The Minimum Wage November 30, 1998February 10, 2017 A couple of weeks ago I wrote about Linda, a single mom struggling with two kids and an income of $18,000 a year, and wondered how much tougher yet it must be for someone at the minimum wage (currently $5.15, or about $10,000 a year). As usual, you had some thoughtful, and thought-provoking, things to say: “My father-in-law was a union worker as were many of our friends. I’ve seen what often happens when a union goes on strike for wage increases – ‘$X is not enough to live on in dignity. We insist on $Y as a minimum living wage.’ They forget, as you forget, that $4.25 and $5.15 are not the only alternatives. One other alternative is to not have a job, because the wage you demand is higher than an employer is willing to pay for your services. Which is better, to be employed at $4.25 or unemployed at $5.15?” – Ray Van Tassle A.T.: Clearly, this is the other side of it. I think there’s a balance here. There will be instances where a business closes or shrinks if the janitor or burger-flippers – or bookstore clerks – have to be paid $5.15 instead of $4.25. But the recent increase in the minimum wage doesn’t seem to have killed the economy or sent unemployment spiking. Most of those jobs need doing and can’t easily be lost to low-wage countries (how is a 20-cent-an-hour child laborer in Bangladesh going to sweep the floor or flip the burger in New Jersey?) nor automated (I’m still waiting for a machine to make my bed). It’s just that many of those workers have very little power to negotiate. The floor needs to be swept, but some desperate person, competing with other desperate people, might be found to sweep it for $3 an hour. The minimum wage sets a floor (just as a state’s usury law sets a ceiling). “My problem with the minimum wage is that it is not well targeted. Although I am not as bad off as Linda, my wife and I have to work hard to support our family. When the minimum wage is raised it doesn’t help me but appears to help the teenagers of middle class families have more disposable income to spend on CDs and clothes.” – John Waggenspack A.T.: John has a good point, though it leads one to wonder: Should a kid get less than another kid for the same hour of work – $4 versus $6, say – because his parents have some dough? I also wonder whether in the long run it may not help the rest of us when the minimum wage is raised. It gives those workers a little more money to spend, which helps the economy; and a little less call on taxpayer-assisted programs. On top of that, I think it may simply be more fair. You might be able to find a maid willing to work for $3 an hour – but is that all you’d pay to avoid having to do it yourself? No, you’d probably be more generous. Well, how about $3 an hour to work at McDonald’s making you lunch? Even though it might lower the cost of lunch by a dime, my guess is that most customers would want to give the poor working stiff a break. And yet competitive pressure for market share and profit give store managers an incentive to pay as little as possible. The minimum wage is a crude but useful way to try to put some protection in place to keep that competition from getting too cruel. “While totally sympathetic to the problem of low-income workers, I can’t afford $5.15 an hour. There are people who would and could work at my bookstore for less, but I would break the law by offering them what we both want. Also, $5.15 becomes much more after FICA and the rest are added in. How can you believe in free markets and demand that government over-regulate them, at the same time?” – Paul A.T.: Well, I wouldn’t want over-regulation. “P.S.,” Paul continues, “I have several of your titles in stock. I can keep the price down if I am not forced to pay an employee a mandated wage.” A.T.: Don’t keep the price down on my account. But, yes, what with the chains offering discounts, and now the online booksellers, running an independent bookstore has got to be a tough, tough business. Some haven’t made it and others will close as well. (Just as online banking will close many a bank branch and ATMs have cut the jobs of many a teller.) Yet I’m not sure that lowering or eliminating the minimum wage would be the best solution. “Here in St. Paul, Minnesota, I personally don’t know anyone – including teens working at fast food restaurants – who settles for the minimum wage. A booming economy and not enough ‘good’ workers (unfortunately, that means just about anyone who shows up for work at the assigned time) has raised many entry level and minimum wage jobs, in some cases, significantly higher than the so-called minimum wage. That is not to say, however, that a family (or even a single person) can live well on these higher-than-minimum wages. “At the same time, we have here in Minnesota a serious shortage of semi-experienced, skilled and computer-literate entry level employees to fill jobs that pay at the next higher levels of wages. You seem to cast aspersions at the Republicans, but what of the ‘Democratized’ educational system that has so miserably failed society at preparing lower income people for better jobs through rudimentary educational tools, and what blame do we put on the ‘victims’ of these minimum wage jobs (which are supposed to be entry level anyway) who do not have the self-discipline and responsibility to climb above this level? “I’ve enjoyed reading you over the past years or so, and I intend to keep doing so, but I think you’re getting a little too partisan, and thus unfair, in some of your thinking. Hard questions aren’t so easily answered as you hint at, and one party is not exclusively guilty of hurting people, as you suggest. That’s maybe why we Minnesotans recently selected a rather unorthodox choice for governor. Because he doesn’t want to play the partisan blame game and finds the extreme solutions of both ends itself hurtful.” – Bob Wicker A.T.: I agree that the Democratic Party has been too beholden to the teachers’ unions (which are not wrong about everything, but are not right about everything either). I admit that I generally find the views of “new Democrats” (i.e., those like President Clinton and Governor Romer and Senator Lieberman), who favor free trade and many of the same sensible economic policies as moderate Republicans, far preferable to those of “Trent Lott Republicans.” In that sense, I am partisan. But I totally agree that “hard questions aren’t easily answered” – and, like you, I cringe at the partisan blame game and all the oversimplification and demagoguery. (Though of course, being a Democrat, I think you guys started it.*) *This is a joke.
Duplex in Vermont November 27, 1998February 10, 2017 “I am looking to buy my first rental property, a duplex with $1,500 per month income. Asking price is $92,000. When calculating a purchase price, should I consider the return I could get investing the $92,000 (even though most of it would be borrowed) or should I consider the return on my ‘real’ investment, the 10% I put down. I’m up here in Burlington, VT” – Steven Polli I think you need to look at it a lot of ways. Ultimately, the numbers an accountant would look back on in figuring your success or failure would be the after-tax results from ‘operations’ each year, plus any gain or loss in the value of the property along the way, as a percentage of your “real” cash investment. When mortgage rates are low, as today, this is the leverage that can make real estate so attractive. Say you get the property for $88,500, putting down $11,000 in cash plus closing costs. And say the $18,000 in rent rolls in without complication each year (maybe even inches up over time). And that mortgage interest, property tax, insurance, repairs, and large allowances for having to repaint, reroof, reboiler, repair (redundant, but trust me, justifiably so) add up to $14,000 a year. You are left with $4,000 on your $11,000 investment — and because you will depreciate the property over 27.5 years, part of that is tax-deferred. (You don’t depreciate the full purchase price, because the land it sits on is worth something and not depreciable. But say you assign $33,500 to the value of the land and $55,000 to the structure — that’s $2,000 a year you get to depreciate for the next 27.5 years. The depreciation lowers your taxable profit by $2,000 each year, though it simultaneously lowers your ‘cost basis’ by the same $2,000 a year, increasing your taxable gain when you eventually sell the property, if you do.) So the numbers could look great. Close to a 40% return on investment ($4,000 on $11,000) — half of it tax-free (well, tax-deferred). And that’s before allowing for the 3%-5% a year or even more the property might appreciate in value. But hang on. In the first place, you’re risking more than your downpayment. It’s conceivable the property could go down in value, not up, with you on the hook for the difference. More to the point, don’t compare the 15% (say) you figure you might earn on this annually to 15% from a simple passive investment like shares of some unusually successful stock. You need to be paid for the work! The hassle! The extra paperwork and tax preparation! Sometimes these things go very smoothly (although they are still work) but sometimes not. Owning rental property is more of a part-time job than an investment. How would the numbers work if you decided to charge a phantom $5,000 a year for your work and worry? So you want to be very conservative in your estimates. You want to be sure you’ve thought through how you’ll handle the accounting, the lawn care, the plumbing problems, the roof leaks, the feuding tenants, their late payments, the eviction process if need be — and so on. Today’s low interest rates may offer you a good opportunity. And the kind of property you describe does not sound terribly difficult or risky. But I’d look to get a very attractive return and, for sure, a positive cash flow after all costs and repairs (and an allowance for periods of vacancy) before going into this. Good luck.
More on Linda and the Minimum Wage November 25, 1998February 10, 2017 UPDATE: AS I WRITE THIS, AMAZON IS VALUED AT SIX TIMES BARNES & NOBLE. HERE’S AN IDEA FOR BARNES & NOBLE: PUT TABS FOR VIDEO, ETC., AT THE TOP OF YOUR WEB SITE AND SEE IF YOUR STOCK SEXTUPLES. IF NEED BE, CLOSE YOUR 504 PROFITABLE STORES AS WELL, SO YOU JUST HAVE A MONEY-LOSING INTERNET UPSTART AND AN EXCITING FUTURE. AND NOW BACK TO OUR REGULARLY SCHEDULED PROGRAMMING. # I wrote recently about Linda, a single mother of two in Montana who earns $18,000 and has a very tough time getting off the credit-card debt treadmill. “What is Linda to do?” I asked. It was more of a rhetorical question than anything else, and a way to lead into musings on the minimum wage ($10,000 a year for a full-time worker), but you had suggestions: John T: “Linda is missing a big source of income: It’s called child support! Where is the father? This is costing her at least $500 dollars a month and probably a lot more.” A.T.: Yes, indeed. But something tells me Linda has thought of this. Ed Ost: “I would suggest not paying the medical bills with her credit card. Set up a payment schedule directly with the hospital if they are willing or (if you must) pay by check and cancel the check if necessary. The main point is to keep the bill with the hospital since they don’t charge interest, at least I’m pretty sure they don’t and if they do, they probably charge a lot less than the credit card companies. Also, she could try using any not-for-profit clinics in the area for whatever health care they provide, probably maintenance type health care such as flu shots, vaccines etc.” Dr. Marc Armstrong: “Linda C.’s credit card problem could be ameliorated if the U.S. had a sensible system of national medical insurance.” Shawn Tapley: “Linda sounds like a very responsible person, now. It sounds like she is living with the consequences of some irresponsible decisions earlier in life (like having kids she can’t afford). That’s not fun, but it is life. Linda may even be too proud to accept many of the welfare programs already in place. From my volunteer work in Georgia, I can tell you that if she were in my state she would qualify for plenty of assistance, including help with medical care. She probably qualifies for federal assistance too. I remain convinced that people like Linda who persevere can improve their lives, and that there is PLENTY of assistance available for these people through private charities and existing welfare programs, WITHOUT raising taxes one penny.” Sri Shankar: “Does universal healthcare violate the fundamental principle of capitalism? Does minimum wage? How does one resolve the cruel efficiency of a pure free market and the cruel inefficiency of a government-run program? I really don’t want to see children homeless and without healthcare in a country like the US.” A.T.: Much about government is inefficient, but not everything, by any means. Social Security isn’t inefficient. Progressive taxation isn’t inefficient. Much about the private sector is efficient, but not everything, by any means. (If it costs $100,000 to put on the gala that raises the $300,000 that goes to pay for the overhead and program expenses of running a private charity, is that really so much more efficient than raising the money by taxation?) # Lots of food for Thanksgiving thought — and not a gram of fat. Friday: A Duplex in Vermont (will you get a load of that Thanksgiving foliage!)
Batteries & Schmidelity November 24, 1998February 10, 2017 CHECKING OUT INTERNET NAMES “Tip: Go to http://rs.internic.net/cgi-bin/whois to find out who owns a site; this is the official Internet name database. If you type in ‘batteries.com,’ you’ll find out that it was registered in July 1996 to some guy in Scotts Valley, CA. This site is very useful both to check out if names are free and to see who is really behind a site.” – Ken Shirriff SCHMIDELITY “Sorry to hear about your bum trade. At Schwab, they display the ‘estimated commission’ on the screen before you hit the final button to send the order. Maybe Schmidelity could benefit from such a feature.” – Dan Mitchikoff A.T.: Yes, indeed. Of course, that would just drive home how much more you’re paying than necessary. MY BILLIONAIRE MOM “I liked your [Schmidelity] column today. It reinforces my inclination not to keep an account my father had at a certain very large full service brokerage firm. What surprised me though is that you were buying $40,000 of a penny stock for your mother. Your mother? How does this fit any sensible suitability guidelines? She’s probably retired or near retirement so she may need the money soon. I realize it’s an AMEX stock and not off the pink sheets, but the last time I looked, none of the S&P 500 stocks were under a buck so it probably doesn’t have a big market cap. YOU may be really, really rich, but this is your mother’s money not yours. What’s her risk tolerance? A lot of common sense is reflected in your books and columns. Did none of it come from her, or is she the eccentric billionaire to whom the normal rules don’t apply?” A.T.: In the first place, my mother is a couple of years younger than I am. (“I have two sons,” she is fond of quoting the late Hermione Gingold, “both younger than I.”) And she is neither eccentric (I would say more: “energetic”) nor, sadly, a billionaire (I would say more: “comfortable”). What’s more, what common sense I do have (clearly not evident in my latest Amazon foray), did come from my folks. Children of the Depression, they know well the value of a dollar and passed it on to me. In the second place, the stock I bought her for under a buck is what they call a “special situation,” and one of which I have written here before. So far, we’re doing OK. Tomorrow: More on Linda and the Minimum Wage
Amazon’s Little Uptick November 23, 1998February 10, 2017 And speaking of Amazon.com, as I was yesterday and frequently have in the past …. I noticed last week that the day after I jumped back in to short a bit more (eager for a tax loss and a good night’s sleep, I had largely covered my short position when it plunged in The World’s Briefest Bear Market That Let’s Hope But Not Assume Is Over) … yes, the very next day, AMZN jumped 22-1/2 points. In one day. And that was just for starters. I had shorted it at 128-7/8 on Monday; it closed the week at 180-5/8. I am not paranoid. And I am not superstitious. So how can one possibly account for this 51-point jump? I actually have an answer: Stupidity! I am not paranoid, I am not superstitious – I am stupid. That must be it, because it couldn’t possibly be the other explanation – that Amazon had finally added the VIDEO tab to the top of its home page. Could this possibly have surprised anyone? Could anyone possibly have thought AMZN was fairly priced, at $128 a share ($6.5 billion for the whole thing – more than triple the value placed on Barnes & Noble), based solely on its ability to sell books and CDs? Surely any investor in the company realizes that one day soon Amazon’s home page tabs – once just BOOKS – will resemble: BOOKS MUSIC VIDEOS SOFTWARE BATTERIES PHONES LENSES FLOWERS CARS INSURANCE MORTGAGES ANYTHING-ELSE As a very happy Amazon customer, I look forward to it. But as an Amazon-valuation skeptic, seeing nearly $3 billion tacked on to the company’s worth in four days with the addition of the VIDEOS tab left me wide-eyed (yet again). True, by Friday there was another astounding positive development – a three-for-one stock split was announced. Who would have dreamed the stock would split? Such fantastic, unexpected news! Like the news that Christmas will come again next month! Or the news that you can actually get four quarters for every dollar. (“We’re rich, Ma! Our dollars have been split into quarters!” [Or, in this case, into thirds.]) I have previously made the case for how, if everything goes right for Amazon, it could conceivably be worth even five or ten times more in a few years. To a short-seller, that is assuredly scary. (PROMISE ME YOU WILL NOT TRY THIS AT HOME. IT’S MY JOB TO DO THE STUPID, RISKY THINGS AND TAKE THE PAIN FOR YOU.) But scary as it is, the key phrase here (or so I tell myself) is “if everything goes right.” So much has to go right. CEO Jeff Bezos is a very smart guy and he may pull it off. That he himself filed to sell 180,000 shares recently – 540,000 of the post-split equivalent shares – means nothing, because he’ll still have a zillion shares left. But as I say, there’s a lot that has to go right. To begin with, Amazon has to, some day, turn a profit. A quick check of earnings estimates for 1999 shows The Street expecting a loss gaping toward $2 a share. So at 180, the company has a projected p/e of better than 90, except it’s not E that’s projected (as in price/earnings ratio), it’s L (as in price/LOSS). The second thing that has to happen is that a great many others who would like to be our primary-source-for-purchasing-everything have to figure, “Oh, what the heck, let’s go out of business and let Amazon win.” This includes all the obvious players, like Barnes & Noble and Borders. But also the less obvious players, like Yahoo (why can’t IT put little tabs across the top?) and Netscape and Dell and Intel and Microsoft and Citigroup and NBC and Sears (well, Sears may be too sleepy ever to get it) and dozens and dozens of others. Let’s start with the book business. I noticed that after a very lackluster TV ad campaign, Barnes & Noble rolled out a pretty snappy print ad. It showed how many more titles B&N had available in stock than Amazon (a lot more) and how many more it had in its database (a lot more, still). Yet Barnes & Noble is clearly the underdog in Wall Street’s eyes, accorded what is now barely one-fifth Amazon’s market value. So for those who like to root for the underdog, giant Amazon no longer has that edge; Barnes & Noble does. And it has hundreds of thousands more obscure titles you might be looking for. In a way, Barnes & Noble really is the underdog. All those physical stores and employees, all those windows to polish and books to rearrange after the author has been by to take his book and put it face out at eye level (mum’s the word!) – it all costs money. To the extent that people are willing to come and pay for the experience, and maybe have coffee, their 504 stores are a great asset. But to the extent bookstores become merely a “showroom” for Amazon – see the book at the bookstore, then go home and order it on the Web to save money – well, that’s gonna make the bookstore business even tougher than it already is. (One small plus in this: How much people spend on books each year is not fixed. You’re not going to buy extra cars once it’s easy to buy them online, or extra refrigerators or pacemakers. But you may well buy more books. I certainly do. In other words, it’s not entirely a zero-sum game.) But even if Amazon got 50% of the world’s retail book business – and that’s just not going to happen – it wouldn’t be worth 180. The book business is just not that big. So an investor has to try to figure out how much of the world’s total business will funnel through Amazon. Will it become a place to go to buy anything? Probably. And will there be other such places aggressively competing for your mouse click? Probably. And might, indeed, every popular “channel” of the future Internet not have an icon for shopping, so even if you’re watching Seinfeld reruns on MSNBC.com, you can click on the MSNBC peacock and buy anything? I think so. And will Amazon have better Seinfeld-like reruns than other channels, better news broadcasts than CNN and Bloomberg, more popular original shows than Fox? I doubt it. But will Amazon possibly make deals with some of these to provide the “back-end” for shopping when you do click the peacock to shop? That would make sense. And so how do you even begin to value a future like that? Let’s work backwards. At $180 for each of its more than 50 million shares, Amazon is pushing $10 billion in market cap. And the people buying it certainly aren’t viewing it as a conservative investment on which they hope to earn 7% a year. No, they’re gambling on, let’s say, at least a five-fold increase over the next decade. So let’s say they’re looking for a company that will be worth $50 billion in ten years, based on profits and dividends at that point, not dreams. How much annual profit justifies a $50 billion valuation? Well, pulling a generous large-company multiple of 20 out of the air, that’s $2.5 billion in annual after-tax profits. How much commerce has to pass through Amazon’s portal to produce such profits? Well, that would all depend on the profit margin it could eke out of each kind of product or service. If it can pull 3% after-tax down to the bottom line (right now it loses 25% or so, but there are reasons for that), that would require sales of $80 billion. If the distribution becomes even more cutthroat competitive than that and only 2% can be cleared, $125 billion in sales. It could happen. And imagine if, on many products and services, it didn’t actually have to do anything other than funnel the orders through to the supplier (the car company or the life insurance company) and for that got a commission. No bricks or mortar to maintain, no humans at the cash register – just a sort of computerized money machine. All of which is why some people do pay these crazy prices for stock in Amazon.com and why, if writing this column scares me into covering my short at a four-day 51 point loss (maybe more by the time you read this!), I just might be one of them. A third thing Amazon may have to worry about is – what if the suppliers Amazon relies on want a piece of the bonanza? For example, how many different ways has Amazon got to ship you stuff? Twenty eager cutthroat competitors? Or just, principally, three: the post office, UPS, and FedEx? What if they want a bigger piece of the pie? I suppose the answer is that Amazon (and its competitors) could just pass on the extra cost to consumers. Or it could buy FedEx. At Friday’s close, Amazon.com’s market value slightly exceeded that of little brother FedEx. Yes, FedEx does have a top-notch worldwide reputation and $15 billion or so in sales, half a billion or so in profits. Yes, it has some pretty good technology, some amazing distribution facilities and a huge fleet of vehicles and aircraft. But it’s no Amazon.com. Amazon.com has a Web site! Sarcasm aside, Amazon has done what it’s done so well that it may be earning ownership of one of the key leverage points in the new economy. If it gets to control a reasonable share of the order flow from the consumer, through Amazon, direct to the goods or services desired – cutting out the middleman and lowering costs in the process – it may indeed be able to take a nice little sliver from a simply enormous, enormous pie. And even though it will have lots of competitors, there will still be plenty to go around. But is it already worth more than FedEx? A lot has to go right. In the meantime, I am launching one of those pricey Investment Advisory services that faxes or pages you the instant I make a market call. Had you been one of my clients, you would have known within 15 minutes that I had shorted Amazon.com. Based on my prior expertise with short sales generally and Amazon in particular, it would have been your signal to buy.
Power Up! November 20, 1998March 25, 2012 What a pain to try to find the replacement battery for your Panasonic answering machine. Not anymore. This is a very simple one, but voilà: You need batteries? Click here. The only reason I even offer this to you is that none of the obvious (to me) things worked. I just assumed there would be a brilliant site called www.batteries.com where you could quickly get any kind of battery you wanted. But no: When I tried that, I got a "no such address" message. Not even "under construction." (Quick, Mr. 1-800-Batteries grab that address and make it synonymous with your own!) I just assumed that if I typed PURCHASE BATTERIES into my search engine, I’d get to the right place. But no. I can’t now reproduce it, but somehow when I tried this, hoping for quick success, I got to a bunch of articles about European battery standards. (I admit this is odd. Today, no matter what I type in the search field kumquats I seem to get to 1800batteries. But I swear: I wasn’t getting it before.) Indeed, after some considerable time thinking about how frustrating it was not being able to get these batteries … stores don’t have them, the prospect of calling Panasonic was mind-numbing ("Press one if you have a Touch-Tone phone …") … and with the phone beginning to beep more and more frequently indicating BATTERY LOW … and not wanting to buy an entirely new answering machine as a last resort ("Press two if you do not have a Touch-Tone phone") … what should arrive in my actual, physical mail but: a holiday catalog from 1-800-BATTERIES, complete with its Web address prominently across the cover: www.1800batteries.com. Are there cheaper places to get batteries? No doubt. You could, for example, check out the somewhat lower-end www.batteryguys.com. (Quick, Battery Guys grab www.batteries.com and make it synonymous with your site!) Or if you’re really in no hurry ("Press three if you’d like to buy a Touch-Tone phone …"), you could just wait until Amazon.com gets a new tab for batteries BOOKS MUSIC GIFTS BATTERIES up at the top of its page. And speaking of Amazon … (tune in tomorrow, if I haven’t killed myself first)
Oops! How I Blew $973.90 November 19, 1998February 10, 2017 I have brokerage accounts for me and a couple of other people at three places: A very large, well-known “full-service” broker I’ve been using ever since I bought 100 shares of Leisure Dynamics at 8 and watched it go to zero – my own fault, 25 years ago, like almost all my other mistakes since. My broker is an actual person whom I love and admire. Love his wife. Love his kids. Proud that I’ve helped put his kids through the same high school I went to. Can’t wait until they finish college. Even with the negotiated rates I get, it’s just ridiculous to be paying so much for the kind of self-directed trading I do. Yes, they now have an Internet site – I can look at my portfolio. But no, you can’t place orders on it, you have to do it the old-fashioned way. And during business hours. Furthermore, because they are full service, they require that I fax a special little letter every time I buy a really dopey low-priced (or even just low-priced) security. This is to verify I was not solicited by the firm to buy this dumb stock – and to protect the firm lest, after 25 years of being a client, I turn around and claim to be a naïve investor and sue them. I am thinking of suing them, but only for the inconvenience of having to fill out this silly form. Bad enough I have to do it once. But every time I buy a new lot of shares in the same security, I have to fill it out and fax it in. Want another 1,000 shares? Fine, but take a few minutes to send us another form saying you still pledge this stock was your own dumb idea, not ours. I offered to sign a blanket release once and for all, but full-service firms like this one have full-service lawyers and full-service procedures they are not about to change for the convenience of a customer. A very large, well-known discount broker I’ve been with almost from the beginning. These are fine folks who, once upon a time, charged very competitive rates. Indeed, under pressure from the discounters, they have fairly recently offered a “deep-discount” Internet trading alternative of their own. It’s $19.95 a trade for limit orders, versus Ameritrade’s $13. But being enormously rich — earning more in a year than someone like Bill Gates earns in a minute (I think) — I do not trifle over such differences. What’s an extra $6.95 to a guy like me? A deep-discount broker that charges $8 a trade for Internet-placed market orders, $13 a trade for limit orders, and for which I write an (erratic, eclectic) daily column. I won’t say which deep discounter it is, lest I appear to be endorsing it. But I will say that I marvel at the ease and efficiency — and low cost — of trading with it. I can even get a human on the phone without difficulty when I have a question, can buy the same obscure foreign stocks I do at my full-service firm (albeit not over the Internet, and at slightly higher rates), and I don’t have to fill out any stupid forms when I want to buy a low-priced stock. And so it was with that background that I logged on to the Internet site of the mid-priced of these three — let’s call them Schmedelity — and placed an order to buy 50,000 shares of a dopey little stock at thirteen-sixteenths. Now let me very quickly say that this was a grander-sounding order than I usually place. Even at under a buck, it was still a $40,000 trade. (Like buying 300 shares of America Online.) And it wasn’t my money. It was for my mom’s IRA. Should I have switched her IRA from Schmedelity to a firm that charges just $13 for an Internet limit order rather than $19.95 (plus some fine print)? Well, possibly, but you know that in addition to being enormously rich, my time is extremely valuable (there’s Seinfeld to watch every night at 11, there’s the bed to make in the morning …) and transferring accounts, especially if you need to furnish copies of the Trust Agreement or whatever (where on earth did we put that?), can be a drag. So without much thinking about it, in I put the order, which wound up being executed over two days — 21,200 shares at my limit price the first day, 28,800 shares the next. Done deal. The confirms came from my discount broker, duly noting “$5 charge for limit/stop orders included” (a “market” order would have been just $14.95, not $19.95) and duly noting, “online discount applied” (they charge more if you deal with a human), and wasn’t I surprised to see the two confirms total $999.90? I called Schmedelity and was told by quite a sympathetic rep that, yes, actually, this was correct — it’s $14.95 a trade plus $5 for limit orders, but there’s a 2-cent-a-share add-on for orders above 1,000 shares. Now, in the haziest way I sort of remembered something like that, when he mentioned it, though I couldn’t remember whether I thought it applied to Internet orders or just the old-fashioned human kind. But we agreed that this was, in the current instance, ridiculous. It’s not as if they had to find these 50,000 shares on the Kuala Lumpur stock exchange and manually count each of 50,000 certificates. It was as easy to buy 50,000 shares of this American-Stock-Exchange-traded stock as, well, pressing a couple of buttons. And the dollar volume of this immense order was, as I say, about the same as buying 1,000 shares of a $40 stock — for which Schmedelity would have charged $19.95. Indeed, my full-service broker would have grumbling charged “only” a penny a share for this 50,000-share order — half as much as Schmedelity. And Ameritrade would have charged $26, not $999.90. (It would have been $13 had the order been completed over a single day; but split over two days, $26.) I pointed this out in the nicest way, acknowledging clearly and firmly that it had been I, not Schmedelity, who made an error — that I had agreed to whatever I had agreed to and was not suggesting they had to give me a break, just that, after 15 years, and under the circumstances, I hoped they would give me a break. What did I have in mind, asked the sympathetic rep? “Well,” I said, “I’d feel great if you’d charge me $100,” which is still four times what I’d have paid at Ameritrade, but who cares. He totally understood but said his own discretion on this (I had reached one of the weekend reps) was limited to $150, so he could basically only knock it down from $1,000 to $850. He said he thought I should call back during the week, because my account was in one of the “premium” groups, and they would likely have a lot more discretion. Back I went to the phones Monday, explaining the situation and again taking responsibility for having goofed … though noting that it sure couldn’t hurt, if they were looking out for customers’ interests, to flash a little “warning” screen when an Internet commission was going to be 70 times the $14.95 that sticks in many a mind, just to be sure the customer is aware of the deal. He was friendly and asked my bottom line. My bottom line, I said, was $500. I had hoped for $100. But if he’d do it for the same penny a share my full-service broker would have charged, I’d pay 20 times what Ameritrade would have charged and just learn my lesson. He said his discretion was only $200, but that if he applied it to each day’s separate trade, that would knock it down from $1,000 to $600. I said I didn’t want to seem unreasonable, but it just rubbed me wrong to do a deep-discount Internet trade at more than my full-service broker would have charged. (At least I hadn’t had to fill out the annoying little form.) Could he ask his supervisor? Surely they didn’t want to lose three long-standing accounts over $100. He came back, having gone to his supervisor’s supervisor, (Don’t you love it when you know for sure you’ve won — even if, in this case, “winning” meant paying 20 times what I might have elsewhere?) — and told me, “Well, my supervisor’s supervisor says that since we are owed $1,000 on this and you wanted to pay $500, would it be satisfactory to split the difference; i.e., $750?” “But you just offered to knock it down to $600, and I said no. Why would I be satisfied with $750?” Well, he said, he was sorry, but that’s the best they would do. So I said I would wait a few days and then, if no one reconsidered and they really were willing to lose the accounts over this, so be it. And so it was. Yes, if I had pushed it far enough, or called a classmate who happens to run Schmedelity, I doubtless could have gotten my way. But that’s cheating. Maybe if it had been a $20,000 commission I would have done that (though the commission is actually limited to a ceiling of 5% of the trade, so on a $40,000 trade, the most Schmedelity charges is $2,000 instead of Ameritrade’s $13). But to save a few hundred bucks, it’s easier just to thank them for 15 years good service and move on. For those who like stories to have a painfully obvious “moral,” there would seem to be two morals to this story: (1) Read the fine print. (2) Just because one brokerage firm charges 10 or 20 or even 70 times as much as another doesn’t mean the trades it does for you are even a jot better or more convenient. It’s like a scarf. To my mock horror, Charles and I just bought my mom a $300 Hermes scarf last week. Crazy, but it was her birthday, she’s a great mom (please don’t tell her what it cost), and Hermes is a big deal. But for pure scarfness — keeping your hair warm, or whatever scarves are supposed to do — $15 should really suffice. Somehow, in the case of this $40,000 trade, I found myself buying a $26 scarf for $1,000. Oy.
Are You a Real Researcher? November 18, 1998February 10, 2017 If you’re serious about the way you find the stocks you buy and follow them once they’re yours, here’s a link you should definitely check out: www.companysleuth.com. You tell it the stocks you’re interested in, and it automatically searches for and e-mails you stuff that would take you much longer to find – like patent and trademark applications and insider trading reports. Especially if you trade in a taxable account, it’s possible that this level of detail could tempt you to trade in and out far too often. As discussed last week, even in a tax-deferred account, buy-and-hold generally works best. But for those who do their investment homework, this site is an easy and at least for now, free way to get a possible edge. (It may be of even more interest to business folk eager to keep an eye on the competition. As in: “They filed a patent application on what? Uh, oh.”)
What, Exactly, Is Linda to Do? November 17, 1998February 10, 2017 From Linda C: “I read the column you had in the Parade Magazine [about trying to get off the credit-card debt treadmill] and am wondering if there is another system that works more efficiently for the ‘working poor.’ I have two credit cards and have about $5,000 plus about $3,000 in student loans. I am a single mother of two children. The only debt I have on credit cards is medical and auto repair. I make about $18,000/year and have no insurance benefits. I live in Montana, land of low wages, high rent and too many people for every job. We have a couch and sofa (picked up in alleys), a kitchen table, beds and a desk. We have no television, no stereo, no entertainment budget and I have come close to paying off my debt on several occasions. Then, a medical situation will come up that costs $50 to $5,000 and we are denied service unless we can pay the bill. The same with the car, which I need to continue to work. I save like a mad person, only to have that wiped out and a debt on the credit card that I work hard to pay off again. I actually believe that the closer I get to paying a card off, the more likely one of the children is going to get sick or need dental work or the car is going to have a problem. I know I am not alone with this problem, especially in this area. Is there any hope that we’ll ever be able to live like others — to save for things we would enjoy instead of making payments to credit card companies for basic life needs? I feel like I’m working for nothing and I’m tired. I have been in this battle for 11 years and I have an excellent credit record.” A.T.: What are the answers? Obviously, it would help a lot if Linda had a working spouse. But in the real world, not everyone does. If good folks like Linda have such a struggle, are the rules of our game somehow out of whack? On the one hand, the rules of the game are no longer set entirely by us. It is a global game, and our wages in some jobs can’t be set irrespective of what someone in another country is willing to work for. But are we really going to drive off to China to buy our fast food if the minimum wage were raised here from $5.15 to $6.15, as the Democrats proposed and the Republicans recently rejected? (And did raising the minimum wage from its long-stuck level of $4.25 to $5.15 in 1997 really wreck our economy or throw hundreds of thousands of low-income people out of work as the Republicans who fought it feared?) But some of it is entirely local. One of the first things President Clinton did, over great opposition from the other party, was raise MY taxes smartly in order to provide the “earned-income tax credit” — for people like Linda, members of the working poor. Some people who earn $500,000 or $2 million a year consider income redistribution a terrible thing. But today’s somewhat higher on-the-best-off tax brackets have not wrecked America’s economy. And, while I hardly favor anything much above today’s rates — please! no! big mistake! — it must be noted that even the 90% top tax bracket under Eisenhower and the 70% top rate under Messrs. Kennedy, Johnson, Nixon, Ford and Carter did not entirely kill our economy. Growth rates and productivity gains back in many of those years were very healthy indeed. (Yes, I know, with oil deals, real estate depreciation, etc., essentially no one actually paid 90%. But still. That was the rate.) Raising the minimum wage “could actually have an adverse impact upon our economy” and could cause unemployment “that hurts the low-income workers the hardest,” Republican Minnesota Senator Rod Grams said when asked about hiking the floor to $6.15 an hour. (That’s $12,300 a year for someone who works a full eight hours a day, five days a week, 50 weeks a year.) It was his compassion for the working poor that led him to vote no. But Henry Ford — no socialist — had an interesting idea. He could have paid less, but decided that anyone who worked building Fords ought to be paid enough to be able to buy one. Raising the minimum wage is no panacea and clearly has its limits — mandating a $30-an-hour minimum would clearly not work. And perhaps there should be exceptions (though that gets tricky) or regional variations. But when you think of Linda, who earns considerably more than the minimum wage, you wonder whether it was really a bad idea bumping it up from $4.25 to $5.15, and whether Ted Kennedy is hopelessly subversive for suggesting it be bumped up another notch still. # Last, related, point: Something else that’s important is to encourage less developed countries to begin introducing the concept of a minimum wage, albeit on a much lower scale at first, too. Better pay empowers consumers to consume, and in the long run — as Henry Ford seemed to intuit — can profit a nation’s capitalists right along with their workers. And the more prosperous workers in those countries are, and the higher their wages rise, the higher our own wages will be able to rise as well.
Credit Card Tide – II November 16, 1998February 10, 2017 TRY A CREDIT UNION From David Ames: “My in-state bank sold its credit card portfolio to an out-of-state bank. My payment arrived one day late, so the bank assessed a $29 fine. (They call it a late fee, but of course the bank suffered no loss.) I found I had a credit-union alternative through my employment. They sent the bank a payoff check. Now I have an 11.9% rate instead of 16.9% and the terms of account are superior. For example, there is no ‘late fee.’” BEWARE “CONVENIENCE CHECKS” From Greg Ricketts: “I opened my Chase VISA bill over the weekend and was surprised to find a $70 finance charge. Being one who pays off the balance each month to avoid such charges, I was very concerned about the origin of this charge. It was noted under the cash advance column which I soon realized was the category they use for the “convenience” checks that I was sent some time ago with the teaser that read ‘Use just as you would your credit card.’ Well I had used the check to pay some fees associated with refinancing my mortgage that I was to be reimbursed for at the end of the month. I thought this would be a perfect use for the check and a way to avoid actually having to ‘spend’ any of my money. I guess this is a case of not reading the fine print on the back of the ad. The APR on the one check I wrote for $1875 was a whopping 46.67% (you read it right — forty-six point six-seven) for the 30 day period. The APR was plainly noted on my statement. Talk about loan sharking. I always thought that only the mob could collect that kind of interest. This type of activity should be illegal. It’s just another way these outfits have of fleecing the public ‘legally.’ “I called the Chase customer service line and demanded that the charges be removed. They agreed, but told me that if I had used a 7000 series check instead of the 4000 series check there wouldn’t have been any finance charges. Silly me, the 7000 series is the one that is plainly stated as being for transferring of other card account balances to your Chase card at some ridiculously low rate. I thought my experience might be helpful to your readers. It’s definitely something every credit card customer should be cautious of.” A.T.: Indeed it is. Beware of those checks. (And be annoyed, too. Because if you just throw them out, someone could grab them from your trash and — well, the smart thing to do is to rip them up first. And why should we have to hassle with that?) Then again, every once in a while some card will offer checks that really do NOT start the interest clock ticking. Or at least they used to. I wrote about one such example — gaping loophole since closed — just about a year ago. IS ONE CARD ENOUGH? From Trina Martin: “I am one of those people who learned about credit card debt and money management the hard way. Ten years ago while a freshman in college, I had 21 credit cards!! I have yet to find out why it is so easy for a college student with no job or a part-time job to get credit. By the end of my sophomore year I was in debt so far that I didn’t know where to turn. By my junior year I got wise and paid off all of my credit cards, but not before ruining my credit! I kept the Master Card that I had since I knew I needed a major credit card and this was the only one I was in good standing with. No one ever taught me about credit card management. I always thought that the more you had, the more important you were. Now, at 28, I know the real truth. I have one credit card — that same Master Card. Today I am much wiser. Three years ago I bought my car new and had to take a very high interest rate because of the damage I had done to my credit. I now have a 15% interest rate on my Master Card and a good credit limit that they raise about every six months. I always send in a payment of $100 when the minimum is only about $50. I only charge after the billing date and although I have a balance on this card, I pay the total amount of what I have charged. I am in the process of paying this credit card off, hopefully without any unforseen charges. In two years, sticking with my plan, I will have this card totally paid off. My credit is now back to good standing. Five months ago I purchased my first home. I plan to keep my one Master Card, since I now know one is all a person needs. I do have a question for you. Now that I am a homeowner, should I get one more credit card for emergencies or just stick to my one Master Card?” A.T.: Wow. Well, that was a lot of struggling, but it sounds as if by age 30 your credit card woes, and even the relatively “low” 15% interest you pay, will be fully behind you, with nothing, let’s hope, but 60 years of clear financial sailing ahead. But, yes: a second credit card is handy, kept in a drawer at home, in case of emergency or some problem or dispute with your MasterCard. Indeed, if you get offers for 4.9% introductory-rate cards, and are very careful about paying on time, why not switch your 15% debt to one of those? You’ll have the security of a second, backup card and a break on the interest on your remaining outstanding balance. THEY REPLACED HIS POWER TOOLS From Terry in Calhan, Colorado: “I pay my credit card off each month, and try not to use it if cash or checks are available. The one exception is for the purchase of anything with a warranty. The reason is that most premium cards (gold, platinum, etc) will, in general, double the warranty of most items bought with the card. This is like getting a service contract for free. Even if the item does not have a stated warranty, many cards offer ‘Buyer Protection.’ This often will replace or refund items that have been stolen, lost or damaged in a way that a warranty would not cover. For instance, I bought a long handled yard tool by catalog, and shortly after it arrived, I mangled it in the garage door. A new one was on its way the same day, thanks to the ‘Buyer Protection’ offered by the card. I keep an up to date inventory of items like this, and I can tell at a glance if the item is covered by a current manufacturer’s warranty, or an extended warranty offered by the credit card. I have had several episodes where a power tool ‘died,’ and was past its warranty, but was replaced at no cost because of the double warranty from the card. The bottom line is: You can win at this game, but ya gotta know the rules!” A.T.: This organized I could never hope to be. But more power tools you.