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                   I N V E S T I N G  B A S I C S
                     Wednesday, November 1, 2000

benjamin.rogers@enron.com
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ASK THE FOOL

-- Q. I'm interested in REITs (Real Estate Investment Trusts),
but I don't understand what "FFO" refers to. Can you explain?

-- A. REITs look and act much like ordinary stocks, but peek
under their hoods and you'll see a different kind of company.
REITs typically own many properties, such as offices, hotels or
apartments. With most companies, net income is a useful number
to evaluate, reflecting the profits left over from sales after
all expenses have been subtracted. With REITs, though, net
income isn't as meaningful.

According to accounting rules, the value of REIT properties is
decreased over time, with depreciation charged against net
income, reducing it. In reality, however, these properties are
probably not falling in value and may even be appreciating. So a
REIT's net income tends to understate its health. This is why,
with REITs, you should look at the "funds from operation," or
FFO, instead. They ignore the effect of depreciation and other
non-cash charges to help you see a REIT's true performance.

-- Q. I often see S&P futures referred to on CNBC. Can you
explain what futures are and why they're important?

-- A. Futures are typically for commodities like lumber,
soybeans and orange juice. They represent contracts between two
parties to buy or sell a certain amount for a specified price at
a set future date. (Fail to pay attention, and you risk having
to take delivery of truckloads of pork bellies!)

With S&P 500 futures, each day the party who bet wrong is
obligated to pony up cash based on the price of the S&P 500.
Futures are bought by some investors to protect themselves
against unfavorable price swings or by speculators betting on
where the market is going. They can be very risky.

Un-Foolish short-term investors pay a lot of attention to S&P
futures, as they can indicate the market's likely moves before
trading begins for the day. We don't fret about futures, though,
remembering that for most of this century, the S&P 500 has
advanced about 11 percent per year, on average.

Got some questions of your own for the Fool? Head to our Help
area or post your question on the Ask a Foolish Question
discussion board.
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http://www.fool.com/m.asp?i=178199

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INVESTING BASICS - DEBATING DEBT

Many investors think that debt on a company's balance sheet is a
red flag. In truth, though, debt can be both bad and good.

First, the bad. If a company is saddled with a lot of debt, it's
locked into interest payments that it must make. If it doesn't
have the cash to cover these at any point, it's in deep doodoo.
Many individuals can probably relate to this, having experienced
the dark side of debt when racking up charges on credit cards.

Now, the good. Consider that most people would never be able to
buy their homes without debt. Without car and school loans, many
of us would probably be driving used cars and taking
correspondence courses we found on matchbook covers.

Debt can be a boon for businesses, too. Many great companies,
such as Federal Express and the Walt Disney Co., came to life
because of early loans to their founders. Established companies
can make good use of debt, as well, borrowing to expand
operations and grow business. Interest payments also decrease a
company's taxable income, as they're deductible. Investors
willing to consider companies with debt need to evaluate whether
the debt taken on is manageable and whether the capital raised
and invested is earning more than it costs.

Perhaps you're worried about the debt load of
Fingernail-on-Blackboard Car Alarm Co. (ticker: AIEEE). Glance
at the notes in the annual report and you may find that the
effective interest rate for its debt is just 5 percent. If AIEEE
is putting the borrowed funds to work earning say, 8 percent,
then things aren't so bad.

When companies need money, they typically have two main choices:
They can issue more stock or debt. Issuing stock can dilute the
value of existing shares. Issuing debt can sometimes be more
efficient, as its after-tax cost can be much cheaper than
equity. All things being equal, though, we prefer to see little
debt on a balance sheet.

Companies that can grow without using debt or issuing extra
stock are in a more powerful position than other firms. Still,
you needn't balk at the first sight of debt. Just evaluate it
carefully.
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IN THE SPOTLIGHT

-- Fool Phil Weiss explained in greater detail about the good,
bad, and ugly aspects of debt in two Rule Maker articles. Read
part 1 and part 2.
http://www.fool.com/m.asp?i=178200
http://www.fool.com/m.asp?i=178201

-- If you haven't checked out our Dueling Fools features, you
should do so. Each week, Fool staffers debate the merits of a
company or financial issue. Read the current and past duels at
at Fool Duel central.
http://www.fool.com/m.asp?i=178202

-- Don't neglect your retirement! Whether you're 25 or 75, there
are some useful things you can learn about planning for or
living in retirement.
http://www.fool.com/m.asp?i=178203
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A NOTE FROM THE AUTHOR(

I hope you're finding this product useful. The content
originally appeared as part of our nationally syndicated
newspaper feature (which I also prepare). Consider giving your
local editor a jingle and suggesting that they think about
carrying the Fool.
http://www.fool.com/m.asp?i=178204

Selena Maranjian
http://www.fool.com/m.asp?i=178205

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