most interesting were the effect of the postwar generation on interest rates and home prices.

It was pretty obvious when it was happening that the boom in real estate during the '70s and '80s was related to the demand created by baby boomers reaching house-buying age. The drop in the real estate market, once we finally managed to get ourselves housed, was pretty obvious, too.

But what I had never even considered was the effect of baby boomers on the credit market. The authors lay the blame for the extraordinarily high interest rates of the late '70s and early '80s on the baby boomers' demand for credit as they moved into the job market, bought those houses, furnished them, started families, bought mini-vans, etc. Gee, I thought that all kinds of global forces were at work, but upon thinking about it some more, it seems that all of those global forces were at work in the face of that increased demand. Very interesting.

Broadly speaking, younger people are credit users and older people are credit suppliers (having saved up something to lend). Therefore, now that the baby boomers are into their savings years, simple supply and demand will mean that interest rates are likely to stay low for many years, the authors conclude.

Now, of course, the boomers are starting to stare uneasily into the face of retirement. And where are they going to get the money to retire in the style to which they wish to become accustomed but the stock market?

Every year, more and more people take a look at their retirement savings and conclude that they better get on the stick if they don't want cat food on the menu in their senior years. And every month, money pours into IRAs and other investment accounts that channel it into the stock market in one form or another. Is it a coincidence that the market is in its longest positive growth streak ever?

Demographics can't predict small things, or... um... unpredictable things. (Duh!) The market will undoubtedly have its downs as well as its ups, and we still have to get through Y2K intact, but I am much more inclined to give credence to predictions of broad, long-term trends supported by logical arguments than to the babblings of short-term market gurus who base most of their arguments on analysis of market cycles. Cycles tend to repeat themselves until they don't anymore.

Of course, there is always the question of what will happen when the baby boomers start taking their money out of the market to live on, but if you buy into the demographic theory, investors may be in for very good times ahead.

The problem with such predictions is that once such knowledge becomes generally known, the market acts in advance to take advantage of what it believes will happen in the future. How that will play out is something I couldn't begin to predict. Still, I find the idea of all those retirement dollars looking for a place to go very comforting -- in a broad, long-term sense, of course.

Fool on and prosper!

Today's Stock Lists | 1998 Dow Returns

03/26/99 Close

Stock Change Last -------------------- CAT - 5/8 46.81 JPM + 3/4 122.88 MMM - 9/16 70.31 IP -1 1/16 44.25

Day Month Year History FOOL-4 -0.93% 3.17% 4.22% 5.76% DJIA -0.14% 5.54% 7.37% 6.94% S&P 500 -0.56% 3.59% 4.68% 4.93% NASDAQ -0.64% 5.73% 10.33% 11.84% Rec'd # Security In At Now Change 12/24/98 9 JP Morgan 105.51 122.88 16.46% 12/24/98 24 Caterpillar 43.08 46.81 8.66% 12/24/98 22 Int'l Paper 43.55 44.25 1.61% 12/24/98 14 3M 73.57 70.31 -4.43% Rec'd # Security In At Value Change 12/24/98 9 JP Morgan 949.62 1105.88 $156.26 12/24/98 24 Caterpillar 1034.00 1123.50 $89.50 12/24/98 22 Int'l Paper 958.12 973.50 $15.38 12/24/98 14 3M 1030.00 984.38 -$45.63 Dividends Received $15.04 Cash $28.26 TOTAL $4230.55 </FOOLISH FOUR PORTFOLIO>