Social Security — Nunn Too Sound July 31, 1996January 30, 2017 I heard/read two very smart things recently, and I felt you should hear them, too: “FDR and his crowd were great actuaries. When they instituted Social Security, average male life expectancy was 62 and the retirement age was 65.” — Sam Nunn, speaking informally to a group of progressives “A good hairdresser is worth 10 psychiatrists.” — Laura Pedersen’s mother, as quoted in Ms. Pederson’s New York Times column Yesterday (if you want something only a little weightier): Can You Beat an Index Fund?
Can You Beat an Index Fund? July 30, 1996January 30, 2017 I read your column on mutual funds, and your penchant for the Vanguard Index 500. I agree, that is the only one I would recommend myself. However, you also mentioned that it is very difficult to beat the market. On that note, a method was developed by Michael O’Higgins and refined by the people at AOL’s Motley Fool that seems to do just that. It involves investing in the five lowest priced stocks of the 10 highest yielding DOW 30 industrials (well, actually the second thru fifth lowest priced, the lowest is omitted). The portfolio is reallocated once a year. That’s it. I just described the entire process. This process has produced returns at a compound rate of 17% since 1961. I believe the market has been about 10% during that time period. [Actually, according to the kind folks at Ibbotson, it was a just over 11%.] Alan Levit CAShuttler@aol.com I’m a little familiar with this system. The problem with this sort of thing is that they didn’t develop it in 1961 and predict what would happen, they looked back to 1961, ran a lot of computer analyses, and found what would have worked had you started in 1961. Whether it will work as well for the next 35 years is doubtful, for two reasons. First, it may be that there is no great underlying logic to why it worked in the past, any more than there is great underlying logic to why one guy out of 256 might have flipped heads eight times in a row. (The odds are one guy would — but not because his coin-flipping method is better.) (I guess the logic would be that these stocks are out of favor, yet have high yields to boost your return and cushion any further falls. It’s certainly not the most dangerous system you could play, that’s for sure. But it also entails lots of taxable dividends and taxable gains if you readjust your portfolio each year rather than buy and hold. If you did it, you might want to do it within the shelter of your Keogh Plan or something.) Second, as this becomes more and more popular, with the Fool already suggesting you consider doing it in December, to beat the January crowd, the people who do it in January will find their performance a little worse (because prices were bid up in December) — and so forth. Not to say you might not do reasonably well with this system. But it’s not quite the miracle it appears. Looking back, there will always be strategies you can identify that would have worked. Looking forward, it’s harder. All comments welcome.
If At First You Don’t Succeed July 29, 1996February 6, 2017 So we’re all watching the O-lympics — which is a lot healthier, if you ask me, than when we were all watching the O-J show — and all anyone can think of are “the thrill of victory and the agony of defeat” (as one TV network used to put it). Certainly a lot nobler sounding than “greed and fear,” or “bull and bear,” or “bid and asked,” which may be the rough equivalents from Wall Street. On the other hand, show me an economy that was ever built on the speed of its runners. I tried to think what I could say about the thrill of victory and the agony of defeat and quickly remembered: I don’t know the first thing about sports. Nothing! I was the only left halfback on my high school varsity soccer team to be right-footed (though I did have heart), and it went downhill from there. But business is a sport itself, no? A competition? Coke versus Pepsi? Kodak versus Fuji? Gimbel’s versus Macy’s? So here’s the story I wanted to tell all you aspiring Gold Medalists (and even just those of you going for the gold): R.H. Macy started a small thread-and-needle shop in Boston in 1842 that closed within a year. A second, also in Boston, was shuttered in 1845. You can just feel his frustration as he made his last entry in the account book: “I have worked Two Years for Nothing. “Damn. “Damn “damn “damn” (And, as I’m fond of reminding slow-starters, Tolstoy was 50 before he wrote his first book.) The lessons: don’t give up, of course. But also: in considering whether to back some entrepreneur, don’t necessarily count him out for having failed in the past. Indeed, just the opposite may sometimes be true. That failure can be just the education an entrepreneur needs. Note: When it comes to Internet companies, there are no failures. Any 20-year-old with an idea can be reliably expected to go public at a $200-million-plus valuation, so give him whatever he asks for. (Or so I thought until a couple of weeks ago. Lately, at least a little sanity has reappeared.) Tomorrow: Can You Beat an Index Fund?
Infidelity July 26, 1996January 30, 2017 No, this is not a comment about the new anti-matter mutual fund group. It’s just that yesterday I made a passing reference to a handwritten Albert Einstein letter I had acquired — the smartest man in the world (fight promoter Don King, I am guessing, is second smartest, judging from the hair) writing on the subject of infidelity. He was replying to a distraught colleague who had apparently written to solicit his advice: her husband was cheating on her. A couple of you — I won’t name names — were curious just what his advice was. For what it’s worth (and without naming the lady, even though it was 43 years ago): Dear Dr. ————–: I can empathize with you well, that the situation you describe is very painful for you. But as a mature, knowledgeable person you should attempt with all your strength to overcome this situation from within yourself, rather than feeling deceived or mistreated. I am sure you know that most men (as well as quite a number of women) are not monogamously endowed by nature. Enforced faithfulness, however, is a bitter fruit for everyone involved. Instead of letting anger towards your husband arise within you, you should pity him, since fate has forced him to balance between two women that are very likely hostile towards each other because of him. This is not an enviable situation and for a well-meaning person there is no satisfactory solution to this problem. If he is a benevolent and just person and his general conduct is decent towards you, you should be able to respond to this with a smile and not make a case of war out of it. Anyway, you should not take the view that your honor has been violated by his behavior. When you get angry, tell yourself that you are still in the simpler and less incriminating position that he. With friendly greetings, A. Einstein Now, when I said up above “for what it’s worth,” I naturally meant his advice. But what is the letter itself worth — handwritten in German. I’m not selling it, but I thought it would be fun to try an experiment. If this intrigues you at all, just tell me what you think a letter like this is worth. What would/should go for at auction?
Hoover: Big Dam, Small Mind? July 25, 1996January 30, 2017 I am having addiction problems. It used to be just computer Scrabble — I actually have that one fairly well under control. Go to meetings only once a week, now. Shrink says I’ll never fully shake the urge to double click that icon, no matter how deep on my desktop I bury it. I just take it a day at a time. But my weakness for “historic documents” seems to overwhelm my normally cheap and prudent nature. I just acquired four new Einstein pieces — one, handwritten in German to a colleague who apparently had written in despair that her husband was cheating on her. The smartest man in the world gives his thoughts/advice on infidelity. Another is his 1938 lease on the summer cottage at which, the following year, he wrote a famous letter to FDR urging him to build an A-bomb. The two best are typewritten in English about why people should not cooperate with the House UnAmerican Committee — Senator Joe McCarthy. But what the heck are these things worth? How do you compare the value of an Einstein letter with the value of some mint condition 1954 Brooklyn Dodgers baseball card? Or a Roman coin? Or a second-rate impressionist painting? Part of the fun is the person signing, but for me the name itself is not a sufficient lure to trigger the addiction. It’s the content. Here is a cheap letter dated July 18, 1898, on the stationery of Colliers Weekly. The writer, aged 28, in his first year as ad manager, is trying to persuade the Urbana Wine Company to advertise. It’s signed: “Conde Nast.” Isn’t that nice? And here is a cheap letter dated September 5, 1917, from a guy in the United States Food Administration — Herbert Hoover, who would be President just a few years later (how’d he pull that off?) to the Rolin Film Company in Los Angeles. “Confronted with the stern necessity of stopping every possible waste of food and foodstuffs during the continuance of the war, we are compelled to earnestly request that the use of real food in scenes on the stage in theatres and the use of real food in the course of the production of motion pictures be entirely eliminated.” Substitutes for real food can undoubtedly be found, he writes, or if not, the scene could just be omitted. Think of all the food that will be saved this way! I don’t know whether it’s more a comment on our desperate circumstances during World War I, the occasional silliness of bureaucrats, or the small-mindedness of Herbert Hoover. But I love it. And it cost a heck of a lot less than Einstein on infidelity. (Please don’t ruin my fun and tell me this was just some guy who happened to have the same name as the future dam.)
Ostrich July 24, 1996February 6, 2017 I ate my first ostrich out at the beach this past weekend. Eddy the butcher had apparently been asked by one of its better customers to order ostrich for some special occasion, and either the customer changed his mind or else there was some left over — whatever the deal, Eddy asked me whether I might be willing to try some for $15 a pound, and I said yes. Eddy’s is the kind of family business that reminds one of what small-town America must have been like when nobody locked his doors. I’ve been shopping there for 22 years—watched Eddy grow up helping behind the counter (and now his kids are helping). So I would have said yes no matter what. But on top of that — OSTRICH! How can you not break into an idiotic grin at the thought? Think of the conversational possibilities. “You and Bill like to come over for some ostrich?” Or . . . “Us? Not much. We spent the day marinating our ostrich.” I can find amusement in vegetables — long-time New York Magazine readers will remember the unretouched photo of an eggplant that looked almost exactly like Richard Nixon, may he rest in peace — so you can imagine the twinkle in my eye with this under my arm. “Don’t forget the ostrich!” I said as loudly as I could to the high school girl bagging up our purchases. Of course, we weren’t carting home an entire ostrich, or anything close. No hoofs. No feathers. Just a two-pound slab of deeply red meat that looked rather like a giant raw liver. One of our weekend guests, a Hollywood director, eats no red meat because of the way cows are slaughtered. (My own reason: the fat content.) Pork is “white meat” (on a fat-par with chicken), but he wouldn’t eat that either, for the same reason. Doesn’t like the way pigs are slaughtered. He admitted to a certain inconsistency in his willingness to eat chicken and fish — being slaughtered can hardly be fun for any species — so even on well-trod culinary ground his ethical guidelines were blurry. But ostrich? It looked like red meat, but apparently has even lower fat content than white-meat turkey. And who knows how they kill the things? My guess is they provide a bucket of sand and then — well, you know. Not wanting to take any chances, our guest had soup. I’m no cook, but was invited to stick a fork into the dinner-to-be and found myself barely able to do so. Imagine sticking a fork into a tire. Yet with 36 hours’ diligent marination (in beer, onions, salt and other spices), the most remarkable thing happened: it came out really well! A London broil in appearance, sliced really thin; a Sydney broil in taste. There is no financial point to this. I am not taking the long way round to introduce you to ostrich futures or recommend a chain of exotic-game restaurants. But I would say that to succeed in the financial marketplace it helps to be the kind of investor willing to try the ostrich — and to abandon it once it becomes a fad. Investing in Russia when Yeltsin was trailing badly in the polls was a little like that. “Invest in Russia?” most people would have said. “You try it first. Maybe if he gets re-elected I’ll stick my toe in.” But now that he has, you have to pay twice as much. (So now might be a good time to take some profits — although the entire Russian stock market is still valued at less than 25% of the Coca Cola Company.) The other obvious ostrichism: Adapt to a changing world. Bury your head in the sand and it could get chopped off. Tomorrow: Hoover: Big Dam, Small Mind?
Favorite Mutual Funds July 23, 1996February 6, 2017 Have you already recommended the ‘low expense no-load mutual funds’ that you like? Not here. If not would you? Thanks. — S. Ruch Sure: 1. The various Vanguard index funds, because their super-low expenses mean you are almost certain to do better than the majority of your fellow stock market and mutual-fund investors — though you will never do exceptionally well. 2. The T. Rowe Price funds, especially if you’d like a little hand-holding. 3. The Twentieth Century funds, though this may not be the best time to start with aggressive funds that do best in bull markets — this one may be in its latter stages. 4. The Mutual Series funds, but hurry — they are about to be purchased by the Franklin group of funds, and for new investors will become “load” funds. (Existing investors will be able to make new investments without the load, they say.) Tomorrow: My First Ostrich
Thermodynamic Milkshake July 22, 1996February 6, 2017 Did you have fun last week? “The U.S. stock market is behaving like a thermodynamic milkshake: there are easier ways to gain 9.25 points, as the Dow did Tuesday, than by exploring a 220-point range, with a stunning 680 million shares traded.” — Mark Anderson, STRATEGIC NEWS SERVICE (SNS is a high-level, high-tech industry $195/year weekly electronic newsletter targeted at CEO types and those sophisticated at high-tech investing. For a free one-month trial, e-mail to Markrander@aol.com.) Tomorrow: Favorite Mutual Funds
Your Kids’ Summer Jobs July 19, 1996January 30, 2017 “As a parent who oversees the contribution of $2,000 each to IRA accounts for two summer employed college student sons, I urge you to tell everyone to do the same. Or is there some new tax angle that would not make it as prudent as I think it is?” Yesterday we cured the common cold, but this one may be even better. It won’t help you, but it could sure help your kids if you can afford it. And they don’t have to be college-age, either. Say you have a 12-year-old earning $100 a week this summer cleaning pools or mowing lawns or teaching Windows 95. Have her set up an IRA with some good low-expense no-load mutual fund and put all the money there. She will resist this idea strenuously, but there’s a way around that. Increase her allowance by the same $100, so it doesn’t cost her a dime. If she still doesn’t like the idea, you have a mentally challenged kid. (Or, if your powers of persuasion are a little better than that, tell her you’ll chip in $75, so it only costs her $25 in current cash to stash away $100-a-week in her IRA. That should sound pretty good, too, and gives her more of a stake in it.) No one starts this early. But because “the power of compound interest” over a lifetime is so extraordinary, they should. So long as the money is earned in some legitimate arms-length way (not mowing YOUR lawn or cleaning YOUR pool or teaching YOU Windows 95), your child is entitled to put up to $2,000 of it a year into an IRA. Clearly, the purpose wouldn’t be to save taxes in the short run. Indeed, there’s always the risk your kid will, irresponsibly, raid the IRA in a few years. That would just serve to transform today’s mostly nontaxable dollars (because on a kid’s meager income little or no tax is due) into taxable dollars (because by then he/she’ll be a taxpayer). But look how it works if done right: 1. Your kid gets into a working/saving habit. This alone is priceless. 2. Maybe your kid learns a little about investing and capitalism. This can’t hurt, since it’s the foundation of our prosperity. 3. If your kid puts $1,000 a year into an IRA from age 12 through 21 and then stops, and if the mutual fund grows at 10% a year over the kid’s lifetime, then the income from those ten summer jobs — $10,000 — will grow by age 70 (when withdrawals must begin) to $1.7 million. Which would be enough to throw off an annual income of $200,000 for the following 20 years, to age 90. All for having done this at the outset. Of course, figuring 3% inflation over the same period, $200,000 a year would really be only about $35,000 by then. And that’s pre-tax. But how many 70-year-olds do you know today who wouldn’t be glad for a $35,000 boost to their annual income? (And because this money would be “locked away” in an IRA, college financial aid offices should not take it into account in determining available funds, which could make a difference in obtaining student aid.) So, yes: if your kids are working this summer, or a few hours a week during the school year, you might consider something like this. And if they’re not working, maybe they should be. The IRA can be set up, and 1996 income deposited, any time until next April 15. But better to do it today.
A Cure for the Common Cold July 18, 1996February 6, 2017 Robert Leroy Ripley was a sports cartoonist for the New York Evening Globe. He drew his first “Believe It or Not” December 19, 1918. It showed, among others, a Canadian who ran the 100-yard dash in 14 seconds — backwards — and a Frenchman who (believe it or not) actually held his breath underwater for more than 6 minutes. Soon he ventured beyond the sporting world (“Boy died of old age at age 7”) and an industry was born. Growing up, one of my favorite books was Ripley’s Believe It Or Not. (I believed it.) And one of the stories in the book, although I can’t say I recall more than its gist, was of an auction at which a man paid a thousand pounds for a book billed simply as, “the secret of good health” — or something like that. He won the bidding, grabbed the book, and found that all its pages were blank except the first. It said: “Keep your feet warm and your head cool” and you’ll be a healthy man. (Not an easy thing to do in a world where heat rises.) Well, he immediately got a hot head at having been taken this way, and cold feet about going through with the deal, but all sales were final. But it’s not such bad advice. Here’s a little more. It may not be worth a thousand pounds to you, but has been to me — and it’s free. You know that little tickling feeling you get at the back of your throat where it connects to your nose, and the next day you’re sneezing and pretty soon you’re coughing and it goes to your chest and the Contac is making you sleepy or the Sudafed is making you feet tingle at night and no amount of orange juice keeps the damn thing from running its course? If you don’t know what I’m talking about, you are a lucky mammal. Anyway, a friend seems to have solved this problem for me: apple cider vinegar. At the first hint of a tickle, I now just screw up my face and take a tiny, tiny sip of the stuff (it’s really not so bad — think of the dressing on a salad, sans the salad), tip my head back and let it swish around the tickle as much as I can before swallowing it. Then maybe a second or third time. End of story. Obviously, I can’t say it will work for you, or continue to work for me. But it’s worked for the friend who turned me onto it, and I’m convinced it’s worked for me. Placebo effect? Perhaps — that’s just fine with me. At least it hasn’t cost you a thousand pounds. Tomorrow: Your Kids’ Summer Jobs