How to Buy a Car March 17, 1998March 25, 2012 “In December we had bad weather and my car was totaled. I needed to find a replacement and checked out Edmunds on the net. Of course, the first thing I did was look up my old car to “baseline” my buying decision. When I got there, I found an ad from auto-by-tel that offered to find me a car at a competitive price. I clicked the ad, searched for my old make and model, and found a deal (basically 1/2 the miles, 50K versus 95K, at a 10% premium over my insurance payment for the totaled car). I received a call from the dealer that night and my wife and I drove an hour-and-a-half to look at it (the dealer’s benefit from using the Internet) and bought it on the spot. I asked the dealer if most of his Internet customers were like me and he said yes. ‘They call ahead, drive in, and drive their new car home.’ It was an awesome haggle-free deal that I have recommended to friends.” -Andrew Beauchamp Couldn’t have said it better myself . . . except that I typically buy used cars, not new. I wonder whether this phenomenon – the better car price with less hassle via the Internet – is reflected in the calculation of the Consumer Price Index. Well, it’s not. But over the years, Internet shopping will definitely be sharpening competition, cutting out middle-persons, and bringing down the prices actually paid.
Why It’s Dumb to Buy Annuities March 16, 1998February 5, 2017 “Why is it dumb to buy annuities? Fidelity has a plan that you can buy and trade stocks and money market funds within the annuity. With this plan you can escape capital gains. Why would this be dumb?” -Frank Cardinaux First off, I doubt Fidelity has quite the plan you describe. When I called to ask, they couldn’t find it. At almost any brokerage house, you can set up an IRA or Keogh Plan (if you qualify) within which you can trade stocks . . . but that’s not an annuity. Annuities do shelter your income and gains from tax until withdrawal, and that’s appealing, but: There’s no telling what the tax code will be decades from now, but historically, long-term capital gains have been taxed only about half as heavily as ordinary income. And guess what: annuity income is fully taxed as ordinary income, even if it was produced from long-term capital gains. So annuities wind up converting what could be lightly taxed long-term capital gains into more heavily taxed ordinary income at withdrawal. Annuities frequently entail sales charges and management fees, as well as a charge for a life insurance component that’s not terribly valuable. So you have a lot of drag on your performance. Typically, it’s a hassle, at least, and expensive, at worst, to switch funds from one annuity to another, so you give up some control over your money when you buy an annuity. Once money is in an annuity, there are restrictions on withdrawing it. Most independent financial advisors agree: the purchase of variable annuities (the kind that are essentially tax-deferred stock mutual funds) rarely makes sense. But that doesn’t stop an army of eager sales people from selling many tens of billions of dollars worth each year. (Nor should it discourage you too much if you’ve already bought one. It may not be the greatest investment decision you ever made, but just saving the money in the first place is 80% of the game-you did a good thing.) We all hate paying taxes so much that we often go to great lengths to find ways not to. In the Seventies, it was crazy tax shelters that had so many sales charges and fees, and so little economic justification, that much of the time you would lose 100 cents on the dollar trying to avoid paying 70 cents on the dollar in taxes. In the Nineties, it’s variable annuities. They’re not nearly as bad as many of those crazy tax shelters were. But they’re still not as good, for most people, as investing outside an annuity.
Tax Babble, Baseball and Scrabble March 13, 1998February 5, 2017 TAX “Last year I purchased stocks on margin. I understand that the interest on the margin account is tax deductible, but so far I have not found someone to tell me where in the tax forms does one write off the interest against any capital gains. Can you please point me in the right direction?” -Bernie Kemp Let me point you in two directions. First, Schedule A, line 13. Second, either Taxcut or TurboTax, the inexpensive software packages that will step you through all this. (My sentimental preference is Taxcut, but they’re both outstanding.) SPRING TRAINING “A friend and I just finished creating a virtual stock exchange that trades securities based on baseball players and teams. Demand drives the stock price, but the stocks are ultimately cashed out according to seasonal performance. Think Fantasy Baseball with market forces thrown in. There are a couple other virtual stock markets out there, for movies and celebrities; I think the concept will become popular because it gives people a chance to have fun with their knowledge of a subject. If you’re interested, it’s at http://majorleaguemarket.com.” -Travis And if you prefer to bet on movie stars: www.hsx.com. SCRABBLE “I was pleased to find your reference to Scrabble. I’m a member of the National Scrabble Association and play frequently in their tourneys. If you are interested in Scrabble clubs or tournament Scrabble, send an email to info@scrabble-assoc.com. By the way, while it is always situationally dependent, the generally accepted tradeoff value for an S is 11 points and for a blank, 30.” -Aaron Ah, situationally dependent. But there will be few situations where you find me parting with an S when it adds only 11 points to the best score I could get without it. As for the blank, especially early in the game, it can almost always be counted on, after a few turns, to provide a 7-letter Scrabble, so – with situational provisionality – I stick by my 60 points for the word or I won’t use it. The real issue here, I think you will agree, is whether the blanks “stay down.” Officially, they do: once played, a blank remains on the board representing whatever letter the player chose. Fine. But when I can, I get opponents to play the house rule that allows either of us to pick the blank back up whenever one of us has or gets the letter the blank stands for – R, let’s say – we can grab the blank back up off the board, replacing it with our R, and use it again. This serves three purposes: It makes the game fairer. With only two blanks, there is a 50% chance one player will get BOTH. So half the time one player has a HUGE advantage. But when you can pick the blank back up, the two blanks may wind up doing the work of three or four or five or six blanks in the course of the game. It’s still possible one player will get them all, but the odds of that are sharply lower (and beyond the ability of anyone on the planet to calculate). It makes the game more challenging and exciting. It adds an additional element of strategy. (If you were going to use the blank to make either ZONE or ZONK, you’d probably want to make it a K, which your opponent is less likely to have, lest he immediately grab it with one of his all-too-common E’s.) And given how exciting blanks are to begin with – one’s heart pounds at receipt of a blank – the more the merrier. It makes me win – because I remember this rule and pounce. Others sometimes forget it and leave the blank sitting there even when, three turns later, they actually do pick up the K. The other main house rule, if I ever lure you over: if you get three of the same letter – three I’s or three U’s being the worst, but even three N’s or anything else – you are allowed to throw in one, two, or all three of them without losing your turn. Hey: it’s the same for both of us, so why should it give me an edge? It’s just more fun, like a Get Out of Jail Free card in Monopoly or a hard rather than a soft ball in squash. What has any of this to do with money? I like to play for $1 a point.
Whatever Happened to Dividends? March 12, 1998February 5, 2017 Yesterday I told you about the Beardstown Ladies who, though sweet, little and old, may not be quite the tycoons they cracked themselves up to be. Today let me mention Floyd Norris, Market Watch columnist for the New York Times. He holds forth incisively on the state of various markets and on issues of shareholder rights — and management abuse of those rights. He is someone on whose savvy you can rely. One of the very best. All of which leads up to my topic for the day, dividends, inspired by a recent Norris column. When I was growing up, Uncle Lew gave my brother and me 10 shares each in a handful of blue chips. These stocks rarely went up or down more than an eighth or a quarter of a point in a day; they paid 4% or 5% in annual dividends (savings account paid 3%) . . . life was simple. Nor was America back then in such sad shape. The economy was growing as fast as now; technology was moving along nicely (a vaccine for polio had been discovered; some kids’ folks were getting color TVs; miraculous electric typewriters were on the drawing board). We weren’t the only superpower, but we were certainly the big man on campus. (And somehow all this was possible without paying our CEOs a hundred or a thousand times as much as we paid the guy on the assembly line. And despite the Eisenhower-era 90% top federal tax bracket.) It was very boring, aged 10, to see these 5% dividends trickle in, 1.25% a quarter. What were my brother and I going to do with a check for $5, even then? (There were no dividend reinvestment plans: the cash was ours.) Yet that was, theoretically, the reason for buying stocks: you’d get a share in the profit of the enterprise. A dividend. Today the reason for buying stocks is: they go up. Profits are good if they meet or exceed Wall Street analyst expectations; but if a company makes a $400 million profit and the Street was expecting $435 million, that is a very bad profit. Ick! Don’t want to be anywhere near that $400 million. Otherwise, there’s little connection these days between a company’s profits and its shareholders. Most of the stocks people are interested in don’t pay dividends or else pay tiny ones. There is a very good side to this: we are reinvesting our profits, and that’s what builds economies and a bright future. There is also a tax side to this: when paid out as dividends, our share in a company’s profits are subject to income tax (unless held in a retirement plan); when reinvested for the future, they may ultimately provide us with a less heavily taxed capital gain (or just bigger dividends down the road). But there are less positive sides to this as well. As Floyd Norris reminds us, CEOs often own relatively little stock (and so get little by way of dividends) but hold gigantic stock option packages (and so care deeply about getting the stock price up). Why pay out dividends when the same money could be used to buy back shares of company stock? Buying back the company stock adds to the demand for the stock, driving up the price; shrinks the supply, driving up its price; and increases the all-important earnings-per-share (because there are fewer shares to divide the earnings among), driving up its price. And so far, everyone seems pretty happy with this arrangement. But there could come a time when, as part owner in the enterprise, you’d like to start getting your hands on a slice of the profits. I guess you’ll just sell a few shares now and then — that will become the retiree’s new monthly income: not bond interest or dividends, but the proceeds from the sale of 10 shares a month. It could work. Yet if stocks ever stop rising so fast, people might begin to focus more on dividends — as they used to. If so, given the skimpy dividends so many companies pay, they may decide to invest in something that pays a bit more. Bonds, even. I’m not predicting this, just trying to make sense of a world in which Amazon.com (a great company, of which I am an enthusiastic supporter) has sales of $147 million, no profit, and is valued by the stock market at $2.8 billion. Is the idea that some distant day it will be paying out $280 million a year in dividends? Or is the idea that it’s an exciting company in an exciting world and the price may continue to go up?
Oh, Those Ladies! March 11, 1998March 25, 2012 So I don’t want to gloat, but did you hear about the Beardstown Ladies? These are the nicest, sweetest old gals, world famous for their market-beating investment club. Big best-seller, translated into lots of languages, sequels . . . how can this not warm your heart? It warmed mine, albeit I doubted that they, or almost anyone, could significantly beat the market over the long run, other than by taking greater-than-market risk. (And they did not strike me as the kind of Ladies who’d do that.) It now turns out, millions of book sales later, that they had a funny way of calculating that market-beating return. Say you or I started the year with $40,000, added $5,000 more from our savings account, and saw our account total $50,000 by year’s end. You or I might say our $45,000 had grown very nicely to $50,000. Not bad for a single year (though most of us have become far too spoiled by this bull market to realize that). What the Ladies apparently were figuring is that they started with $40,000, now it’s $50,000 that’s a 25% increase for the year. Which it is, except that half the gain came from their own pockets. So when all the figures are recalculated sensibly, it turns out, I believe, that the Ladies did a bit worse than the market, like almost everyone else. No one is suggesting intentional deception. They are sweet little old Ladies, after all, with a sweet little old Publisher that apparently felt no need to check the accuracy of their claim. But it’s rather as if Dolly weren’t a clone after all, just a normal sheep. She might have gained significantly less attention, and would almost surely not have made the Bahhh-Seller List. All of which suggests, as always, that over the long run, most people who take average risk will get average returns. (Those who take above-average risk will like as not get killed higher risk makes higher return possible, but by no means guarantees it.) And it suggests, as always, that keeping taxes and transaction costs low (and annual expense charges low, if you’re in mutual funds) may be even more important, and certainly easier, than picking a portfolio of market-beating stocks. Not that I don’t try.
Trading Stock Options March 10, 1998February 5, 2017 “So, what do you think of this latest bull run? I’m reading an article in The Wall Street Journal that states the current PE (past 4 qtrs) is an average 22.2 — is that very high? To earn my keep, I’ve been scraping by with investments (very small) in real estate and by trading stocks options.” – David, South Florida entrepreneur David, if you can make a living over the long run trading stock options, you are a smarter man than I — and most others. By their nature, options involve relatively short-term bets. GOSH, it’s hard to know where anything is headed short-term. (I know it will be warmer in the summer, but next week?) And with options, you’re not investing (where all investors can win), you’re betting (where for each winning dollar there is tax to pay, plus someone’s losing a dollar — plus commissions). I assume you’re not doing anything crazy (writing naked puts or calls), so if it’s working, hats off to you. But this is a tough way to earn a living. The market is high here, but with the demographics and psychology at play (“everyone” now knows to put all his or her money in the market, just buy more if it dips), it could just keep going up, with small setbacks, for a very long time. (Or it might not.) I recently tried to sketch what I thought were some of the key overriding positive and negative forces at play. I know that when one’s stake is small, it’s frustrating not to reach for ways to make big money fast — and options certainly hold out that possibility. Imagine having owned out-of-the-money Oxford puts before it dropped from 67 to 14. Or out-of-the-money calls on Apple before it jumped from 14 to 23. Or a zillion others. (In-the-money options would have been profitable, too, of course . . . but the longer the long shot, the greater the risk and the cheaper the options, and thus the greater potential return.) I play with options, too, from time to time. Hard to resist. But I think any money you’ve made playing this game has probably come from me. One day, I fear, you will be passing it on to someone else (and no small chunk, in any event, to Uncle Sam).
Joe Beats the Bank March 9, 1998February 5, 2017 From Joe: “Enjoyed your recent comment on how having money in stocks and taking out an automobile loan is the equivalent of buying stocks on a margin. [Except that with a car loan, the interest isn’t even tax-deductible! – A.T.] As investors and the drivers of automobiles, my wife and I sold a portion of our holdings in Kelloggs and Campbell (great stock!) to buy her 1995 Cutlass Supreme (low mileage used car, of course!). The dealer would not let us pay cash for the car, so we put 50 percent down and ‘borrowed’ the remaining 50 percent. Within about 30 days, we had paid off the loan. When I called the bank to get the payoff amount, the woman thought I was selling the car. Nevertheless, we paid off the loan and earned a guaranteed 10 percent return on our investment. [Not having to pay 10% is as good as earning 10%. – A.T.] Now we have a decent car for her to drive and excess cash to continue investing in the market. “This strategy may be scoffed at by some, because the money might have done better sitting in the market. I look at it this way. The market did well, and our unsold shares increased in value. Had the market turned south, my wife’s car would still be paid for, and with our excess cash we could replenish our holdings at lower prices. No one can predict the market, but this is what I call a win-win strategy.” A smart way to look at it, if you ask me. But, I wrote back: “Huh? The dealer wouldn’t let you buy the car for cash?” And got this in reply: “Our dealer was surprisingly honest with us. He said they make money three ways. On the sale of the car itself, on the extended warranty (which we didn’t buy), and on the financing (they get a “finder’s fee” from the bank). If we didn’t finance it, he would have given us less money on the trade-in (a fourth way they make money). We didn’t feel it was worth the extra effort to sell the trade-in on our own, so we opted for dealer-financing and paid the loan off in about thirty days.” I used to advise people to act as if they planned to finance the car, without coming right out and lying about it . . . then, once the price was firm, just to whip out the checkbook and pay cash. That was my suggested negotiating ploy. I felt a little bad about it – but only a little. “The car dealers have their bag of tricks, and you have yours.” Well, Joe went me one better, although in this case it appears to be the bank, not the dealership, with whom he may have been dealing in less than 110% good faith. The one thing to be sure of before you play it the same way: are there any one-time loan fees or prepayment penalties? (For example, if it’s a “Rule of 78” car loan – I hope not many are anymore – then the interest is “front-loaded,” which means you get nicked on prepayment.) Note that the Internet provides all kinds of helpful ways to buy cars cheap, with more coming all the time. I should do a column on that soon – so if any of you have had good or bad experiences with this, or tips of your own, please let me know.
Want to Live Forever? March 6, 1998March 25, 2012 My friend Jim Halperin has done it again. In his first novel, The Truth Machine, he speculated on what the world would be like how fried O.J. would be right now (though he didn’t use that example) if we ever invented a 100% accurate polygraph of some kind. The saga of the book’s publication was as amazing as the book. Here was a guy who’d never written anything in his life other than one slim tome on rare coin grading. I have a copy. It’s probably biblical in its significance if you’re a rare coin dealer (Jim and his partner are the country’s largest), yet it shows no signs of literary grace whatsoever. But he had an idea for a book this truth machine notion and he just set about doing it. He wrote it. He sent it to all his friends for comment. The first chapter was great. The rest needed work. He rewrote it 20 times. He took a night course in writing. He hired local editors to coach him. All the while, he was running his business and fathering two small boys. The book got better. Then one day an actual bound book arrived at my door with a jazzy jacket exactly as you’d expect to see it on the shelves at Barnes & Noble. Jim had hired a jacket designer, contracted with a printer and a distributor in addition to writing the book, he was publishing it. He printed 35,000 copies, a huge first printing for a first novel. He established a web site so people could read it free and comment. Then one day he got a call from Ballantine, a division of Random House, offering him a couple thousand dollars for the paperback rights. Jim accepted. And I am watching all this, from 1500 miles away, somewhat bemused. Everybody wants to write a novel, but who actually does stuff like this? Then a month or so later, July 1996, he gets another call. Ballantine’s higher-ups have been reading the manuscript. They want him to stop selling the hardcover so they can publish it. In fact, they want to make it their lead title for the fall. Now I am not just bemused, I am agape. Beyond agape. Agape would be that they want to make it their lead title. Plenty to be agape about, no? But that they want to make it their lead title for the fall is beyond agape to anyone who’s ever dealt with a book publisher. Normally, it takes a year after a novel is finished to hit the stores. They were proposing eight weeks for this one. And they hadn’t even begun negotiating the deal! Long story short, Ballantine upped its offer from "a couple of bucks" to Real Money, took the remaining 30,000 of Jim’s books, rejacketed them, and raised the price from $19.95 to $24. Thousands were sent free to reviewers and "opinion makers" to get a buzz going. A thousand were handed out at the 1996 Republican National Convention which is pretty funny when you consider that in the book (as in real life a short time later), Clinton wins reelection. First Ballantine printing: 150,000 copies. This is surely ten or twenty times the size of the first printing of, say, John Grisham’s first novel, A Time to Kill. Look for the movie from Twentieth Century Fox. But none of this will make you live forever. It’s his second novel, The First Immortal, that deals with that. To read the prologue and first chapter, click here.
Four Things You Didn’t Expect to Learn Today March 5, 1998February 5, 2017 1. If you ask for “half a cup of coffee,” especially on an airplane, you will get a full cup. The way to get half a cup (60%, actually), is to arch your eyebrows in an unusual way and ask for “just a quarter of a cup.” To get a quarter of a cup, squint as if trying to see something very small and say, “Could I have just a sip — one finger — of coffee? Really: just one finger.” And hold out the index finger of your right hand horizontally, grasping it with the thumb and forefinger of your left hand, as if to put it on display. 2. Never use an S in Scrabble if it doesn’t enhance the score you otherwise could get by at least 15 points (unless you have two S’s, which is rarely the bonanza that it seems). Never use the blank other than to make a seven-letter word, or else to earn at least a 60-point score. Yes, JO, AA, AI, AE are words (and AG and ED are in the latest Official Scrabble Dictionary). 3. It is perfectly all right to eat a full grapefruit. And the best kind to eat are the ones with the thin shiny skins even though they’re harder to peel. (You peel them, because then you can just eat the sections, eliminating the need for a spoon, eliminating the waste, and eliminating the possibility of squirting juice on your tie or your companion.) 4. It is dumb to buy annuities. And yet people keep doing it, in droves. Stop it! (Having bought, though, it’s usually wise to hang on. And console yourself with the knowledge that, while it may not have been your very best alternative, you were a heck of a lot smarter buying the annuity than not saving that money at all.)
A Clear Connection March 4, 1998February 5, 2017 It was Friday afternoon, the “w” on my Thinkpad keyboard was in a state of obstreperous revolt (or should I say obswtrewpewrousw rewvolt?), IBM had not rushed me the “Easy-Serve” carton as promised (you get a carton, FedEx it to them, they fix and FedEx back), and I’d been meaning to splurge on an even newer, faster laptop, so . . . I was all set to spring for an IBM Thinkpad 770, even though it’s almost twice the price, but (a) they don’t make it easy to buy, and (b) it inexplicably didn’t seem to come with a 56K modem like the competition (it still offered 28K). A call to Dell revealed that El Niño in the Austin area had kept the company’s employees from getting to work that day (literally: the recording said they were closed). So then I did what I almost always remember to do when all else fails — I called 800-243-8088, a phone number hardwired into my brain from way back in the mid-80s, when the 8088 chip was today’s Pentium II. It was now 4:23 p.m. Eastern Standard Time. Justin, who answered with minimal branching (with IBM you want to kill yourself by the time you get to a human), said he’d be happy to get a computer to my home 1500 miles away before noon the next day — Saturday. The one I picked required some extra memory to be installed and tested, but they could do that, too. “How much time do I have before the cutoff?” I asked quickly, figuring it was a matter of minutes. “Until 9 p.m.,” Justin said, although he himself would be there working until 1 a.m. So he leisurely faxed me the specs, I called back, placed the order, and had my new laptop delivered — with its additional 32MB of RAM installed — at 11:15 a.m. the next morning. Call for software or a printer cartridge — or a laptop — in the evening and there it is, right as rain, in the morning. Awesome. I’m sure PC Connection is not the only outfit that can do this. (They have their warehouse at an airport, which helps.) But in a world of “please listen carefully as our menu options have changed,” 800-243-8088 is a good number to remember.