MITTS Friends Like These … July 16, 1998February 5, 2017 From a retiree: “What do you think of Market-Index Target-Term Securities for a tax-sheltered account? I just read a brief article discussing the advantages of MITTS over options to protect one’s principal in securities. If they are a reasonable investment for one already retired, where should I look to obtain the details of each?” A.T.: Investment firms are constantly looking for creative ways to get their MITTS on people’s cash, and most of these ideas are — to steal a joke from my wise friend Less Antman — NUTS (New and Untested Terrible Strategies). MITTS aren’t the worst idea in the financial universe (selling naked puts is the worst idea), but they are very expensive insurance against a very unlikely scenario. Briefly, MITTS are derivative securities — a manufactured product like gefilte fish, which is not an actual fish (“I caught a gefilte fish!”) but derived from fish. They promise to pay at maturity an amount no less than they were issued for — and no higher than some specified ceiling. Just how well you do within that range depends on the performance of some market index. As an example, Merrill Lynch’s Technology MITTS were issued in August of 1996 at $10 per unit and promise to pay between $10 and $20 to the holder at maturity in August of 2001, depending on the performance of the CBOE Technology Index. No downside risk (ignoring inflation) in exchange for limited upside potential. So far, so good, but there is more to it. The payoff is not based on the increase (if any) of the index over its price in August 1996, when the securities were issued, but on the increase over 112.5% of the index, so that the buyer gives up the first 12.5% of appreciation. Also, since the index doesn’t reflect dividends (which are admittedly small, but might make up 1% a year over that time), the owner also gives up around 5% more. Thus, you are giving up about 3% per year over the 5-year life of the product. If owning the stocks directly might have earned you 10% a year, now you will earn more like 7%. You will have $1.40 for each dollar you started with instead of $1.61. And you are limiting your gain to an absolute maximum (in this example) of 14.87% a year, which is what $10 growing to $20 in five years represents. The insurance MITTS provide is expensive because the stock market rarely loses money over a five-year period. (In fact, notes my friend Less, a mixture of 50% U.S. stocks and 50% international stocks has never done so, even with a start year for the investment of 1929.) Of course, going forward, anything’s possible. (“In the entire history of this city,” you can just hear the San Francisco real estate agents reassuring prospective buyers in 1905, “there has never been an earthquake that caused really serious losses.”) So there could come a time MITTS buyers have the last laugh. To play it safe in retirement, consider putting equal amounts into a broadly diversified U.S. stock portfolio or index fund … a broadly diversified international portfolio or index fund … and a short-term bond fund.
Spiders vs. Diamonds July 15, 1998February 5, 2017 From Derek Deer: “Why are spiders so much more popular than diamonds? (Today’s trading volume was at over a 10 to 1 ratio). Both have similar expense fees of .18%. The long term performance of both indexes (as well as the NASDAQ) are [sic] very similar. Does it have to do with distribution of dividends?” A.T.: Two reasons, I would guess: First, spiders (the nickname for a “stock” with the symbol SPY that basically gives you a tiny piece of all the stocks in the Standard & Poor’s 500 index) were invented first. The folks who wanted a way to trade the equivalent of an index fund took a liking to them, got used to them, and have no particular reason to switch. Second, the S&P is a much broader, more sensibly calculated index than the Dow (which diamonds – symbol DIA – mimic). So for those who seek true market-weighting, spiders make more sense. (The Dow is only 30 stocks compared with 500 for the S&P, so it’s less representative of “the market.” And it is calculated without regard to logic, which makes it less representative still. To make the point, imagine a day on which 28 of the 30 Dow stocks are unchanged, but two others move up and down $3 each. A $30 stock in the Dow rises $3, which is to say 10%, and a $100 stock in the Dow falls $3, which is to say just 3%. The 10% and 3% moves are considered equal – $3 is $3 – and the Dow, in this example, closes unchanged. It becomes all the less sensible if that $30 stock happened to have 2 billion shares outstanding, meaning that it had a $60 billion market capitalization that just gained $6 billion … and the $100 stock had just 100 million shares out, giving it a $10 billion market cap that just dropped $300 million. As far as the Dow Jones Industrial Average is concerned, it was a wash: the $300 million loss and $6 billion gain are considered equivalent. This is not to say the stupidity of the way the Dow is calculated doesn’t largely cancel itself out, or that Derek is wrong: The various indices do tend to move largely in tandem. Nor is it to knock Messrs. Dow and Jones, who would have been hard-pressed, sans pocket calculators let alone computers, to calculate it differently. But still.)
Report from Russia July 14, 1998February 5, 2017 So now Russia wants $20 billion from the West, and I say: Give it to them. (Well, lend it to them.) Not to say $20 billion isn’t a good chunk of change. It is, for example, nearly a third the market cap of Dell Computer. If Europe split it with us (not a good time to ask Japan to chip in), it would be the equivalent of every U.S. and European household lending Russia a hundred bucks. Nor would there be any guarantee of repayment or success. Russia could still go down the tubes. But Russia — like Mexico, which we recently helped with an even larger bailout that surprised the naysayers by working out well — is not going away. And a prosperous, more-or-less democratic Russia is spectacularly in our self-interest. Especially when you consider the alternative. So what are things like in Russia these days? I have this recent report from my wise and good Russian-born friend Gennady: # It is July 4th as I am writing, about 65 degrees and raining. Sounds lousy, but not too bad of a weather for Moscow. As I threatened, I will perform the cathartic process of expounding on paper (I mean Word 95) my take on this country and its people. It has been 3 years since I moved back here, which in a country in upheaval is a very long time. Russia is a big subject to cover so I will try to break it up into somewhat more manageable subjects. Men Russian pop music is very sappy. A typical male song will be a cry-fest to his beloved, extolling everything about her, vouching his love to the very end. The lyrics tend to be embarrassing. It is also common for a man to beat his beloved. In 1996 in this country, 40% of the murders were husband killing wife. Furthermore, since so many men are alcoholics, it is up to the women to provide for the family. This is a country with machismo turned upside down. The men claim all the perks that come with it but want none of the responsibilities. Women Many times I have told my parents how grateful I am that they took my sister out of this country. It has often been pointed out that Russia is always represented by a woman’s figure, a Motherland, as opposed to, say, Germany, which is associated with a male, a Father. All the war victory statues have a woman representing Russia. Women are truly the sufferers and the heroes here. As much as the communists have been claiming equality for women, it is almost jarring how unequal the sexes are. The proverbial glass ceiling here is made of concrete. Bear children, clean, cook, repeat. Sex This is a very open society when it comes to sex. The puritan forbidden mystery of it so prevalent in the US is nonexistent here. Promiscuity reigns. People start having sex early and indiscriminately. Furthermore, it extends across all social circles. Sex between young teenagers is not limited to the inner-city youth. There is also a clear separation between sex and family. People marry young in Moscow, typically between the ages of 18 and 24. I imagine it’s even younger in the provinces. And then they start affairs. What is interesting is that the affairs are not too clandestine and there is never any feeling of remorse attached. Women cheat on their husbands quite a bit as well. The process is mechanical, devoid of any emotions and I suspect is mainly a way to deflate some of the boredom that surrounds. In all my years of working in the US, only once did I know of an office romance. Here it borders on ridiculous. In our organization, I have a feeling that all single people have gone through all possible boy-girl permutations. Since availability of apartments for these trysts is limited, they stay late and “do it” in the office. I am also aware of two married men who are cheating on their wives with girls who work in the office. Trust No One Pathological liars. This city is filled with them. Particularly, from what I hear from friends in financial circles, they reign in the government sector. Since the country never had a history of building structural business relationships, it is every man for himself and people don’t care what bridges may be burned in order to make (or steal) a fast buck. Here is a story from my friends at [an investment bank] of how George Soros lost on the order of half-a-billion paper dollars here: About a year ago he invested $1.2 billion for a 25% stake of a company called Svyazinvest, a holding from the old Soviet days that rules the Russian telecom industry. The jewel of the holding was a large (almost 50%) stake in the Moscow telephone system. Several months after the payment for Svyazinvest was made, it turned out that there was a small print in the regulations of the Moscow telephone system that allowed an investor who pumps $125 million into the company to force an issue of shares equal to the outstanding number. Out of nowhere, a company called Sistema (actually an arm of the Moscow mayor) appears which “invests” real estate “valued” at $180 million and forces the issuance of the stock. This dilution forced immediate plummeting of the Svyazinvest stock. My friends at [the investment bank] are screaming that it is obvious that due diligence by Soros’s Russian advisory firm was not performed. Furthermore, they are pointing out that now, even though they have been working with the Moscow telephone system for years, there is a new unwritten rule that all financial transactions are to be done through that advisor. Pretty, isn’t it? [I.e., might the advisor been in on the scheme from the beginning?] What is sad is that these “events” discourage new investment. Nevertheless, there is a lot of direct investment going on. A client of ours, a system integrator, decided to build an ISP [Internet service provider] company. Before they opened an office and hired anyone, a Swiss investment company came in and bought a 50% stake for $10 million. It is commendable because I believe the brains to deliver high-tech solutions is where this country can excel. Lots and lots of smart geeks here. Business When I got here three years ago, it was truly messy. Since we do niche marketing in a high-tech industry, that is the industry I was able to observe. Technology companies would form, haphazardly hire people, give them something to do and when the going got tough would randomly fire some employees to save on overhead. About a year-and-a-half ago I was sitting in the office of a co-owner of a network of computer stores. With 7 stores and an annual revenue of about $50 million, this company is easily the largest technology retailer in the city. This president pulls out an NEC annual report and tells me he would like us as their marketing agency to produce something similar. I ask him why he wants it; after all a financial report is something you produce for the market and the shareholders. He responds that it would be “nice” to show to prospective vendors, key clients, etc. I said, fine, let’s see the financials of the company and we will do something. At this point, the gentleman points at the safe standing in the corner and explains that his financials consist of three items: his list of outstanding bills, his list of outstanding invoices and the cash! To this day they are not sure what the profit margins of the company are. In this country, since the days of communism, employee hiring has been a crucial task. Well, let me tell you, I have become resigned to the belief that it is next to impossible to find qualified help in the business environment. Incompetence reigns and not only in advertising. As I speak to people in various industries, I inevitably hear a complaint of how difficult it is to find anyone with drive and a self-starter spark. In every industry, from finance to store management, the boss always has to be there because the employee will slack off/not come to work/be unhelpful to customers, etc. After three years I am yet to find a native that I can hand an account over and be confident that the account is led appropriately. Even if the person is responsible, he will lack abilities to plan and initiate ideas. I believe that this is one of the major contributors to the fact that the country is held back. Whereas America was built by hordes of entrepreneurs, in Russia the trickle of such entrepreneurs is sneered at and held back by the lazy masses. I constantly compare our Russian clients versus the multinational ones. With the local clients, haphazard unplanned behavior reigns. If this week the business is down, let’s cut the advertising and cancel the seminars for the next month or two. This behavior shocked me two years ago when I first confronted it and it still does because the companies’ managers have hardly become more professional. Corruption You have heard all about it and I have become pretty much inured to it. Last week, however, I was able to understand just a little more. People always wonder why no laws of any merit can pass the Duma and the Federation Council. Finally, a communist deputy explained: it is all vested interest, with a twist. For example, say someone wants to introduce a law that empowers tax inspectors to raid and collect taxes at the customs area. To do that, authority needs to be consolidated under the taxation department banner. Say it can be proven that this consolidation will triple the revenue intake. Well, supposedly such an arrangement can never pass because the customs authorities will have to give up their powers. What that means in real terms is that someone will be losing bribe revenues. That person will immediately run to his protection in the Duma, who are also on the payoff, and a way will be found to kill the initiative. It is truly every man for himself and a total Mexican standoff arises. As a result, the only time the Duma votes as a block is on highly political issues, like condemnation of government policies, etc. When it come to internal matters, it is all divide and conquer. The New Russians Almost everyone in this country is poor, but the “new Russians” are obscenely rich and decadent. Another toy for them opened about two months ago: a super-super expensive restaurant. A “tsar’s dinner” is prix fixe at $650. At the same time, the country is broke. Here is one that just came up yesterday: Our organization rents space from MGU (Moscow State University). We rent two floors in a complex of buildings right in the center, a block from the Kremlin’s main entrance gates. It seems that the government and the city of Moscow have not been paying MGU the subsidies as provided by law. As a result MGU has been unable to pay the electric bills for several months now. Yesterday the city of Moscow cut the electricity off to the entire complex!!!! Values This summarizes what I think about people in this country. You may have noticed as you have traveled that Europeans consider Americans a bit square and a bit naive. They think Americans are all alike, are not very astute, and are devoid of sarcastic spark. I must agree with that. I must also point out that at this point in time Americans are much more willing to listen to ideas, accept others and, more importantly, lack this idiotic European feeling of superiority. Here in Russia there is a dichotomy of values that are instilled in the young generation. On the one hand, people look around and, if they have any brains, can see they are living in a rat hole. On the other hand, they grow up firmly believing that they are the smartest, strongest, most powerful … The result is that people here totally lack in self-reflection. They refuse to acknowledge that they today cannot build the best cars, best rocket ships, fastest microchips. It is always “we have the smartest teachers, scientists, doctors… but they are not paid well enough to perform the miracles they are capable of.” It is never “we need a Marshall plan to rebuild our PEOPLE.” And until you admit that your country is covered in [filth] because the PEOPLE, ALL OF THEM, are [dumping] on it, you cannot come up with a comprehensive plan to give it a shower. So, my advice to the snobs who laugh at America, is to maybe try to learn a little. And maybe acquire the respect for hard work. The Inscrutable Russian Soul There is one thing that nobody understands: how can people work in horrible environments (miners, transportation workers) for 10-11-12 months, not get paid and not riot, or at least refrain from coming to work. As someone pointed out, when a trade union strikes, it is usually for wage increases. Only in Russia, they call a strike to protest wage non-payments. [So there may not be respect for hard work, but there has to be a lot of respect and compassion for the hardships average Russians have endured for … well, for centuries.] Crystal Ball What has changed and what do I think is coming? After three years I am finally starting to understand what Russians mean when they say that this country will never be built according to a Western model. They are probably correct when they say that it was wrong to build this country on the US model. American economic model extracts the highest price for success. It is probably true that the transition from the Soviet model should have been less harsh, more gradual, closer to the French or German systems. I hear frequent complaints of this nature. It is too late, however. I am at this point convinced that this country, if lucky, is due for a long painful transitional period. In my own experience everything here takes longer than planned or expected. I think the improvements will take a long time and I am convinced that before the factories start working the people will have to change. The cynicism and the laziness will have to be replaced by something else. People will have to develop a spark in their eyes and a bit of an optimism and enthusiasm. It is pretty funny, but I observe that even in the gym the people are going through the motions in a listless manner. This country does have a lot of extremely smart people who are not realizing their potential and are not benefiting the country. And that is sad. Hopefully, some day very, very soon they will start realizing that potential.
Distrustful at 2,000, Tempted at 9,000 July 13, 1998February 5, 2017 From S. Fox: “I was brought up to distrust the stock market. But a good friend of mine at Merrill Lynch has been trying to get [me] to try it out for awhile. In the long run (I am only 26), would I be better off putting some in the market, or putting extra cash I have into my house?” A.T.: In the very long run, stocks will way outperform houses, for the most part. Except that, wait — maybe not. A house might appreciate at 3% a year, but if you bought it with only 20% down, then your cash investment is appreciating at 15% a year. (Right? You paid $20,000 in cash to buy a $100,000 house. It appreciates $3,000 — 15% of your $20,000 investment.) Not bad compared to the historical 10%-or-so return from stocks (appreciation plus dividends). But you’re not comparing buying stocks with buying a home — you’ve already bought one. You’re comparing buying stocks with paying down your mortgage, or else with making some home improvements (I’m not sure, from your message, which). Paying down the mortgage is like getting 8% risk-free, if it’s an 8% mortgage — not bad at all. Remodeling the kitchen or putting in a pool is less likely to provide a positive return when you sell, but may well increase your enjoyment of the home while you live there (once the inconvenience of living with the construction and the frustration of dealing with the contractor have lifted and your blood pressure returns to normal). But there’s little question that it would be terrific for you to get into the habit/discipline of putting $100 or $500 every month — whatever you can comfortably afford, gradually increasing it as your income allows — into one or two low-expense, no-load mutual funds, or directly into stocks. A lifetime of steady investing is something you will almost surely be happy, years from now, that you embarked on. But never borrow to invest. Pay off your credit card balances and car loans (but not your low-interest, tax-deductible home mortgage) first. And keep your expenses and transaction costs low. Sorry to be the heavy with your friend at Merrill Lynch — I know he/she means well and has to eat, too — but feeding him is an unnecessary and unwise expense that over the years will drag down your investment performance. (For more on all this, go to the library — lest you feed me — and get my book, The Only Investment Guide You’ll Ever Need. I think it will answer a lot of your questions.)
The 700 Club July 10, 1998February 5, 2017 Recently, I passed on the word that to find out who your long-distance carrier is – or your neighbor’s, if you’re across the way using her phone – just dial 700-555-4141. It’s free. However nothing, it seems, is quite so simple, and I got lots of interesting feedback. Michael Rosner: “Although the 700-555-4141 number is free, most 700 numbers are not. From what my local phone company has told me, they actually fall into the same category as 900 numbers, and other premium toll call numbers. At least for my telco, when 900 and related numbers are blocked from a phone line, the 700 numbers are blocked also. Unfortunately, this includes the free 700-555-4141. So for me, I have to read my phone bill to check my long distance carrier. Another free phone trick I know of is 958. In my area at least, dialing these three digits will tell you the number of the phone you are calling from.” Marc Weinstein: “It’s not necessary to do the 700# to find out who your long distance carrier is. Simply press “0” twice!” Alan Light: “700-555-4141 wouldn’t work from our phone (‘beep beep beep. We’re sorry – your number cannot be completed as dialed from the phone you are using; please check the instruction card and dial again’). Maybe it’s because our phone service is through AOL?” John Dicks: “I’m disappointed. You of all people need to know about and have either a 700 or 500 number! Here’s the deal: For about $5 a month (only thru AT&T), you get a number (which you get to choose – so you can make it easy to remember) which you can give to special people through which they can always reach you! It allows you to program the number such that it rings wherever you ‘call forward’ it to. In other words, my kids can always reach me no matter what office or hotel I might happen to be [in]. Granted you can do that with call forwarding, but I don’t want to forward all of my home or office calls – only the ones calling with my 500 number. And it makes it wonderfully simple for ‘the chosen ones’ to remember – as opposed to leaving them a list of numbers. Your responsibility is simply to call your own number periodically and update it. Incidentally, people can call you by dialing ‘1’ and the number, thus making them pay for it, or ‘0’ and the number and enter a PIN which makes you pay for it.” Bob Wicker: “Have I just been hoaxed by you? I called that 700 # in your column today and the recorded message said I was just activated to Worldcom. Now what do I do? I’m not sure who had my account before and I thought it would be nice to know. Little did I know I was changing my long distance carrier … and I sure as heck wasn’t prepared to do that … at least automatically … without knowing a thing about the new carrier.” A.T.: Bob wasn’t hoaxed. Turns out his carrier is a subsidiary of Worldcom, and he just didn’t know it. Meanwhile, of my plans for 600- and 400-numbers – “and the 777-numbers (for gamblers?) and 666-numbers (devil-worshippers?) and 555-numbers (fictional TV characters?)” – my sharp friend Dorothy writes: Sorry to burst your bubble, but the ‘she’ who hands out area codes is NANPA, the North American Numbering Plan Administrator. I believe NANPA is run by Bellcore. They hand out area codes to geographical areas as the old ones are ‘exhausted.’ The new ones are generally introduced to a split-off portion of the old area, but occasionally, the new NPA (telephonese for area code, e.g. Numbering Plan Area) is ‘overlayed’ on the old area. (Didn’t Manhattan get an overlay a few years ago?) Incidentally, the 888 NPA — introduced just a couple of years ago to augment the toll free 800 numbers — is almost exhausted. The new toll free NPA will be 887 and will be introduced shortly. Complete number exhaust, if we continue to assign numbers at the present rate, should occur around 2005. Telephone companies all over the country are trying to figure out ways to conserve numbers to avoid exhaust. In the years 1996, 1997 and 1998, California will have introduced THIRTEEN new NPAs! I think just about all possible NPAs have been assigned and are just waiting to be rolled out when needed. Incidentally, the scuttlebutt in the industry says that, within the next 10 years or so, you will get a number and it will be yours for life, regardless of where you live. Yet numbers do not ‘belong’ to customers; by law they belong to the phone company. The public likes to blame THE PHONE COMPANY when an NPA split occurs, but, of course, the telcos don’t do these exercises just for fun. In fact it is enormously expensive for them to roll out a new NPA. Blame all the users – us – of secondary residence lines, cell phones, pagers, etc.
Navigating A Small Boatload of Cash July 9, 1998February 5, 2017 From Michael Portuesi: “I’ve read at various times about the prudence and rewards of diversified investments, asset allocation, and dollar-cost averaging. “Now that I have a small boatload of cash – mostly as a result of sales of my previous employer’s stock (I’m a software engineer, who worked for a company that at one time was going places) – I’m thinking that I should purchase a mixture of stock and bond funds, plus keep some of the cash around. The money would remain invested for five years or more. “But given my uncertainty regarding the near-term future of the stock market, would it be wise to put a lump-sum there at the outset, if one expects the market to go down over the next year or so? I understand dollar-cost averaging, and I would have no hesitation to invest regularly through high and low, but it seems odd to put a large amount of money into the market when you believe it to be near a local peak. “What are the considerations here? Assuming for a moment my crystal ball is better tuned than most, why would I invest now, rather than sit out for six months or so? If I’m investing for the long term, is any time really a good time?” A.T.: Good question! Assuming your crystal ball IS better tuned than most, you’re right: wait. But that’s an awfully big assumption, because even the brightest minds on Wall Street tend not to have tunable crystal balls. That said, I admit I’d have trouble buying the Dow at 9000, too. The stocks I tend to buy at times like these (so far, with poor results compared with the Dow) are out of the limelight, overlooked, that seem to me to represent decent value. Like most investment questions, yours is truly answerable only in hindsight. You’re wise to recognize that the market is no bargain here, and to keep some of your money safe and relatively liquid. (Try Treasury Direct, especially if you live in a high-tax state, for your short- to intermediate-term bonds; no need for a mutual fund.) But you’re always – yes, always – wise to embark on and stick to a program of regular monthly investments in the stock market … so long as it’s truly long-term money you’re investing (five years is really only intermediate term). So if you have nothing in the market now, I would certainly start. But I wouldn’t dump every cent into the U.S. market all at once at today’s prices. Indeed, let me go way out on a limb and suggest that, after suitable research, you put a little in Russian stocks (5% of your stake?), via a fund, and a little in Japanese stocks (10%?), either directly (many are traded here) or via a fund. In ten years, you will either hate me for this suggestion or else, if it goes really well, forget it was mine. Good luck!
Miscellaneous Deductions and Good Strong Coffee July 8, 1998February 5, 2017 From Lorraine: “I want to know if it is possible to include software (Pitbull, etc.) and subscription costs (Investors Business Daily, etc.) as part of your cost basis for taxes. Assuming you have any profits!” A.T.: No. Investment expenses get lumped in with any other miscellaneous deductions you may have – including things like union dues, tax preparation fees, unreimbursed employee business expenses and costs incurred in a job search – and then only to the extent they all exceed 2% of your adjusted gross income, count as a deduction if you itemize. Say you have $600 in investment expenses, $150 in union dues and $40,000 in adjusted gross income. All but $800 of your $750 in investment expenses and union dues would be deductible – i.e., none of them. One small thought in this regard. In the example above, you might try bunching your investment expenses every second year, so you had $1,200 one year and zero the next. Timing your subscriptions and purchases to work out this way just to get a small additional deduction may seem a bit obsessive – I wouldn’t bother with it myself. But it’s an option. And now, on an entirely unrelated subject . . . BLACK COFFEE I shouldn’t have to tell you this, but some people seem not to get it – every so often you go in to a restaurant where they serve coffee in clear glass cups. Transparent cups. Surely you know coffee tastes watery this way. It must be served, and will taste much more robust, in an opaque cup or mug (white is best). It’s just simple physics.
Geniuses Lose Money, Too July 7, 1998February 5, 2017 One of the smartest people I know lost $2 million recently shorting Dell, and another good chunk shorting Excite. This is instructive, because it shows just how difficult and dangerous shorting stocks can be. (I warned you!) This fellow was not born yesterday. He made his fortune early as a Wall Street trader. He lives and breathes computers. He is not reckless. (That is, he did not short 100,000 shares and watch Dell jump 10 points; he shorted 2 shares and watched it jump a million points – what were the chances of that? – or so it feels to him.) He points out that Dell’s $60 billion market cap now rivals that of Hewlett Packard, while competitor Gateway Computer has a market cap of more like $7 billion. Is Dell that much better than the rest? Can IBM and Compaq never threaten its growth? One interesting advantage Dell has (my friend notes ruefully, in hindsight) is that it charges no sales tax. Because it does business only in Texas, it charges only Texas customers sales tax. (Don’t hold me to this; it is his perception; I haven’t checked it.) Gateway and the others sell through retailers throughout the country and have offices in many states, and are thus required to tack sales tax onto their mail-order sales. Right there, through no technical brilliance other than the quirks of tax law, Dell has, typically, a 6% to 8.5% price advantage over the competition. (Theoretically no such advantage exists. Theoretically, Dell’s customers file “use tax” forms and pay the tax that way. Dell has no responsibility to collect it, but, theoretically, its customers in most states have an obligation to pay it. But do you know anyone who ever has?) So, as we commiserate over his loss – $2 million may not be much to you, but it is to him – we plot Dell’s downfall. We envision state sales tax authorities subpoenaing Dell’s customer lists and hitting up customers for delinquent use tax plus interest and penalties. We envision cheap foreign imports, made all the cheaper by the Asian crisis, eating into Dell’s margins and market share. We envision a tornado hitting Austin, or Michael Dell being indicted for violating the Illegal Alien Act. (Anyone who has done so phenomenally well so phenomenally young must be from another planet.) To be honest, I don’t personally put a lot of energy into envisioning these things, because I am not short Dell. I put my energy into envisioning the things I hope befall the Internet stocks I am short. Excite is not one of them – my friend is short Excite – but after we finish persuading the local tax authorities to go after Dell customers, it is our dream to get IBM, Compaq and the others – the companies that determine how new PCs are shipped – even Dell – to begin exercising their muscle in this area. Yahoo wants to be the default start page on Compaq-shipped browsers? Fine. Compaq should charge Yahoo $100 trillion a year for this privilege. How would that cut into Yahoo’s profits (assuming Yahoo someday were to have profits)? Excite wants this privilege on IBM Thinkpads? IBM should charge Excite $100 trillion as well. IBM and Compaq, et al, have the leverage here – they just haven’t woken up to realize it and claim their share of the pie. This is how tough short-sellers think when the going gets rough. Because you know the old saying: When the going gets rough, the tough get … margin calls.
Losing Money in a Bull Market July 6, 1998February 5, 2017 Jay writes: “I have been in stocks for 7-8 years now. Earlier I was in options also, but after a year learned my lesson. (Enough said there.) I have been pretty good in stocks with moderate gains and very few losses. I don’t invest for long, and usually get out after a moderate gain (i.e. holding for 1 month to 6 months). I usually pick stocks after researching; by that I mean finding out what exactly they do, their p/e ratio, debt, cash they have, how well they have been doing earning-wise, etc. “Recently, I had been hearing news on these Internet stocks, that how they have been doing really good. Their returns were great. And so, I wanted a piece of those returns. So, in late April I bought couple a of stocks: PVTR ($5.25)- PIVOT RULES – building a new online store to sell golf apparel, and TRAC – TRACK DATA CORP(for $8). The day I bought, they came out with the good news of going online, etc. So, then I waited for my quick returns. (Mind you, this was the first time I did this.) Today PVTR is at 2 1/16 and TRAC is at 4 13/32. I hold about 300 shares of PVTR and 125 shares of TRAC. Given a choice now, I would NOT invest or shouldn’t have invested in those companies. My question to you is, is it a good idea to hold these till they go back up or should I get out and save the rest of my money? Also, these web board messages are so confusing. All these people post on those messages and they at times can influence those decisions also. (I personally look at yahoo message boards for individual stocks). “I am 27 years old with a wife going through college and not earning, so I don’t have that much cash to begin with. Usually, I am invested 100% and i.e. about $10,000. “Give me your advice on those 2 stocks. Thank you!” A.T.: Oy! I know nothing about these stocks. If you’ve analyzed their prospects and believe they’re great companies, hold them or buy more. Or find other stocks you think represent great value and sell these to get the tax loss. (Your losses will cancel out taxable gains. Any excess losses up to $3,000 can be written off against your ordinary income each year, with the balance carried over.) But, Jay, I think you’re pitting your skills against some very savvy players by investing the way you do – and handicapping yourself badly by adopting a strategy of selling quickly. All your gains will be subject to ordinary income tax (both state and federal). Better to find investments you believe in for the long term and let them grow tax-deferred – or at least until you qualify for long-term capital gains rates. (I suppose if you’re in a very low tax bracket, this part doesn’t much matter – yet. But as you prosper, it will, so keep it in mind.)
Amway July 3, 1998February 5, 2017 From R.C.: “Tom’s account reeked of Amway. You could do worse, as you say. They do have actual products, though any discount store makes their idea of ‘wholesale’ look ridiculous. Seen their price on a 3-pack of underwear? I wanted to share a favorite quote from an Amway training tape. The man on the tape is down-to-earth, Italian, owner of a small struggling construction company. Very funny guy and tremendous motivator, especially to anyone considering a stint at cold-calling. His impression of Amway and similar prior to his getting involved: ‘I thought that was something you did just before you killed yourself.'” And Sarah Heacock cautions: I would NOT go around suggesting that Amway was a legitimate multi-level marketing company because it actually sells goods. In my humble opinion (and my dad tried to make Amway work for MANY years while I was growing up, so much so that it nearly tore his marriage apart), what this guy was describing sounds exactly like Amway. Sure, in Amway, you can sell the (overpriced) goods and get people to buy them as well as buying them yourself (everything I ever had except for the soaps were fairly shoddy goods). However, that is NOT what they stress to the people wanting to strike it rich. Nor is what they DO stress — recruiting other distributors and making a portion of your downline’s orders back in profit — what really makes the money. What really makes the money for Amway is the motivational tapes and such that they sell. THAT is where people become Diamonds, etc. They are good at convincing their downline to buy the Amway-produced motivational tapes and going to Amway’s out of town functions. That is where the money is, not the products that Amway is selling. This is evidently stuff that Amway folk learn when they get higher in the business. My father had friends who became distributors in their own right. They discovered this nugget of info and immediately abandoned the company, even though they had spent over $40,000 plus lost two good jobs and a car on the way up, telling everyone they knew how Amway made its money. Which is what convinced my father to get out. He trusted these people. Anyway. Just wanted to let you know. But Marie sees it (somewhat) differently: “Those ‘circles’ and ‘Diamonds’ [your correspondent writes about] are Amway. I used to be an Amway distributor — and I know exactly what he’s saying because it’s what I was told. It worked, but true … you have to work it — really hard. But yes, it does work. Now as for the people who can’t afford it being the ones who are in it the most: well, sometimes. But I can say that the scenario that George H. presented is indeed Amway. BTW, just in case you would ask … I left because I truly didn’t like ‘selling.’