The basic insight of William Poundstone’s, Priceless: The Myth of Fair Value (and How to Take Advantage of It), (Hill and Wang, 2010) is that context-free true values don’t exist. The price paid for something — anything, everything — is related to its context and is easily manipulated. Each of us, no matter how sophisticated, gets suckered on something, sooner or later.

Poundstone summarizes the findings of psychologists who have researched how human beings assign prices to products and services they’re willing to pay. The researchers ask: What explains assignments of price?

They’ve found that we buyers pay prices in terms of things we know, things we think we know and things we don’t know. Hormones influence what we’re willing to pay. Photographs. Sex. Dollar signs. Position on a menu. Position in a store. Advertising. Pressure tactics. We — you and me – can generally be led to a price in excess of true value when the price is presented to us “properly.”

Staging residential real estate is a common psychological technique that sellers use to get buyers to pay a higher price than the property is otherwise worth, that is, to get a buyer to pay for nothing. None of the stager’s created feel, furnishings, smells, sounds or emotion is a real asset. None of the stager’s craft conveys. But the seller’s dollar invested in staging reportedly produces higher prices than non-staged property and more than pays for itself, which is why sellers do it.

In real estate, the market “value” of residential property or land is almost always determined through a comparable analysis whereby the dollar worth of the target property is calculated in relation to recent selling prices of three close-by and roughly similar properties. Target-property “value” in a comparable analysis largely means what the three comp buyers were willing to pay for their properties. It’s clearly a market value, but it may or may not have much to do with what the target property is worth in any real sense, as measured, say, by replacement cost.

Take a familiar example. A house is fairly and honestly market valued through comparables analysis at $500,000 at the end of 2007, based on the recent sales of three identical houses on the same block. Three years later, this same house is fairly and honestly market valued at $300,000 based on the recent sales of the same three houses. Price in this sense is entirely based on the snapshot expression of current market conditions and context. It has little to do with the cost of building the structure on that parcel of land. It doesn’t have much to do with true value.

In both years, the buyer should look beyond fair market value and find something closer to an intrinsic value, a worth of the property to the buyer in light of its assets and liabilities and his resources and plans for it. That should be the buyer’s price.

One of the most powerful price-manipulation techniques Poundstone discusses is anchoring.

Let’s say you have three identical one-acre lots for sale. You price Lot 1 at $50,000, Lot 2 at $25,000 and Lot 3 at $10,000. You, the seller, believe that the price you would readily accept for each lot is $5,000. But you want more.

The $50,000 Lot 1 price is the anchor that buyers are forced to use for reference in pricing the other two. You don’t expect to sell Lot 1 or Lot 2 at the listed prices. Lot 3 appears to be a steal at $10,000. Lot 1 sells, then, for $10,000, which is $5,000 more than you would have accepted otherwise.

That leaves Lot 1 and 2. You cut the price of Lot 1 from $50,000 to $25,000, and advertise the 50 percent discount. You cut the price of Lot 2 from $25,000 to $15,000. Lot 2 sells, then, for $15,000, which is $10,000 more than you would have accepted otherwise.

That leaves Lot 1. Cut its price to $20,000. You have one comparable at $10,000 and one at $15,000. Buyers now know that you’re willing to come off your advertised price. Let’s say you sell Lot 1 for $12,500. The buyer figures it’s a steal, since he got a $50,000 lot for only $12,500 through tactical waiting and shrewd bargaining.

Anchoring has produced a found-money profit of $5,000 on Lot 1, $10,000 on Lot 2 and $7,500 on Lot 3—over and above what you would have otherwise accepted.

And if you’re really sneaky, you would price Lot 1 at $50,000 and advertise Lots 2 and 3 as for sale on the basis of “Make me an offer.”

One experiment pitted real-estate agents against amateurs in measuring the effect of various anchor prices (listing prices) on offering prices. Anchoring inflated the offers of both groups. Agents, however, were pulled up less than junior and senior undergraduate business students.

The anchor price is the first one on the table. That price frames the buyer’s thinking about value. Offers are made in terms of what was asked. Listing prices are anchors, which are usually set in terms of comparables, which are reflections of other comparables, etc. etc. Even absurd anchor prices will operate on buyers so long as the seller is willing to wait for its magic to work.

Buyers of commercial real estate try to firm up the infirmity of pricing by determining the “intrinsic value” of a target property. ”Intrinsic value” is defined in terms of its net present value (NPV), which can be calculated in several ways.

The general idea is that NPV represents a dollar number that takes into account all current costs of acquisition, all future costs (such as interest, maintentance and taxes) and all future cash inflows (such as rent). A discount rate (or hurdle rate) represents the buyer’s required rate of return. When these factors are calculated in combination, a positive NPV indicates a buyer-favorable investment; a negative NPV indicates a buyer-unfavorable investment.

After all is said and done, however, Poundstone would say the research shows that a high anchor price for commercial real estate still pulls up the selling price, even though the buyer has done what he could to offset the effect of the anchor price by “considering the opposite” and using NPV in negotiations. The lesson here — and the one that should be applied in all investments – is that when a buyer can’t get it for the price that makes financial sense, the buyer should walk away from the deal.

Priceless was not written as a primer for how to price above value. It was, I suspect, written as an expose of how buyers can be manipulated. Consumer Reports tells you what things are worth. Priceless helps buyers pay that price, and no more.

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I often get requests to not write about certain individuals with whom I share mixed marital arts. Therefore, I will not name my wife, Melissa, as the only requester in this group of one.

In that context, my reportorial ears perked up when our 24-year-old daughter, Molly, alone and miserable with a fever, laryngitis and sinus infection in her New York apartment, croaked over the phone, “Write about woe is me.”

While the unnamed person not mentioned above has been fretting over her sick daughter’s 500-mile separation from the vital personal nagging to drink liquids that only she can provide, I’ve worked up a good fret of my own over the societal consequences of Molly draining her brain from Blue Grass, Virginia to Bloomberg News in Manhattan.

Hollowing Out the Middle: The Rural Brain Drain and What It Means for America, by Patrick J. Carr and Maria J. Kefalas (Beacon, 2009), argues that the most talented young people are leaving rural small towns while changes in farming and industry have left the economic landscape bleaker for those who don’t.

Based on 200 interviews with 30-something individuals from a farm-and-factory town of 2,000 in Northeast Iowa, Carr and Kefalas believe that the “export” of young people is leaving such communities “hollowed out” and close to extinction.

About 40 percent of their interviewees were “stayers”— mainly working-class kids who struggled economically; 20 percent were college-bound “achievers”; 10 percent were “seekers” who joined the military; and the rest were “returners” who eventually came home. A small number of returners were “professionals”; the authors dubbed them, “high fliers.”

Carr and Kefalas write that small towns collude in their own declines by “pushing the best and brightest young people to leave, and by underinvesting in those who chose to stay, even though it was the latter that were the towns’ best chance for a future.” (Carr and Kefalas, “The Rural Brain Drain,”The Chronicle of Higher Education, September 21, 2009.)

My observations over almost 40 years don’t quite square with theirs.

Some rural places are losing population while others are not. Demographers use different definitions of “rurality” and different measures of population decline, but the general consensus is that rural population loss is most severe in the Great Plains (from Texas to Canada), Upper Midwest, Mississippi River Valley from the Gulf Coast to Illinois and the Appalachian Mountains from Tennessee to Maine. (See http://pr.utk.edu/alumnus/winter96/country.pdf for a map showing county rurality scores, defined as “degree of isolation from and inability to participate in the programs of the larger society.”; www.ers.usda.gov/briefin/rurality/ruralurbcon/; www.prb.org/Articles/2008/populationlosses.aspx?p=1; www.dailyyonder.com/double-whammy-rural-counties-lose-population-two-ways; and www.aliciapatterson.org/APF2102/Coffman_Anthan/Coffman_Anthan.html.)

Net population loss typically results from two factors: out-migration exceeding in-migration and deaths exceeding births. U.S. Census Bureau data from 2007 showed that 1,346, or 43 percent, of all U.S. counties — both rural and metro — lost population since 2000 compared with only 689 net losers in the 1990s. About 700 rural counties are among the significant losers.

Molly is part of America’s internal migration that has been shifting people — and particularly youth — out of rural areas since the 1930s.

Economics is responsible for part of this redistribution. The increasing mechanization of agriculture, forestry and mining has allowed these rural industries to increase production with less and less labor. Rural communities have also experienced a deindustrialization that has closed their factories, mills and retail stores, which, in turn, has reduced related opportunities, jobs and local taxes.

The other reason for rural population loss has to do with young people seeking opportunities that don’t appear to exist where they grew up—Molly is one of those.  Some of her classmates left because they saw no other choice; others left because they wanted to.

Those coming in to rural America are looking for high environmental values, lifestyle opportunities, lower living costs and less stress. Some are retirement relocators, while others are middle-aged individuals with the wherewithal to live and work beyond metro areas.

All rural communities say they want to retain their young people through “economic development.” I’ve watched — and participated in — these public and private programs for decades. Better rural infrastructure — transportation, communications, utilities — is better than “worser” infrastructure, but these improvements alone rarely offset serious disadvantages in location, climate, workforce inadequacies, environmental degradation or lifestyle liabilities.

Economic-development programs work best in the most advantaged of the least distressed areas. They haven’t done much in the rural “zones of repugnance” that the market has abandoned or ruined. It’s possible, of course, that they would show more success if they were conceived better and financed longer.

I doubt that efforts to “revitalize” the several hundred hardest-hit rural counties will either stop the population loss or be worth the time and money, because both the private sector and individuals are running in the opposite direction—and they are more powerful over time than scattershot, countervailing development projects..

In some circumstances — with the right idea, people and funds — public money, foundations and private investment can create enclaves of employment that retain population in disadvantaged rural communities. But this has rarely happened on a county level, let alone regionally.

Recruiting “industry” to places that are less favorable than available alternatives is a largely unrewarding economic-development strategy. The other approach, which few economic-development efforts try with sustained seriousness, is to recruit and then enable people — local and non-local — who are willing to invest their work, talent or money. Enabled individuals can create jobs in these places.

The rural brain drain is the collective expression of thousands of individuals pursuing their best economic-development strategy. When the reasons that brought people to the countryside no longer exist, it will make economic sense for people to leave and force these communities to find a new — and, admittedly, often lower — level of sustainability.

Economically sensible decisions frequently come with loss, pain and regret. Some small towns will disappear. Many farmhouses will be abandoned or neglected. And the Nation, as a whole, will lose a valued part of the cultural and political fabric that we’ve worn for a long time.

My impression of watching local kids leave over more than 25 years doesn’t square with the finding of Carr and Kefalas. Both stayers and leavers in this county of 2,500 are a cross-section of their group. All the best don’t leave, and all the worst don’t stay—the  pattern that Carr and Kefalas report. The drain is one of numbers primarily, not quality.

I’ve come to believe that all rural kids should leave their hometowns for a while, whether or not they go to college.  They improve themselves when they function on their own in a broader world. They learn skills and develop networks. They rub intellectual and financial elbows with people unlike themselves. They return better able to make a living and a difference.

I’ve told Molly to keep the farm after we’re gone, because it will always be home in a community that knows her. But she and I know that our local economy is not likely to have a job for a humor columnist—her stated career objective, which would be very funny if she were joking, which I hope she is but fear she isn’t.

Oak to acorn!  Fall farther from the tree!

“You have to figure out how to get paid for stuff you write from out here…in dollars,” I said to the kid with two head infections at the other end of the line. “Your mother once traded her legal services for fresh horseradish and day-old donuts. Barter is a business model that will only bring you tears and stale calories.”

“Dad. It’s now called, ‘monetizing content,’ not ‘getting paid for stuff.’”

“Well, at least you understand the theory of cash payment. If you move back to the country, you need to have first established yourself as a writer rather than try to break in from Pluto.”

“Quit telling me what to do. My head hurts, and my nose is stuffy. Do something.”

So I did. I wrote about her woes and my worries.

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Economists from Adam Smith to Karl Marx believed that human beings make rational economic decisions. Both believed that each individual pursued his self-interest, though they had different ideas about where these interests lay. They also acknowledged that both individuals and groups could err in understanding their optimal economic interest. And Marxists, of course, argue that the true interests of the working class are easily manipulated by religion, advertising, nationalism and consumerism, not to mention cold beer and rock ‘n’ roll.

Much research has been done since WW II to suggest that the picture is much more complicated than every individual investing as an economically rational actor. We often make investment decisions with a mix of rational thinking and emotions, sometimes in balance, sometimes out of whack.

Sellers of real estate are now coached to stage their properties to appeal directly to the buyer’s emotions through pleasant smells, visual cues, furniture arrangement and just-baked cookies.

Listing agents know the key that turns the buyer’s lock is to get him or her to become emotionally invested in the seller’s property. “I love it!” are the words a seller wants to hear from a buyer, because “love” goes a very long way to solving whatever problems may arise during the transaction. Love often trumps cold reason.

Traders of stock and commodities are supposed to be analytical and rational in their decisions so that prices of equities and goods at the end of each day reflect a true market valuation. Well, how many times have we seen traders run with the herd in a panic of fear or a blindness of optimism?

Perfectly rational decision-making is an unachievable goal over time in my opinion, but land investors should be aware of some common situations that invoke emotions at the expense of clear thinking.

Fear of Missing the Boat. When everyone you know has jumped on board a particular investment ship, you probably have missed the boat that will make you a profit. The last boat at the dock is often the one that sinks. And if it doesn’t sink, the price of the ticket is way too high.

Fear of missing the boat prompted people to pay $3,000 to $4,000/acre for Southeast timberland a couple of years back when a fair price — in my opinion — was more in the $1,000 to $2,000/acre range.  The fair price — which was not the market price as shown through comparables–  reflected the then current value of the merchantable timber and a bare-land value for timber-producing land.

From a buyer’s perspective, comparables analysis simply pegs the “value” of a target property to prices of recent similar sales; if everything is going up for no good reason, the last buyers in line always pay more than they should based on comps.

Think of this process as a chain letter: the first in line always make money; the last always lose.

This price escalation in timberland was rooted in Higher-and-Better-Use valuations that attributed second-home and recreation high values to lower-value timberland. Imputed HBU value was justified in some situations, but not all. It was based on comps and hope and a little speculation. Buyers overpaid, because they convinced themselves that future prices for the land they were targeting would be even higher than those being asked. They feared being left out.

Bubbles are fueled by fear of missing out and greed. Bubbles are emotion-driven, not fact-driven.

Greed works the up-side. Positive reinforcement occurs in investing when you make some money. Success builds confidence in what you’ve done, whether you’ve done it the right way or just lucked out.

There’s nothing intrinsically wrong with finding a formula and applying it again and again. You need to keep in mind, however, that circumstances change, with the result that a formula that worked before may not work now or in the future.

The buy-wholesale/divide/flip-retail formula made huge profits for timberland investors in the 70s through the 90s when timberland was selling at low timberland prices and an immediate harvest might pay off the full acquisition price, leaving profit in the cutover land divided into retail lots. But when the get-in wholesale price rose too high, that formula became a trap, not a ladder to the stars.

Success also leads to a more cavalier attitude toward future risk. Instead of finding out something for sure, the investor tends to become less diligent in his due diligence. He thinks that he’s been there before, so he thinks he knows where he is now. Confidence leads to over-confidence, laziness and mistakes.

Testosterone is a dangerous motivation in investments. Competitive people want to win. Winning to beat someone else is a potentially ruinous motive for an investor. How many times have you seen two otherwise sensible individuals in a bidding war at an auction where their final motivation has turned into beating the other bidder? Sellers love testosterone contests. I have seen testosterone play a role in small land purchases and billion-dollar deals. It’s equally bad when a buyer feels he has to match testosterone with a seller.

The reward in investments is profit, not winning. The reward is the result, not the process. It doesn’t make sense to win the purchase, and lose money. Beating a rival for its own sake is usually pointless and often self-defeating.

Cutting losses. People become emotionally attached to whatever they have. Stock investors tend to hang on too long going downhill. Hope springs eternal when we’re faced with repudiating our own past judgments.

This emotional tendency to hang on helps a land investor and usually hurts a stock investor. Land investors rarely stick too long with land, which trends up without much volatility over the long term. Stock investors, on the other hand, may be holding on to a company that has become handicapped by technological change or mismanaged.

Companies disappear, land doesn’t. Companies lose all their value; land doesn’t. Patience is rewarded more with land than equities.

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Worst, I drive.

I scold myself for being a paler shade of green.

Villain and victim is, I think, the message of Carjacked: The Culture of the Automobile and Its Effect on Our Lives, by Catherine Lutz and Anne Lutz Fernandez (Palgrave Macmillan, 2010). Where Americans once saw the car as a ride to freedom and self-expression, Lutz and Fernandez argue that, today, its costs exceed its benefits when everything is counted. Cars, they argue, cost too much to buy and maintain; involve more than 40,000 fatalities a year; drive us into an expensive, oil-centered foreign policy; create suburban sprawl and endless congestion; and pollute our air, water and land.

Even if vehicles ran on nothing and created no pollution, Lutz and Fernandez argue that they would still be agents of death and injury, still create sprawl and bumper-to-bumper commuting, still require expensive public investment in roads and bridges and still consume natural resources inefficiently.

I’m old enough to remember when driving a car was fun, not a guilt-trip.

And who doesn’t recall the sacrificial lamb that bore our learning-to-drive mistakes? Mine was my mother’s turquoise and white, 1955 Chevy Bel-Air 150, a two-door sedan with a manual shift linked to an almost non-existent six-cylinder engine. Her ’55 was the stuff of putt-putts to office and supermarket, not hot-rod dreams.

My dad bought her — and me — a new black Valiant in 1962 when I was a high-school senior. It was slung low on its narrow-stripe whitewall tires and featured quirky lines, which inspired a few quirky lines of my own in the dark. I thought it was pretty cool until a college girlfriend called it the “squashed pig.”  She drove a 1927 Model A Ford with New Hampshire plates, which, I had to admit, was a lot cooler than my dorky Plymouth pushbutton automatic with its receding chin and unnoticeable suburban squeal.

Forty years later I taught my daughter, Molly, to drive in an ancient-but-patient Toyota farm truck. I drove us out into the middle of 150 acres of open pasture, locked it into low-range, four-wheel drive and told her, “Let ‘er, rip.” We bucked and reared for a week or two and tore up the sod at a speed of about three miles per day.

Molly grumbled that I was a “bad Daddy” for forcing her to learn on a manual transmission when every other kid was steering an automatic. Eight years later, of course, she lords it over suitors who can’t drive a stick.

Along with nostalgia for different cars in which we’ve done different things, most of us remember legendary traffic jams, close calls and crashes. Car freedom is never free—the Carjacked point.

Our vehicle fleet has grown in step with our population and our wealth. Registered vehicles increased from about 74 million in 1960 to about 240 million last year. If our population hits 400 million in 2039 as projected, we would expect to see 315 million vehicles at the current ratio. The wealthier the household, the more vehicles it operates.

While it matters how our growing number of vehicles is fueled, converting the fleet to greener power only solves one part of the problem that they create, as Lutz and Fernandez see it.

The Carjacked logic leads to the conclusion that Americans and the rest of the world need to rely more and more on fewer and fewer passenger vehicles for reasons beyond petroleum dependency and air pollution. But Lutz and Fernandez don’t follow their argument to where it points, namely, state-imposed limitations on private vehicle ownership. I can understand their reluctance.

When a government decides that its people should use fewer or less of something “for their own good,” it can limit availability, ban it completely, tax it or punish its use. People routinely subvert such limits through passive resistance, open defiance, bootlegging and black markets. Most things that have been outlawed are readily available.

A huge tax would reduce the number of new vehicles produced and sold. Such a tax would hurt our car-centric economy and each of us in many ways while falling heaviest on those least able to bear the weight. We might end up like Cuba, nursing our limping oldies into the sunset.

A policy that limits the number of vehicles an individual can own would foment rebellion. No American government could manage that policy unless the people were uniformly convinced that alternative choices were worse. It’s hard to imagine a consensus like that in light of our current debate over man-made global warming and its remedies.

Ours has been a vehicle-dependent economy for 100 years. Maybe it’s the hand we are fated to lose with.

But a reasonable partial solution is mass transit where it can be done. Might Washington suggest that the bail-out babies, Chrysler and GM, produce fewer cars — which they’re good at — and more trains, trolleys, subways and buses? Is creating a market for these products beyond us?

I grew up riding Pittsburgh’s electric street cars, which is one reason why I like light-rail trains.

I now take Amtrak to New York City from Virginia rather than drive or fly. It’s cheap, comfortable, as reliable as the alternatives and not stressful. It’s as fast as driving and far less dangerous. It’s almost as fast as flying and a lot friendlier. No searches, no seizures and very big seats.

If you lay a transparent Amtrak route map over a map of Interstate highways, you quickly see that this one type of public road now offers more than twice the mileage of passenger rail. People gave up on trains 50 years ago, because cars were cheap and more convenient. Passenger rail, with all of its problems, is an increasingly attractive choice to highway driving with all of its problems.

President Obama announced this week that he was putting $8 billion of 2009 economic-recovery money into 13 high-speed rail projects. Unfortunately, much of that manufacturing will be done abroad, and these funds aren’t adequate to complete the projects. Still, a little economic engine is better than none at all.

Between 1980 and 2007, the mass-transit share of highway and mass-transit passenger-miles together declined from 0.015 percent to 0.010 percent even as mass-transit mileage rose from about 40 million miles to 52 million, according to the U.S. Bureau of Transportation. It might be useful to think about what differences a 20 percent mass-transit share would make in our lives.

Mass transit is off-the-shelf technology. People use it when it’s available. But its downside has always been financing—finding money for investment and generating income to cover current expenses, whether the system is publicly or privately owned. Financing mass transit, however, seems an easier problem to solve than those associated with a growing vehicle fleet.

Mass-transit systems make no sense in rural America where we are not massed up. We have no economically feasible alternatives to cars and pick-up trucks, though, like others, we’re likely to shift toward smaller models and downsize the number we have around.

Individuals can make some choices that reduce the impacts of our need to drive four wheels and an airbag.  The less we choose to make them on our own, the more likely it is that we will be taxed in that direction, or worse, ordered.

That ugliness is a ways off, but you might be able to see it coming…at 55 mph.

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John Bogle - Vanguard Group Founder

John Bogle, founder of the Vanguard Group, has made a lot of money being a trustworthy business friend of individuals and institutions that invest in stocks and bonds. Vanguard fees are reasonable, and Bogle popularized index funds that usually prove to be better bets than stock-picking over the long run.

When Bogle writes, I read.

Bogle wrote a truly extraordinary op-ed piece in the Wall Street Journal (“Restoring Faith in Financial Markets,” January 19, 2010) that calls for profound investor-oriented changes, including federal legislation, in the way money managers and mutual funds act toward the stocks (companies) they invest in.

His argument is that the stewards of money have betrayed their clients. Returns “…have often been illusory,” tricked up by financial engineering and over-the-top risk-taking. The agents who invested client money failed to follow their fiduciary duty to their clients by not acting as owners, by allowing corporations to pretty much do as they pleased. The blame, he believes, lies with corporate behavior, but also with institutional investors — mutual funds, public and private pension funds, etc. — that now own almost 70 percent of the shares of U.S. corporations, up from less than 10 percent in the mid-1950s.

He points to five developments that followed the growth of “agency ownership” of corporate stock: 1) short-term speculation has replaced long-term investing, which allowed stock price to replace a company’s intrinsic value (the discounted value of its future cash flow) as the measure of investment; 2) the financial sector became the principal driving force in the U.S. economy, and client fees charged by stock exchange firms and mutual funds now run to about $475 billion; 3) innovation in financial markets provided neither security nor better value, only ways “…to make money for Wall Street firms rather than for their clients”; 4) money managers ignored real profits and cash in their analyses of corporate balance sheets and income statements; and 5) lacking any checks, executive compensation became decoupled from performance and simply went up because nothing was there (like owners) to stop it.

Bogle advocates that money managers start to act solely in the interests of their shareholders and beneficiaries; perform proper due diligence in their investments; actively participate as owners in corporate governance; and eliminate conflicts of interest in their activities.

If these policies are not adopted by money managers, does it follow that Bogle would advise investors to avoid stocks?  It seems that is the implication of his argument.

I laid out of Bogle’s arguments because I think it reflects what my wife once said about stocks, “You can’t win.” While the “you” she was addressing was me, she was expressing her general feeling that run-of-the-mill investors can’t win.

Since the 1920s, stocks have earned an average of 9.8 percent annually, with a net return of less than 4 percent annually once inflation, fees and taxes were figured in. (Jason Zweig, “Why Many Investors Keep Fooling Themselves,” Wall Street Journal, January 16-17, 2010, quoting Ibbotson Associates.). Bogle says that he would trade his own assets for a net-net-net return of 2.5 percent guaranteed, which says a lot about what he thinks about future returns.

In a less-than-4-percent world, it’s understandable how Bernie Madoff and his “consistent returns” lured investors in with no questions asked.

I have watched my own stock investments disappear (Pan Am, Digital Equipment) and ride down three crashes under professional management. Here are a few reasons why I think land is a better long-term investment than stocks.

Penetrability. Corporations often hide things, spin things and fail to disclose things that bear on their future earnings. It’s hard to know what companies are planning to do with their capital and what risks they don’t disclose. It’s also hard to know who they want to buy or who wants to buy them — and whether they’re being run honestly.  (I also had money in Tyco.) It’s almost impossible for an individual investor to penetrate the screens to get the facts that would allow a sensible investment decision. And Bogle says money managers can’t be counted on to do sufficient due diligence. (As with all generalizations, exceptions exist.)

Land sellers, of course, often erect similar defenses against buyers. The difference is that a motivated land buyer can generally pierce a seller’s lack of disclosure or misrepresentation through diligent scoping. Land is simply easier to figure out than corporate reports. Any ordinary citizen can scope land, which is not true of a 10K.

Intrinsic value. Land has intrinsic value. It can earn money. It has tax advantages. It always appreciates over the long term. Corporate stock may or may not have intrinsic value; I’m thinking of assets, profits (in hand) and cash. Intrinsic value doesn’t disappear.

Land will always be worth something unlike so many dot.coms of recent memory.

Risk. The fortunes of individual companies are subject to multiple risks, some of which are train wrecks. Compare the DJIA 30 companies of 2010 with 20 years ago—14 companies were dropped, including USX, Bethlehem Steel, Westinghouse, Sears, Honeywell and Woolworth, among others. Inasmuch as land demand and prices are driven by population growth and finite supply, land risks are fewer and generally not as potentially catastrophic. Land is not like the horse-drawn buggy at the dawn of the automobile age. Demand for it won’t disappear as a result of technological change, foreign competition, trade policy or shifting consumer tastes.

The risks with land investments are almost always knowable at the time of purchase. Diligent research should protect an investment for at least 7 to 10 years against surprises that would lower property value.

Long-term horizons. America is supposed to register 400 million people in 2039, up from about 305 million or so today. That’s money in any one’s long-term land bank.

Will population growth benefit most companies as directly? Which companies today would you wager will be around in 30 years? What annual return would you bet on for stock investments during the coming three decades?

For the long-term investment, buy and hold works in land; my experience is that it has not worked in stocks.

Volatility. The past decade has seen two runs ups and two stock crashes. Land prices moved up and down, but the 20-year trend has been up. The market and prices for land — agriculture, timber, recreation, second homes — is driven by a somewhat different set of factors than metropolitan residences. Country property is less volatile than its city cousins.

In and of itself, volatility does not make stocks a chancy investment. But I’ve learned that there’s a whole lot less stomach churning with land than with stocks. And that has value too.

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The point is that the remote regions of the UP are a truly unique part of the country where one can truly be themselves. The wealthy merge with the needy and at times not even the life long locals can tell them apart. You do not need to spend all morning in the shower before you head to town for a nice dinner. That is if you even decided to install a shower in your camp, most folks round here sauna instead.  That brings me to another point, it’s “sahh-oooooo-nah” – not sauna.  In fact, that is one of the easiest ways to spot a tourist – if they don’t pronounce the word sauna as if they were an old fashioned car horn.

If you love the woods, nature, paddling, hunting, fishing, exploring, bird watching, moose spotting, relaxing, and just plain being yourself; you will absolutely love it up here… that is if you can deal with a little bit of snow, bugs, and the funny accents.

If the UP sounds like a place where you could hone your outdoor skills, chop wood for the wood stove, catch dinner, or just sit with your significant other and watch the stars like you’ve never seen them; now really could be one of the best times in recent history to make your move. Dealing in the remote land business, I constantly hear the old timers brag about the ridiculous deals they got way back when. I hear the younger old timers tell me they sure wish they’d have bought a forty when the prices were dirt cheap through the late 80s. I hear all the regrets from all sorts of folks… except from a very select group of folks that realize this (right now) is one of those times everyone will look back on a say “would’ve, should’ve, could’ve”. Now, I know what you are going to say – of course he’s telling us to buy land in the UP… he’s a real estate agent. Well, maybe your right, but I call ‘em like I see ‘em, and that’s my honest opinion.  And hey, you really wouldn’t like it here anyway…

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Reporter M. P. McQueen says that the tough market of the last few years has “…made buyers more wary…” of “fibbing by home sellers.” Despite disclosure laws in more than 30 states, McQueen writes about a “gray area involving the disclosure of problems the seller may not know about….”

McQueen writes that the most common “misrepresentations” problems are: 1) disputes about property dimensions; 2) infestations, mold or radon in the residence; 3) flooding; 4) neighboring nuisances; and 5) planned projects that fail to deliver promised amenities, like a community pool.

I’m not sure that I know the difference between a fib and a lie (in its simplest form of telling a falsehood), or a fib a lie and a failure to disclose a material defect in what a buyer is about to purchase, or a fib and a lie that deliberately distorts a property’s assets or liabilities without exactly saying something that isn’t true. These are not “gray areas,” in my opinion, and I’m not generous enough to call them “fibs.”

Buyers, of course, also have motive, opportunity and means to be equally fibby.

They often provide sellers with false information regarding their financial strength, need for seller financing and intentions for the property. These, too, can be misrepresentations or outright lies. The difference, I think, is that sellers deliver a “good” in the transaction that is not what the buyer thought he was purchasing whereas when, all is said and done, the buyer almost always gives the seller a lump-sum cash payment. The seller is getting 100 percent of what was agreed; the buyer may be getting something less.

The areas of seller “misrepresentations” in country real estate — including lies, distortions, concealments, misdirections, silences, failures to disclose, white lies, crossed fingers andfibby-wibbys  usually involve the following:

Acreage. The buyer needs to know the specific acreage that the seller claims to own and does own. The buyer can start by looking at the acreage number in the seller’s deed. (A title search will have to confirm whether that number is accurate, which is a different story.) The buyer should have a surveyor run the deed’s legal description through a mapper program to determine whether the “calls” generate the deed’s acreage and whether the calls close, which indicates accuracy. Then the buyer should compare the deeded acreage with the boundaries in the field to make sure that all of what is deeded will in fact convey without disputes with neighbors. Tax-map acreages may or may not be accurate. The deeded acreage should be the same as shown on a survey and on a mapper program.

Access. A property that is accessed by a road that crosses the property of one or more parties is often embellished with seller-supplied legal opinions. The buyer should insist that such an easement (or right of way) be in writing, recorded and be of sufficient width that large trucks can use it. If the recorded easement contains restrictions, the buyer must be willing to live with them.

Roads into properties are often legally informal. A permission to use a road does not constitute a legal right, and it can be revoked at any time. If a seller says that he “owns” an access road by “prescriptive easement” or “necessity,” a buyer needs to understand that it will may take a court case to establish these claims and the buyer, now the new owner, may not win. Talk to a lawyer if that’s what a seller says to you.

Nuisance and annoyance. Most sellers do not disclose issues with neighbors, such as unusual levels of noise, odors, behavior and night-time light. A new owner has the option of taking such an issue to court as a nuisance, but success is unlikely. More often, the new owner is dealing with an issue that is an annoyance, but not a nuisance. In either case, buyers need to ask about both.

Value of assets that the buyer cannot immediately and cheaply confirm. Minerals, merchantable timber, rental income from and rental demand for pasture or crop land, water rights and personal property to convey (farm equipment and materials) may be difficult to value, even with expert help. An inexperienced buyer often takes the seller’s word for such values; often not such a good idea.

Problems that may not be manifest but are not seller-concealed. Floodplain, wetlands, navigable waterways and habitat for listed species constrain what a landowner can do with the property and can, in the case of floodplain, present a threat. Sellers should be asked to disclose what they know about such environmental issues.

It’s easy for a buyer not to ask about strong episodic winds, earthquakes, forest-fire threats, diseases/pests in timber, tornados, chemical residues from past use (lead and arsenic ground contamination, for example), buried stuff, karst, ground instability, among others. Don’t take the easy path.

Buyers lose nothing by including language in their purchase contracts that make the purchase contingent on the seller disclosing all material and latent defects in the property and conditions in and around the property that could negatively affect the buyer’s use, possession and enjoyment of the property, including but not limited to, the following:

Make sure that the contract includes a warranties-to-survive-the-contract provision.

Get help with this language from you local lawyer.

Buyers are responsible for doing adequate due diligence. Sellers should be expected to be honest about what they say, don’t say, what they know and what they should reasonably be expected to know. A fibby seller should be made aware that he risks blowing up a deal or a post-deal lawsuit.

If the seller tells you to go jump in his lake, ask him if it’s stocked with killer guppies. Resistance to disclosure reveals a lot.

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For 20 days after Christmas, two-thirds of the land of the free was moaning the frozen-pipe blues as temperatures stayed closer to zero than 32.

Many Americans have at least one good frozen-pipe story in our oral histories.

The best are about hot and cold lines buried in ceilings that broke during dinner parties so that the crystal chandelier over the first-floor dining room turned into liquid performance art, and no diner asked for extra gravy.

I often discourage visits from unwanted guests by noting that the waste-water lines serving our spare bedrooms are frozen. This strategy is less effective in the summer.

Like many old farmhouses, ours was built before FDR declared indoor plumbing an inalienable right. Indoor came to Blue Grass in the late 1930s, and our pipes have been acting up ever since.

Chinese made pipes out of reeds 3,000 years ago, then bamboo. Others fashioned them from clay, lead and wood. Modern materials with the best freezing characteristics are copper and plastic, either of which can be installed directly against baseboards on uninsulated, North-facing walls for optimal vulnerability.

I have found prayer to be of little use against frozen pipes. Neither His rod nor His staff ever does as much good as a heat gun and hair dryer.

Frozen pipes always follow the Four Iron Laws of Country Life.

1.  Bad things usually happen at the worst moments.

If pipes froze in July, or even September, it would be a lot better. Water repairs are always more pleasant when you’re not wearing mittens.

Livestock follow this rule religiously. They always break through fencing on dark and stormy Sunday nights. They prefer blizzards, but will settle for Class 4 hurricanes.

Similarly, water-proof boots always fail when you’re standing in water, never when they’re sitting high and dry on your mudroom floor.

Wood fires go out when you’re cold; ladder rungs break when you’re standing on them; and tires go flat when you’re driving somewhere, although recent improved models will go flat just as you’re about to go somewhere.

2.  Good things resist happening when you most need them.

When you really need a nice-as-pie day, it comes in September with all the others, not January when it would lift your spirits. Rain, I should point out, rarely comes during a drought

Every farm-carpentry project sooner or later presents a philosopher’s dilemma–a choice between good character and its opposite.

The character path requires undoing what you’ve done and redoing it better to reach the point at which you currently are only different. Doing over will require a 75-cent part that you have to get from a town 35 miles away. This, however, is the proper way to do the job.

People who do things the right way the first time got good-citizenship stars in the third grade. They were the Robins. I was tracked into the Crows, a demotion from K through 2 spent in the Grackles.

The other choice is to fetch a super-sized nail, bang it in with a sledge hammer and hope that it either doesn’t double over into a yoga pose or split the nail-to wood (which will require driving for the part).

Over the years, I have usually chosen the nail after weighing four variables:  1) how disgusted I have become with the cosmic uselessness of the project at hand; 2) how angry I am at still being a Grackle; 3) the odds that my wife, Melissa, will see me fail after cheating on the right way to do things; and 4) my testosterone level.

I can report that, so far, bigger nails bend worse AND split the wood. No nail I have ever used was big enough. Failure forces me to conclude that I should have used an even bigger nail. We address many problems this way.

Fortunately, hammering a railroad spike into a frozen water pipe usually breaks the blockage.

3. Jamming the pedal to the metal almost always makes things worse.

Men understand that kicking any dysfunctional machine is always the best and cheapest way to fix it. I have kicked photocopiers, soda dispensers, freezers, ATMs and cell phones with uniformly excellent results.

It follows that stomping on a gas pedal is the gender-appropriate way to improve the performance of any stuck machine that runs on four wheels and the liquid remains of ancient ferns.

I have gunned it when I’ve been marooned in floods, hung up on stumps and wallowing in mud holes larger than Maryland. Results have varied, but rarely exclude the catastrophic, which I figure is the result of not gunning it enough.

Wet, grassy slopes are the blood-oath enemy of the heavy foot. I have personally witnessed the slope down to my creek plotting the wreck of my farm truck by calling in a cloudburst from a sunny April sky.

When facing a slope, slimy with ice or mud, flooring your truck’s gas pedal will always get you 85 percent of the way up…and not an inch more. The more times you make a run at it, the lower you get each time. Many of our finest public policies draw inspiration from the Law of Diminishing Returns, which started behind our barn.

Gas-pedal gods are easily angered. They hang out in the rear differential where they feast on wet-slope rage. Rouse them, and you will find yourself either doing a forward roll off the road or at the bottom of a ditch the size of the Panama Canal.

The ditch, by the way, is always too steep to get out of by gunning it. You are then forced to get help from a kind-hearted stranger, or your wife, who, for unknown reasons, doesn’t spend half her life in messes of her own making.  It goes something like this:

Her:  Need a hand, big boy? Again.

Me:  #$%^&*.

Her:  Want me to get the tow chain and the tractor?

Me:  Let me gun it one more time.

Her:  It’s too deep.

Me:  What do you know?

Her:  Remember the last time?

Me:  That was then, this is now. I have better tires.

Her:  You’ll end up over the side…like last time.

Me:   Have a little faith in my judgment.

Her:  …I’ll get the tractor. Just to keep the battery charged, of course.

I have not had good luck kicking frozen pipes, or even stomping on them. They respond a lot better if you douse them with gasoline and toss a match.

4.  All farm work scheduled for Sunday afternoons during football season shall be postponed to protect local endangered species.

I’ve shown Melissa the tunnels of the Four-Eyed Mottled Mole that only hunts once a week in the fall between 1 and 7 p.m. on Sundays.  It is America’s most endangered rodent, owing to the recently observed fact that both females and males prefer the company of barn cats to each other. It’s also one of the few mammals that’s invisible to the human eye.

Our farm appears to be its last remaining habitat. I’ve told Melissa that federal authorities have ordered me not to do farm work during their Sunday hunting season.

“That’s fine,” she said. “Stay inside…and unthaw the pipes.”

An RFR is a future right, and it is contingent on the property being put on the market.

The terms of an RFR can range from vague and non-binding to very specific and very binding. An RFR can easily mean different things to different parties, so it’s essential that both know precisely what each means by an RFR when it’s first being discussed.

One type of RFR is essentially an option to buy the property before it’s sold to any other buyer. The seller and holder/buyer may or may not agree at the time the RFR is negotiated to bind themselves to a specific price and other terms. The option may or may not end at some specific date in the future. The seller is not obligated to sell if price and terms have not been established when the RFR was set up.

A variation on the RFR as option price is an agreement to sell and buy at a price based on one or more appraisals when the RFR is invoked or as a percentage of the current value as agreed to by the parties when they negotiate the RFR. The parties could agree, for example, that 100 acres is worth $100,000 right now and the option price will be three percent higher during the term of each succeeding year, either compounded or not compounded.

A second type of RFR is the right of its holder to match any offer the seller has, thus preempting its sale to another party. The holder is usually not required to match an offer, but may choose at his option to do so.

A related idea is something called a Right of First Offer (ROFO), or Right of First Negotiation). The language usually requires the property owner to engage in good-faith bargaining with the ROFO holder before negotiating a sale with other parties. But an ROFO may simply give its holder the right to make an offer and not obligate the seller beyond looking at the holder’s proposal. An ROFO could, but usually does not, bind the parties to come to an agreement. An ROFO gets the buyer’s foot in the seller’s door, but nothing is predictable after that.

Every RFR should be drafted as either an agreement or a contract (in which the holder gives some “consideration,” or pays for, the right). It may bind the current owner alone or run with the land. In either case, I would advise having it recorded.

Both parties — the holder of the right and the owner/seller — find a self-interest in working out an RFR. The owner/seller’s motivation may be cash in hand at the time the RFR is agreed to. The holder is usually motivated by a favorable price or terms down the road coupled with an improved ability to pay for the sale.

A purchased RFR typically sets forth a future (option) price and other terms. This gives both parties in current conditions certainty about a future time, price and other arrangements. If the holder cannot meet the RFR’s terms in the future, the RFR is not exercised and the seller is free to sell or not sell to anyone. In most cases, the RFR holder has no claim for the money he paid in advance for the right he does not use.

An RFR can also be set up among ownership principals that allows those who wish to continue to own a jointly held property the right to make a first offer or match an offer to a partner who wants to exit the partnership or to that partner’s estate. The holder/buyers get the chance to keep ownership among themselves, while the seller may be able to get the best price from those already in the deal. A fractional share in an ownership entirety is often discounted in the market, and a sale outside the group may penalize the seller.

RFRs of whatever type are usually set to expire at some specific future date. (This does not apply to ROFOs.)  The longer the term of the RFR, the more uncertainty and risk each party accepts in light of market changes for the property’s value. As a rule, time benefits the holder to the extent that real estate is appreciating on a fixed-price RFR. One or two years is the typical range.  Some RFRs allow either seller or buyer to invoke the RFR at any point during its term. Others give the buyer the right to make an offer only at the end of the specified term.

A lender or mortgage broker may ask a borrower to agree to a refinancing RFR that obliges the borrower to work through the holder (i.e., lender or broker), or gives the holder the right to match any refinancing terms. Do not agree to this type of RFR, which, depending on its language, can gum up a sale or refinancing at better terms. If you have signed such an RFR with a lender, request a release and talk to a lawyer.

An RFR is not a do-it-yourself legal project. Both parties should get lawyers involved in drafting language and making sure that everyone understands how it will work.

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The consensus thinking among economists is that the U.S. economy will grow about three percent in 2010. Some, however, believe that it will muddle along with no consistent growth for at least several years, and maybe more. A minority argue that a second dip is in the offing.

The growth rate in the broader economy has always directly impacted prices for traditional wood products, such as lumber and paper. New-home construction has been a reasonably reliable driver of demand for and prices of many lumber products. Southeast pine — to use a shorthand – has ridden both home construction and fiber needs for many years. The question is: Will these historical horses still be pulling the Southeast’s wagon in the future?

Take housing.

Our population has grown to about 306 million. The number of new one-family houses built from 1975 to 2008 dropped from 875,000 annually to 819,000, but those bookends don’t reveal a fairly steady growth to about 1.65 million in 2006, and then the familiar crash to half that. During the same period, the average number of square feet in new one-family houses increased by more than 50 percent, from about 1,650 to 2,520 in 2008.

It’s reasonable to expect that new-home construction will pick up, probably slowly, if only because of our growing population. But we might start preferring smaller new houses, consistent with an aging population and income-limited younger people having small families. We may use more wood per house, however, rather than less, as a substitute for metal and petroleum products. We may also shift toward more multi-family and fewer single-family new constructions as a result of continuing income pressure on the middle class.

I’d net this out in terms of Southeast timber as a prediction for maybe a one percent minimum, or a little more, annual growth rate in house-related lumber during the next 15 years.

Southeast pulp and biomass demand is even harder to predict.

I can’t see how most of the traditional paper markets — such as newsprint and coated products — will show much growth, given the shift to electronic information exchange and alternative supply sources. New paper mills are not being built in this country. Pulp will continue to find markets as feedstock in construction products, however.

So what might Southeast pine be used for in the future if some — but not all — of its current markets look sort of soft going forward?

Cellulosic ethanol. As we know, 10 percent of our gasoline is now ethanol, most of which comes from corn. Federal production mandates and subsidies underpin this industry. The corn-based ethanol industry may not be able to stand on its own with gasoline prices under $3.50 a gallon. Some have questioned whether there’s a net energy benefit in the corn process.

I’d put on the table all of the corn questions and more for cellulosic ethanol from trees. Maybe a cost-efficient, energy-efficient process is out there, but the experience with coal-based synthetic fuels may be more applicable. Yes, you can make gasoline out of coal, but it’s always more expensive than alternatives and involves tricky environmental issues. I wouldn’t count much on wood-based ethanol. Other sources of cellulosic feedstock are available.

As of February, 2009, Reuters reported a total capacity of 3.07 million gallons/year of cellulose-based operating pilot plants, only one of which was in the Southeast—a 1.4 mgy plant usingbagasse in Louisiana. This includes all types of cellulose feedstocks, not just wood.

Commercial-scale plants not yet opened using all forms of cellulose amounted to a capacity of 225 mgy. This included Georgia’s Range Fuels plant of 20 mgy and a Gulf Coast Energy plant in Florida (25 mgy), both of which used woody biomass. Finally, there was a total of 83.47 mgy in pilot or pre commercial cellulose plants nationally, of which three woodies were in the Southeast with a total capacity of 17.4 mgy.

Taking all three categories together, they amount to about 60 mgy of Southeast wood-ethanol capacity if all the commercial plants open and all pilot plants come on. That’s not much of a hook to hang a timberland-investment strategy on.

Pellets. Make sense to me.

Europe is a growing market for U.S.-produced pellets. It has 450 pellet plants in operation, with more coming on, which may become a good market for Southeast wood. West Coast pellets are being shipped there. Global pellet production was about 10 million tons in 2008. It’s expected to double in five years, with growth in the U.S. market moving ahead at a fast pace.

The U.S. has not moved very quickly into pellets, particularly as a source of generating electricity. Most U.S. pellets are burned as wood-stove heat.

Electricity generation from woody biomass. This, too, seems like a horse that’s ready to run.

In 2007, the U.S. had 346 electricity-generating plants burning solid wood or wood liquids that had a total nameplate capacity of 7,510 MW, or only about 0.007 percent of total generating capacity. That’s a pittance.

Power generation seems to me to be an obvious growth sector for wood, particularly in the Southeast and East of the Mississippi. The technology is there. Wood biomass is priced competitively with coal. It can be burned in a dedicated facility or in a co-generation scheme. It has fewer environmental negatives than coal, which it should displace.

The wildcard in Southeast timber is the possibility of widespread use of a very short-rotation species, such as a cold-hardy Eucalyptus, that could be harvested on, say, a seven-year cycle. Coppicing such a tree on Southeast plantations would provide oodles more wood volume (“oodles” is a rigorous macro-economist’s term I learned in graduate school). Such a species would find a market in pulp, pellets and generating power. It would displace traditional planted pine stands, the extent to which is difficult to forecast.

ArborGen, the South Carolina partnership of International Paper, MeadWestvaco and Rubicon Ltd., has developed a Eucalyptus that seems to be good down to 10 degrees and would do well in the Deep South. It’s likely to produce in the range of 10 to 15 dry  tons of biomass/acre/year and can be harvested every five to seven years. Some environmentalists are challenging federal approval and introduction, based primarily on a concern that the Eucalyptus will invade and take over native forests and general opposition to tree plantations on biodiversity grounds. ArborGen’s species should be available at some point in large quantities. It’s expensive, but production volume should justify the high cost.

Historic real returns on timberland have been in the eight-to-10 percent range, certainly for the preceding two decades. But Jack Lutz suggested that going forward, institutional investors should look for returns in the five-to-six percent range, owing to macro-economic factors, shifts in markets and various uncertainties. Lutz, who is associated with the Forest Research Group and FourwindsCapital Management, presented his findings at the International Quality & Productivity Center’s 6^thTimberland Investment World Summit held in New York several months ago.

I’ve only touched the surface of these various ideas. But I think where I have led myself is to the position that the timber-producing value of Southeast timberland is probably as safe as anything else when everything is netted out, but the timber market environment will probably change fairly dramatically over the next 15 to 20 years. Timberland owners may want to consider getting into long-term supply arrangements for plantation production with a biomass plant to contain market risk.

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