Pay Dirt: New stock rule is 'Buy and beware'

Wall Street journalist Dave Kansas has had a front-row seat to his share of bubbles and busts. The 41-year-old who hails from St. Paul and once stocked shelves at the Kowalski's market on Grand Avenue spent the early 1990s at the Wall Street Journal and left to become editor-in-chief of TheStreet.com from 1996 until 2001, when he rejoined the Journal.

Today, he's editor-at-large of the personal finance site FiLife.com, a joint venture of Dow Jones and IAC Corp. He often comes back to the Twin Cities to catch a Wild game or, most recently, to write a Fortune magazine article about the fallout of Bernard Madoff's Ponzi scheme in Minnesota.

In an interview last week, Kansas said he wrote his third book, "The Wall Street Guide to the End of Wall Street As We Know It: What you need to know about the greatest financial crisis of our time -- and how to survive it," to answer the two questions that he's been asked time and time again over the past year: "What just happened?" and "What do I do about it?"

Q As I carried the book around, a couple of people read the cover and said "I don't know Wall Street." Explain to them what Wall Street used to be like and what is it like today.

A In simple terms, Wall Street was a huge money-spinning machine that helped to finance large portions of the economy. They used a lot of borrowed money, they created complicated investment instruments, and the fact is a lot of that strategy went wrong for most of the companies on Wall Street. Today it's a much more chastened place. There's a great deal of hesitation about financing economic growth and there's a tremendous lack of confidence in how the basic financial system is supposed to function.

Q Which financial institutions will come out the winners?

A I think banks that didn't get deeply involved in all the crazy Wall Street-oriented investments of the last decade are in a better position -- including U.S. Bancorp -- that seemed to have done well just by hanging in there. I think boutique firms that specialize in what Wall Street originally did, which was a lot of advisory work related to mergers and acquisitions and initial public offerings, are in a better position to survive. Probably banks of sufficient size to weather the losses such as J.P. Morgan, but you might have thought that about Citigroup and Bank of America too, and that's looking more questionable.

I think the mom-and-pop bank that can provide good service and is a good steward of their capital stands a good chance of doing well. But it's going to take some time before the overall banking service recovers. Large swaths of the financial markets are basically closed. There's not much confidence -- and ... confidence is the lifeblood of the financial system.

Q You hit on the trillion-dollar question: How do you restore confidence?

A If I had a really good answer I'd probably be in the Obama administration. I think there's a lot of debate around trying to mimic the Swedish model ... in the early 1990s the Swedish banking system collapsed and there was nationalization of the banks. There's a great deal of discussion about doing similar nationalization, but a lot of resistance to it. The U.S. banking system is much huger, and much more complicated than the Swedish banking system of the early 1990s.

Q What's it going to take to restore confidence on Main Street?

A Chiefly it will be the indication that companies are hiring again as opposed to cutting people. An indication that someone can sell their home at a reasonable value, in a reasonable amount of time will be an important indicator.

Q Is it the end of Main Street as we know it, too?

A I think one of the biggest changes that's taking place right now is a reappraisal of what kinds of risks people are comfortable with taking. For a long time everyone felt the stock market was kind of a no-brainer in a way that was unhealthy. People are probably going to take a more measured approach, to have some stock-market exposure but also be thinking about bonds and cash in way that they haven't thought about in the past.

Q Do you think the conventional wisdom of "buy and hold" and "diversify" still works?

A That's a great question and I think a lot of people are wrestling with it. I've not sold out, so I've stuck to the conventional wisdom personally. History indicates that individuals tend to sell at the bottom. History also indicates the market can be down for a long time. It took 25 years -- from 1929 to 1954 -- for the Dow to reach its pre-crash highs. Everybody in the financial community is looking at that and trying to decide if this time it's different.

The financial planning industry has not done a good job managing the life cycle, about moving people to less risky investments as they get older and move toward retirement age. I've heard too many stories about people too exposed to the stock market at too late an age. And this notion of "Buy and hold" should be "Buy and beware." People should look at their portfolios and rebalance once a year, say, to make sure that they're not overexposed or underexposed to any particular stock, bond or cash holding.

Q In the book, you chose debt as the focal point for individuals in this economy. I'm wondering why you think paying down debt is more important than having emergency savings?

A It doesn't make sense to build up savings if you have high credit-card debt. If you have $10,000 that you could save or use to eliminate your 20 percent interest credit-card debt, you should pay off your credit-card debt. If you lose your job, you can build up your credit-card debt again.

Q Who would you say the book is written for?

A It’s for the vast majority of people out there who know we’re in a financial crisis but don’t really understand how or why we’re in that crisis. I think a lot about my family. They’re not steeped in financial news, but they’re incredibly curious about all the stuff that’s happening and how it came to be like this. So I was trying to write for people who just wanted to figure out “What the heck happened?” in a way that would be accessible, so they would be better equipped to sort out what they ought to do.

Q You were just in the Twin Cities. Describe how is the mood in New York different from the mood here?

A The mood in New York is much grimmer as it relates to the economy than it was in the Twin Cities. And I think that’s because the because the New York economy is so tightly tied to what happens on Wall Street. And there’s been so much damage, carnage and job loss on Wall Street that people can’t help but think about it. Things are more diverse in the Twin Cities. There is a large financial community there, of course, but it’s less a big money hub as it is in Manhattan, which is why the Bernard Madoff story was surprising as it related to the Twin Cities.

Q Can you talk about the challenge of writing a book on a topic where news breaks daily?

A It’s just like writing a magazine story with longer lead time. My last chance to really look at it was in mid-December. You need to kind of focus on the bigger trends in place and become a little less detailed oriented. That worked in terms of writing about the automakers and Citigroup. It didn’t work so well in terms of mentioning now-departed John Thain of Merrill Lynch or Bank of America.

Q Would you say you’ve changed how you’re managing your money in the past few months?

A I have not changed much, but I toyed with taking cash I had available and investing it in the stock market back in September and I thought about it again in December and I thought about it again this month. For me and for other people, what’s important is the ability to sleep well at night and not about getting into the market at a perfect time.

Q In the book, you mention a return to thrift. Do you think that will be by choice or by force, because credit has dried up and income is down?

A I think it’s mostly happening by choice. Even with the unemployment rate the way it is, 80 to 90 percent of the workforce probably hasn’t seen much change in their material situation. But people know enough people who are being forced into a change and the headlines are such that people can’t help but notice that things are different. I hear stories about people all the time whose financial situations haven’t changed at all who are eating at home instead of eating out, who are taking the bus instead of taking a cab, or bringing a sack lunch to work instead of ordering in Chinese food, not buying the season tickets, just buying a couple of tickets. The psychology around money has really changed for a lot of people. I’m traveling less, eating at home a lot more, trying to figure out ways to save money here and there.

Q Do you think the shift towards thrift will be permanent?

A No, nothing is permanent. But we went through a process like this in the late 1980s and early 1990s in the wake of the “Greed is good” decade. There was a kind of a moving away from ostentatious displays of wealth and we’re seeing a similar thing now. President Barack Obama spoke of an era of responsibility and I think a lot of people are embracing that.

Q Any rays of hope in this economy?

A I think the new administration has a smart economic team and I think that they’re going to work hard to help solve the problems we have. Also, we sometimes lose sight of how vast and complicated the U.S. economy is and that there’s a lot of creativity and a lot of small business activity that flies under the radar screen that’s going to be the source of a rebound. The other important thing is historical context. We haven’t had a rough recession in almost 30 years, but we got through that one too. We can’t lose track of the fact that the economic cycle comes back, even if it gets bad before that happens. I think we’re going to start to see that within a year.

Kara McGuire writes about money • 612-673-7293 or kmcguire@startribune.com.