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. Last Updated: 07/27/2016

Things, Not Thoughts, May Be Today's Best Bet

WASHINGTON -- The new Forbes 400 is out, and the young software, electronics, media and retailing billionaires who dominate the magazine's list show how much moneymaking in America has changed.


"In the not-so-distant past," says Forbes, "wealth was almost always based on possession of physical assets. Wealth was timber, oil, real estate. ... That was yesterday. Almost all of today's new fortunes are based not on hard assets but on ideas and organizing principles."


Of the 43 new people on the list, only two made their money through real estate and only one through oil and gas. Of those who fell off the list, 11 were land or energy barons.


To the folks at Forbes, this change demonstrates the glory of capitalism in the digital age, confirming George Gilder's 1989 prediction that the new decade would bring "a global economy dominated more and more by fortunes of thought rather than hoards of things."


Well, maybe. But investors with a contrary frame of mind may draw another conclusion: The reason the number of hard-asset billionaires is dwindling is that hard assets are undervalued. Now could be the time to buy real estate, oil, metals, grains and other things. They may be cheap, and ready to grow expensive again.


James Grant, editor of Grant's Interest Rate Observer, and Jim Rogers, the astute investor and author, have been touting hard assets for a long time.


Their argument is simple: As free markets spread, billions of Asians, Latin Americans and Africans will move into the middle class. They'll want space for bigger houses, fuel for new cars and more food for their improved diets. Demand will increase, but supply could fall, as land used for farming and mining gives way to homes, offices and factories. And when demand rises and supply falls, prices go up.


Of course, those who see an inflationary boom in hard assets could be dead wrong. Thomas Malthus, who thought population would outstrip food, made just this mistake 200 years ago.


Advances in technology always have mitigated the supply-side problem. For instance, we've learned to use microchips and new materials to make more fuel-efficient autos. Pesticides and fertilizers have helped us grow more on less land.


You don't have to believe in a millennial revolution, however, to like real estate and oil. You simply have to believe in cycles. "Real assets were great in the 1970s," says David Swensen, Yale University's highly successful chief investment officer, "and financial assets were terrible. Financial assets have been spectacular since 1982, and real assets have been awful. So it makes you think. What do we do about this?"


Swensen's answer, according to a recent issue of Grant's newsletter, is to put a big chunk of Yale's $5 billion endowment into timberland and natural-gas reserves. The university has already invested 10 percent of its assets in real estate.


Two of my investing heroes also are touting real assets:


Writing in the current issue of Worth magazine, Peter Lynch, who once managed the Fidelity Magellan fund, recommends oil stocks. "Today, we've got tight supplies and low reserves in both oil and natural gas, while demand continues to grow."


Princeton economist Burton Malkiel is a bargain hunter who is high on real estate. In the new issue of Bloomberg Personal, a publication of Bloomberg Business News, he recommends mutual funds that own real estate investment trusts, or REITs, in part for their remarkable dividends -- now averaging 7 percent. A high dividend is often a sign that a stock is undervalued.








But analyzing REITs is difficult, so Malkiel advises small investors to put their money into mutual funds that own them.