Good Bye U.S. Savings Bonds, Hello Stem Cells, Farmland and India

They’re the worst possible gift you can give a grandchild, niece, nephew, or any other young person in your life despite their ongoing popularity. You’d never know how bad they are from the high praise they receive.

Kiplinger’s calls them “the gift you buy for a newborn niece or nephew, "Bankrate.com says they’re “the gift that keeps on giving," and The U.S. Treasury calls them the “gift for any occasion.” I guess that’s a big part of why 55 million Americans - more than one in six Americans - now own them.

I’m talking about U.S. Savings Bonds. Over the years, they have become the ultimate “fall-back” gift for the tough people to shop for as kids, infants, teens and savings bonds always seemed to be a decent fit, but they’re no longer the gift that keeps on giving.

First, their yields are pitiful. The EE Bonds, the most common, yield a paltry 1.3%, and the yield is low and going lower. The EE bonds will reset at an even lower rate in April. The I Bonds, which are indexed to inflation, aren’t much better, and only yield 0.7% on top of inflation (as tracked by the Labor Department’s Consumer Price Index). Older I Bonds had fixed yields of inflation plus 2% or more.

The long-term outlook for them is even worse. The U.S. government is currently $10 trillion in debt and could easily double that in the next five years if the economy doesn’t recover. A U.S. Savings Bond is basically a loan to an otherwise bankrupt U.S. government.

Finally, there are just so many better options. Remember, the majority of savings bond recipients have 15 years or longer before they’ll probably need to cash out. That’s why I’m urging everyone I know to give better financial gifts - ones that will offer true prosperity to the young ones in our lives.

The Gift of Real Prosperity

When you think about it, most of us don’t have the luxury of a 15 or 20-year time horizon when it comes to investing. We have to turn over a lot of stones to find investments which offer capital appreciation, high levels of current income, or both. However, young people are in a much, much better position, and with the market collapsing this year, we have the potential to give away a truly life-changing fortune within the next few years.

For instance, my nephew is almost two years old. He’s not getting any toys from me this year, and he’s in for a big box of disappointment over the short-term, but he’ll be getting a lot more in the long-term. I’m buying him stocks in these three sectors which, even if only one pans out, in 15 years will be worth a lot more than any savings bonds.

1. Stem Cells

In his book The Stem Cell Dilemma, Dr. Leo Furcht states:

No new approach to dealing with the monumental suffering and social costs of major diseases comes close to the promise of stem therapy.

In 1968, the first successful bone marrow transplant was conducted at the University of Minnesota. The stem cells in the donated marrow rebuilt the recipient’s blood-producing marrow.

In the last five years, dozens of blind people can see again after receiving stem cell treatments. Damaged spinal cords in mice were repaired with human neural stem cells. A new trachea (windpipe) was created with stem cells and transplanted successfully to a 30-year old woman in the United Kingdom.

We’ve already looked at how Corning (NYSE:GLW), a company which reinvents itself practically every decade, is moving big into stem cells. Pfizer (NYSE:PFE) is throwing a couple of hundred million dollars into research.

More than 40 years of stem cell research are working their way into real-life medicine. At the rate advances are coming, the medical industry will be completely changed over the next 10 to 20 years. Big Pharma, hospitals, medical equipment manufacturers, and everyone else in the healthcare industry will experience radical changes.

Owning a broad subsector of stem cells plays will certainly have one or two, which pay off big. I believe there are tremendous opportunities in stem cells for long-term investors right now.

2. Farmland

This is a pretty simple one. The world’s population is growing and the world’s available farmland is not. The question here is not if there will be a big payoff, but when.

The recent agri-boom sparked a worldwide race to bring underutilized farmland into production. Venture capitalists scoured the world for farmland. Hundreds of millions of dollars were invested. Farms in the Ukraine, Russia, and South America were modernized.

There’s very little undeveloped farmland left in the world. The amount of arable (suitable for farming) land is in steep decline compared to the world’s population, and it’s only getting worse.

In 1961, there were only three billion people in the world, and there was plenty of food to go around. There were about 40 arable acres for every man, woman, and child in the world, which was more than enough to feed everyone. Add to all that a decline in the average quality of soil around the world and it’s pretty clear we’ve hit “Peak Soil.”

The fervor for agriculture-related investments may have cooled, but the fundamentals haven’t changed a bit. Farmland will be one of the dearest real estate in the world over the next 10 to 50 years. There will be advancements in fertilizer, genetically modified seeds, and other agriculture technology, but farmland will still be a very dear asset.

3. India

Last week, I had a chance to speak with Harry Dent. He’s written a few best-sellers like the “Roaring 2000s” and predicted the economic stagnation in Japan long before anyone else. Harry is one of the best big picture guys in the world. He focuses heavily on age demographics, spending patterns, and has dozens of spot on predictions over the long-term.

We were both completely on the same page when it came to India.

In his newest book, The Great Depression Ahead (a book that will surely make its way to our recommended reading list when it’s released in a few weeks), he states:

There will be a more concerted global boom again from the early 2020s into the mid-2030s – and beyond in many countries from India.

India has everything going for it. It has a relatively young population. Its workforce will be growing for decades. It has the government institutions in place to protect property rights to support a capitalist economy. As a result, it could very well be the best place to invest if you have a long-term time horizon.

India stands head and shoulders above the rest of the other BRIC countries when you look 15 years out or longer. Brazil and Russia have gone up and down with commodity prices and China, as a whole, is getting old. I expect we’ll see the downside of China’s “one child policy” in the next 10 to 20 years. Don’t get me wrong, India’s not perfect, but it’s the best of the bunch and we have time on our side.

There are so many great investments out there. Stocks are cheaper than they’ve been in years. As we looked at the other day, there are incredible values in convertible bonds, and corporate bonds are also undervalued.

There are a lot of options, but you have to stick to the plan. In this case, the plan would be to ride the waves, which will likely have big payoffs over the next 15 or 20 years. When I’m investing money for a two year old with the understanding it’s not going to be touched for at least a decade, I’m betting on the big sweeping trends and looking for the biggest wins.

A long-term perspective gives us a lot of luxuries. The biggest luxury is not having to time a buying point (I still think there is going to be a significantly better time to buy over the next two or three years) and not having to worry about what will happen one or two years down the road.

I’m looking forward to passing on the savings bonds and giving a true gift of prosperity this holiday season. At the Prosperity Dispatch, we believe there are fortunes to be made in stem cells, India, and farmland, if you have enough time.

Disclosure: None

Comments

[Yazlf:]

The savings bond program has been emasculated. I don't think that EE bonds reset anymore. You're going to get that 1.3% for 30 years! The yield on the I bonds is also poor as mentioned. The bond prior to the current one had no yield above inflation - nada! And they dropped the maximum amount to $5000 from $30000. I socked away my kids' college money in the I bonds from 2004 to 2007 (instead of one of those 529 stock mutual fund plans -whew!), but they've really ruined it for that purpose now.

Our grandparents bought War Bonds to support the govt in tough times. Maybe the new administration should start a similar version for the little guy with some real yields to let people participate as a team in the economic recovery.

2008 Dec 23 08:10 AM

[Careful Inv...:]

It always pays to be skeptical when reading the financial press! It is not unusual that the articles presented are written by inexperienced young people who earn a living by getting something in print. This article is a case in point. I bonds are currently paying 5.64% of compound interest that is not taxed until they are redeemed, and when they are redeemed the interest is only subject to federal income tax (no state tax). The bonds may be redeemed at any time after a year. It is true that there is a two month interest penalty for redeeming prior to five years, however this is modest in comparison to many CD's. The interest will be reset April 30 and may very well go down for the next six months, but will give the saver protection when the inevitable inflation comes back. The bonds are as good as FDIC insurance, and the $5000 maximum is not really true. You may buy $5000 per year in paper I bonds and an additional $5000 per year in bonds maintained in an on-line U.S. Treasury account. If you are married those numbers are doubled if you chose to buy bonds that are co-owned by your spouse.

2008 Dec 23 10:12 AM

[Krusty:]

Interesting. I got here fromthe Pfizer Yahoo page. THAT stock has lost somewhere around 30% of its value in the past couple of years, and the loss of Lipitor is yet to come. Stem cell infusions may not be enough to save the Big Blue Pill. And after braving my 401K report, I'd be HAPPY for a 1% yield, in the PLUS column. Maybe the earnings on Savings bonds are paltry by your expectations, but it sure beats the enormous loss so many of us "little guys" are taking in the market. Additionally, just HOW does a small investor buy farm land? 400 acres of Illinois cropland (a relatively small farm) would cost something like $2 million in my estimation (could be wrong, but its in the ballpark). And WHAT does one put his Rupees into in India? Without getting ripped off, that is. Great ideas, but difficult for the little guy to get into without taking a HUGE risk. I won't be looking for your nephew on Park Avenue.

2008 Dec 23 12:32 PM

[Carlos Lam:]

Note: the stem cells mentioned are ADULT stem cells, including those from cord blood. To date, embryonic stem cells have produced NOT A SINGLE medically available treatment. Check it out: www.stemcellresearch.o.../

2008 Dec 24 06:09 AM

[Chris B:]

On Dec 23 12:32 PM Krusty wrote:

just HOW does a small investor buy farm land? 400 acres
> of Illinois cropland (a relatively small farm) would cost something
> like $2 million in my estimation

Agreed, Krusty. I'm somewhat baffled by this recommendation. Would an investor buy a few acres and lease it to local farmers in order to pay the property taxes, while hoping for capital gains around 2% per year? It seems like timber might be a better bet - in 18 years a lightly managed tree farm could provide the equivalent of 10+% annual returns depending on future lumber prices (don't cut the lumber yourself, sell the land with the appreciated trees so you don't have to wait 30 years). Hunting leases could pay the property taxes and professional management is available, for example:

www.reynoldsforestry.c...

Because forest land is usually unsuitable for crop farming, it can be bought for cheap. Think $1k per acre or less for freshly clearcut hillside in the rural south. Then spend the $600 or so per acre that it takes to set up a professionally managed tree plantation, sit back, and let it grow.

2008 Dec 24 10:36 AM

[canary:]

Long range forcasts are easy. 15 years from now, nobody will remember.
Right now we need guidance on which infrastructure companies are going to get busy. Compressed natural gas for vehicles is still the best solution:
It requires new infrastructure to distribute the gas, it will save drivers money which can be spent on other items, it will reduce that $700 billion dollars a year going to foreign countries, and the vehicles are cheaper to buy than electric ones.

2008 Dec 26 04:32 PM

[jon/mels:]

I remember when Internet was getting discovered by investors and business some dinosaurs in market who were used to old stocks were talking just like some people are talking here , embryonic stem cells have produced NOT A SINGLE medically available is absolutely misleading and wrong,Adult stem cells such as blood-forming stem cells in bone marrow (called hematopoietic stem cells, or HSCs) are currently the only type of stem cell commonly used to treat human diseases. Doctors have been transferring HSCs in bone marrow transplants for over 40 years. More advanced techniques of collecting, or "harvesting", HSCs are now used in order to treat leukemia, lymphoma and several inherited blood disorders.religious believes were always against facts and science, since big names in drug companies are investing in stem cell research I am convinced it will be as big as Internet in very close future, by the way if they have no product how come already there is huge competition for patents???!!!!

2008 Dec 31 11:32 AM

[Laxman:]

Besic research and clinical trials on stem cell is taking place in India on large scale. Very strong results are visible in case of Diabetics patients.

Investment possibility in Biotech field all over the globe and particularly in India is big. I forsee spectacular results in another 5 years.

Those watching closely Indian stock market, will fully agree , lot of potential, one has to take long term position.

Jan 06 11:42 AM

[Paul R. Cady:]

I was going to respond to Mickey's article, until I saw your comment. Mickey has obviously not done his homework. Buying I bonds through Treasury Direct is a great way to buy grandkids a good investment. I have bought my 9 year old granddaughter a $100 I bond every year
for * years starting in 2000. The I bonds have appreciated in total value,
for example, $100 I bond bought in 2000 as of 09/01/08 was worth $165.24, which is an annualized average return of 8.155%,$100 I bond bought in 20001 as of 09/01/08 was worth $147.88, which is an annualized average return of 6.84%,$100 I bond bought in 2002 as of 09/01/08 was worth $131.76, which is an annualized average return of 5.29%. The worst return I have gotten, so far, is 4.05% on I bond purchased in 2005. I can certainly live with these returns. I suspect thay get bad press because the dealers that represent the stock market view savings bonds as a threat to their crap game.

On Dec 23 10:12 AM Careful Investor III wrote:

> It always pays to be skeptical when reading the financial press!
> It is not unusual that the articles presented are written by inexperienced
> young people who earn a living by getting something in print. This
> article is a case in point. I bonds are currently paying 5.64% of
> compound interest that is not taxed until they are redeemed, and
> when they are redeemed the interest is only subject to federal income
> tax (no state tax). The bonds may be redeemed at any time after a
> year. It is true that there is a two month interest penalty for redeeming
> prior to five years, however this is modest in comparison to many
> CD's. The interest will be reset April 30 and may very well go down
> for the next six months, but will give the saver protection when
> the inevitable inflation comes back. The bonds are as good as FDIC
> insurance, and the $5000 maximum is not really true. You may buy
> $5000 per year in paper I bonds and an additional $5000 per year
> in bonds maintained in an on-line U.S. Treasury account. If you are
> married those numbers are doubled if you chose to buy bonds that
> are co-owned by your spouse.

Jan 10 03:11 PM

[Leigh J.:]

My company, The Hidalgo Alfalfa Company, LLC, buys & operates farms in New Mexico. We offer private-equity investors 15% annual returns, with a $5K minimum investment. This is a great way for small investors to invest in farmland & make above average returns. If you would like additional information email me at [e-mail] Thanks.


On Dec 24 10:36 AM Chris B wrote:

> On Dec 23 12:32 PM Krusty wrote:
>
> just HOW does a small investor buy farm land? 400 acres

Jan 15 04:44 PM