When Prizes and Awards Are Not Taxable January 15, 1999February 12, 2017 I won a prize. Not from the Publisher’s Clearinghouse Sweepstakes, although I expect to hear from them any day, but the kind of prize one can only dream about: a tax-free prize. Or at least that was my recollection of the tax code. Ordinarily, winnings and awards and prizes are taxable. Win $1,000 as “employee of the month?” Taxable. Win the lottery? Taxable. The A.S.P.C.A. raffle? Taxable. You especially don’t want to win that lavish $20,000 Mediterranean cruise, because if you do, and you accept it, you owe maybe $7,000 in taxes (not to mention what you’ll blow on all those needless trinkets you find yourself buying while ashore). But a “civic” or “literary” prize — a Pulitzer or the Nobel, for example — is different. I did recall that Congress made an exception for those. And sure enough, they did. For your prize winnings to be tax-free, you simply have to meet these tests: It must have been won for outstanding educational, civic or literary achievement. (I had written a magazine article.) It must have been won without your trying to win it. I mean, it’s OK to have devoted your life to peace … but if you actually applied for a Nobel Peace Prize or had to have done something specific to win it, like 10,000 push-ups, your winnings would be taxable. (Not only had I not made any active attempt to win this prize, I had never heard of it.) It must require no service on your part; i.e., you don’t have to go around for a year with a crown on your head as a spokesman for something. (My prize — $1,000 — requires nothing of me. It fell into my lap as if dropped by a bird I did not even know was passing overhead.) Now, as I say, it was only $1,000. And yet the notion of tax-free money … well, to a poet who had won a poetry prize, it might not mean much. Poets’ hearts sing to loftier notes — and they tend not to be in high tax brackets to begin with. But to a financial writer. Ah, the music, the harmony, the peace. Bliss. Except that there is one other requirement: For it to be tax-free, the money must be assigned to a government agency or charity before you even touch it — and you can’t take a charitable deduction for it. In other words, it is tax-free so long as you never get a penny of it. Hello? So why did anyone write all these regulations in the first place? I can trim that section of the tax code down to 20 simple words: “All cash prizes and awards, and the fair market value of all noncash prizes and awards, are taxable as ordinary income.” I am told that the U.S. is the only country in the world that taxes Nobel prizes. This is not to say you shouldn’t keep trying to win one or that if you do win one, you should be anything but grateful. I wouldn’t even mind the tax bite at all except that the tax writers have teased us so. It takes your average mass-market tax guide hundreds of words to explain (in lay terms) “When Prize Winnings Are Not Taxable.” But really the answer is: never. # Incidentally, you quarterly estimated tax filers: Today’s the day your fourth estimated 1998 tax payment is due. Have a nice weekend. HOUSEKEEPING NOTE: Currently, an alternative route to this column is www.andrewtobias.com. As of February 1, that will be the ONLY way to reach it. To keep reading, please adjust your bookmark. Also, please note my new e-address: atobias@andrewtobias.com.
An Even Better Source for Free Books January 14, 1999February 12, 2017 Yesterday I told you how you could buy books (physical ones) cheaper than Amazon – guaranteed – and earn “bookmarks” in the process. Last week, though, I was touting free books (albeit really old ones, minus paper and bindings). As usual, several of you knew a lot more about this than I did. Wrote Andrew Tefft: “For more free books, check out the Project Gutenberg web page at http://sailor.gutenberg.org/. This is what I thought your column would be about when I read its title. Project Gutenberg books (including all those you mentioned) are in the public domain and thus can be offered free by anyone, and downloaded free from many places. Comparing the formatting of 20,000 Leagues from Project Gutenberg and 1stbooks.com, they appear identical (file names, line breaks, heading spacing) but half of the last paragraph is chopped off (same problem with all the other ones I looked at) in the 1stbooks version, so I can’t tell if they retained the list of changes added by the Project Gutenberg editor. In other words, 1stbooks is getting at least some of these from Project Gutenberg – but where is the credit for the hard work of those volunteers? Does 1stbooks contribute anything back to the project? If they do, they keep it secret. Someone not familiar with Project Gutenberg is led to believe that the people at 1stbooks typed in or scanned these texts themselves. “Naturally there someday may be a market for non-public-domain e-texts, but if you’re going to get the public domain ones now, the Gutenberg Project deserves to be supported. Monetarily, by volunteering, or just by spreading the word. Am I just complaining about capitalism at work? Perhaps – but the scores of volunteers helping Project Gutenberg can get a lot more books online than any company is going to be able to afford to do, whether it’s giving the result away or selling it.” Thanks, Andrew. Meanwhile, Pieter Lessing writes that he not only uses Project Gutenberg, but that he downloads titles from the Internet “in a form usable by PalmPilots – I carry two full novels on my PalmPilot at the moment – handy while waiting at the carwash!” In my view, this can mean only one thing. He is either a very fast reader or has a very dirty car. HOUSEKEEPING NOTE: Currently, an alternative route to this column is www.andrewtobias.com. As of February 1, that will be the ONLY way to reach it. To keep reading, please adjust your bookmark. Also, please note my new e-address: atobias@andrewtobias.com.
Which Will It Be – Curtain #1 or Curtain #2? January 13, 1999February 12, 2017 From Andrew Frisch: “I’ve been following your Amazon tales and the ensuing sidebars for some time now. Since you promoted booksamillion.com today, I figured I’d let you know about another on-line bookseller and some interesting things it offers: www.books.com – I’ve actually been using them since 1992, when they were a telnet-based business, before the web thing caught on. They offer two features I appreciate. The first is ‘bookmarks,’ which are earned with purchases, and are accrued towards free books. It works out to about 5 percent if you use them efficiently. In college and grad school, I used them for most of my textbooks, which proved to be significantly cheaper than the school store, and helped build up those bookmarks rather quickly. “The second feature borders on trivial but is kind of nifty. They supply you with a button to press to compare prices to both Amazon.com and BarnesandNoble.com. If either price is lower, which it rarely is, they automatically lower theirs to beat it. Typically it saves you a penny or two, but sometimes it’s a few bucks. Definitely worth the click.” A.T.: Well, I tried this, naturally enough searching on, well, me. And it came up with only two weird selections for Andrew Tobias, I think because a middle initial – P. – has somehow crept into the world’s databases for me and I can’t get rid of it. (Never mind that it is my middle initial – I don’t use it.) But when I searched on “Only Investment Guide,” sure enough, I got my book, offered at $10.35. Which sure beats the $13 retail price. And then I clicked on Price Compare and – to my surprise – found that while it was $10.40 at Amazon.com, it was $7.80 at barnesandnoble.com, so suddenly Books.com had switched its price from $10.35 to $7.62. That sure beats trudging from store to store and haggling the old-fashioned way! One might think this sort of thing bodes ill for the fat profits Amazon will eventually make, not just on books but on videos and clothing and everything else it will eventually help you buy – the Internet is likely to make retailer profits razor thin on just about everything – but even with the stock up more than four-fold in the last eight weeks (and about 24-fold in the last year or so), AMZN enthusiasts are not hard to find. To wit, this from Motley Mike: “I think the power of Amazon is not just their book selling, but their music, movies, and their potential to sell more things. Have you checked out their video store – it is great. All kinds of search capabilities, reviews, etc. Anyway, just wanted to tell you that it’s too bad about your misguided shorts, but I’m glad you did short the stock because it’s guys like you that help Amazon-longs like me! Have a great day. Mike.” A.T.: And here’s the thing. Amazon is terrific, and I have long assumed they’d be selling lots – indeed, everything – besides books. It’s not a tulip or a scam. Good people and good execution deserve success. But it is not the only good company in the world. Basically, the stock market today is giving people a choice, like that game show with the hidden prizes behind the three curtains. Here’s today’s choice (just two curtains): Curtain #1: You could own all – ALL! – of Amazon.com. It would be 100% yours. All its assets, all its debts (I don’t think it has debts), its technology, its cash, its inventory, its brand recognition and goodwill and future profits – all yours! Curtain #2: You could own all – ALL! – of Federal Express and United Airlines and the New York Times Company and Barnes & Noble. They would be 100% yours. All their assets – the planes and trucks and printing presses and retail stores and Web sites and technology and worldwide brand names and cash and profits – and all their debts (though if one went bankrupt, it wouldn’t affect your holdings in the others). Plus, just to make it as appealing as possible, you’d get a check made out to you personally for $1 billion. Truly, all this would be yours. OK, this is a rare moment. WHICH CURTAIN WOULD YOU CHOOSE? Music, please. Close-up on sweat on contestant’s brow. Mike chooses … Curtain #1! And the crowd roars in agreement. Because of course as of this writing, that’s just how the crowd is valuing the two prizes. Amazon is valued at a little more than $28 billion (down 10% from its high, no less). And the other four companies, combined, are valued at just under $25 billion. So even with that extra billion in cash I threw in to make it interesting – even these days $1 billion buys a lot – Wall Street would tell you Curtain #1 is more valuable than Curtain #2. And maybe, given Amazon’s bright prospects, this is true. But it’s not as though FedEx’s prospects are so dim. Or that the New York Times doesn’t have a worldwide franchise whose value could grow. Or that even the bright people at Barnes & Noble and United Airlines won’t be able to find ways to grow their businesses. And it’s not as though that measly billion in cash I threw in would have to be buried in a mattress, either. So what Mike is saying is that Amazon’s future is not just very bright, as I think it is, but that to pay $30 billion or so for the whole thing is what he’d do if he had $30 billion. Personally, I’d spend $1 billion launching a competitor to Amazon ($35 to register the new Web site, $999,999,965 to hire Pixar or somebody to program it and make it fun) and use the $29 billion left over for a really great party. Tomorrow: An Even Better Source for Free Books HOUSEKEEPING NOTE: Currently, an alternative route to this column is www.andrewtobias.com. As of February 1, that will be the ONLY way to reach it. To keep reading, please adjust your bookmark. Also, please note my new e-address: atobias@andrewtobias.com.
Cheap Long Distance January 12, 1999February 12, 2017 I am not recommending this, I have not tried this, and I apologize if you already got this e-mail solicitation yourself. But if you haven’t, and you have a hefty phone bill, this could actually make sense. Sure, there is a grammatical error in the very first word — always a bit off-putting (and sure, they misspelled “interstate” and Israel). And sure, they round UP to the nearest minute (so a 2-second phone call counts as a full minute), and they charge seven cents, not five, after the first couple of months — plus a $4.95 access fee in any month when you’ve used the service. And sure, intrastate calls are nine cents, not seven or five cents. And you have to dial those stupid extra digits each time you want to make a call. Sure. But with the various memory speed-dial functions a lot of phones have now, the extra digits may be no trouble. And “canceling” this service is supposedly as simple as not using it. So what’s to lose? And if you do make a lot of calls, you could save some real money. Say you now get one of those dime-a-minute rates yet still rack up $100 a month in out-of-state calls. With the plan these folks offer, you’d save $300 a year. (And the truth is, some of you continue to pay a lot more than 10 cents a minute, in which case the savings would be greater still.) That may not sound like much — $300 a year. But putting it into a Roth IRA, say, if you’re 28 today and could compound it at 10% a year, would enhance your resources by $132,000 by age 68. (Never underestimate the value of a little scrimping and saving.) So — with that background — here is the e-mail I got: # 19-Dec-98 04:11 EST Sb: Long Distance for 5 cents per minute anywhere in the USA! Fm: “5 Cents/Minute” > INTERNET:extreme_discount@bigfoot.com You’re [sic] name has been received as a person interested in money saving products. If you have received this e-mail in error, please e-mail us at mailto:trash10@usa.net. Please e-mail questions to mailto:request14@usa.net HOW WOULD YOU LIKE TO SAVE MONEY ON YOUR PHONE BILL? Without changing carriers, you can NOW DIAL 10-10-629 +1+area code+number First time users will be asked to enter a project code. The project code for you to use is: 55355 You will now hear a recording announcing your rates. 5 cents per minute 24 hours a day 7 days a week! NO contracts NO signing up NO minimum usage NO switching carriers Here are some 10-10 numbers advertised on TV or in print. Let’s see what you get: Depending on the time of day you call, and how long you talk, rates vary from approximately 30 cents to 10 cents a minute. Rates vary according to the time of day, and whether it is a weekday or weekend. 10-10-220 ~~~~~~~~~ 99 cents up to 20 minutes, then 10 cents each minute there after [sic]. If you talk less than 20 minutes, you still pay for a FULL 20 minutes. The average phone call is 3-5 minutes. If you talked 5 minutes, you are now paying about 19.8 cents per minute. 10-10-811 ~~~~~~~~~ The dime line. 10 cents a minute. [minimum 3 minutes] A one minute call is 30 cents. 10-10-629 ~~~~~~~~~ 5 cents per minute nationwide for all iterstate [sic] calls and 9 cents per minute for all intrastate calls. This is for BUSINESS & RESIDENTAL PHONES RIGHT NOW! INTERNATIONAL CALLERS ~~~~~~~~~~~~~~~~~~~~~ DIAL 10-10-629+001 + AREA CODE+ NUMBER. FIRST TIME CALLERS WILL BE ASKED FOR YOUR CODE: 55355 Listed are examples of what you will pay per minute, no additional charges for international calls. Argentina .45 Australia .14 Belgium .15 Brazil .46 Canada .07 Chile .29 Croatia .39 France .14 Germany .14 Guyana .77 Honduras .53 India .67 Isreal [sic] .22 Italy .23 Japan .26 S. Korea .35 Mexico .15 Myanmar 1.25 Netherlands .14 Nicaragua .49 Norway .17 Poland .35 Russia .43 Sierra Leone .95 Saudi Arabia .87 S. Africa .47 Thailand .69 Yugoslavia .68 United Kingdom .09 QUESTION: How will I be billed? As you are now, through your local telephone company, on the same monthly phone bill that you receive now. Question: Can I use this for both HOME OR BUSINESS: YES, SAME RATE, 5 CENTS PER MINUTE 24 HOURS 7 DAYS A WEEK. Please e-mail questions to mailto:request14@usa.net DISCLAIMER: 10-10-629 is only available in the United States. When first using this service you will hear a recorded announcement confirming your rates. Calls are billed in 1 minute increments with partial minute usage rounded up to the next full minute. Make unlimited calls for 5 cents iterstate [sic] and 9 cents per minute for intrastate domestic calls for the low monthly payment of $4.95 access fee for the first 60 days of service. After the first 60 days, make unlimited calls for 7 cents iterstate [sic] and 9 cents per minute for intrastate domestic calls for the low monthly payment of $4.95 access fee. The monthly access fee is assessed per line. All fees and charges will be included on your local phone bill. If you do not use this service in any given month you will not be billed the 4.95 fee. This service may not be available in all areas and is subject to tariff. All rates are subject to change and right is reserved to limit or deny service in accordance with tariff conditions. # Even if this one doesn’t make sense for you, isn’t this a good time to haul out your phone bill, try to make sense of it, and find a way to cut it significantly?
Do Small Stocks Really Beat Big Ones? January 11, 1999March 25, 2012 From Jonathan Edwards: “It’s a fundamental tenet of investing that, over time, small cap stocks outperform large cap stocks. One might be tempted, then, to invest in small cap-oriented mutual funds. But it’s not clear whether the studies that demonstrate the superiority of small caps assume that you hold them once they become big caps or sell them and invest in other small caps. If you bought Microsoft in 1986 and held it, you did well. But a small cap mutual fund that bought Microsoft in 1986 has presumably long since sold it since it doesn’t meet their small cap investment guidelines. Do you (or your correspondents) have any idea whether one can follow the small-cap-mutual-fund path to riches?” One of my correspondents, Less Antman, does indeed have a very clear view. He writes: “The belief that small stocks outperform large ones may be more of a fundamental myth than a fundamental tenet of investing. The academic studies were incredibly flawed, failing to take into account the enormous spreads between bid and ask prices on lightly traded stocks and the historically high trading costs. All of them assumed that investors repeatedly traded in the smallest stocks without incurring ANY trading costs whatsoever, turned over their portfolio at blazing speed, and paid no income taxes back in the days when tax-sheltered brokerage accounts didn’t exist. David Dreman’s recent revision of Contrarian Investment Strategies [yours for $17.50 from www.amazon.com or $15.75 from www.booksamillion.com] did an excellent job of identifying the bogus nature of the ‘small stock advantage.'” In the real world, Less notes, small stock mutual funds have a consistently inferior historical record to large stock mutual funds, primarily because of higher management and trading expenses. (In the investment horse race, the mutual fund with the lightest jockey – the lowest expenses – has a huge advantage.) “The traditional 2% advantage of small stocks over large stocks disappeared in 1982,” Less continues, “not surprisingly the year that Ibbotson Associates [a respected arbiter of such things] switched from artificial indexes of small stocks to the actual results achieved by the DFA 9-10 stock index fund (it invests in the stocks with market capitalizations in the ninth and tenth deciles, meaning the smallest 20% of market capitalization). The DFA fund underperforms the index it was intended to duplicate – the one that beats big cap stocks by 2% – by approximately, SURPRISE!, 2% per year. “Finding a terrific little company with a product you believe in and then holding on for years could make you rich, but habits of savings, diversification, and patience during bear markets are much more likely to help you achieve your goals. Small stocks can be a good diversification tool, since small and large stocks don’t perform in identical fashion, but there is no magic in small stocks. Buy and hold stocks, or buy and hold mutual funds, and you’ll do well. Short Amazon because you’re smarter than Mr. Market, and you’ll be forced to write daily commentaries to pay your food bills.” Ouch.
Free Books January 8, 1999February 12, 2017 Early Morning Readers: If this appears to be the same column you read yesterday, then please click here to see what wound up being yesterday’s column – we switched them. I have the estimable Brooks Hilliard to thank for this one. It’s a peek into the future – but also a way to get free books right now. (You supply the paper if you want to print them out.) Ever read 20,000 Leagues Under the Sea? Want your kid to read Tom Sawyer or Huckleberry Finn? Aesop’s Fables? How about Adventures and Letters of Richard Harding Davis? (He was the ultimate foreign correspondent at the turn of the century.) Amazingly, these things download very fast, at least when you choose “plain text.” And while the selection is still very limited – so this is more of an amusement than something you are likely to rely on to buy books – it is, as I say, a taste of the future. Check it out: www.1stbooks.com. Of course, most of the books you’ll find there come under the heading of “cheap” rather than free. According to Brooks, who has researched this for his own monthly e-newsletter, “authors earn a 40% royalty on sales, which – even at low prices – is often more per book than they get from traditional publishers. Most books are available for downloading in a choice of formats including Adobe Acrobat (which preserves the original ‘look’) and one or more word processing formats. In either case, the buyer can either print them out or read them on screen. Because First Books has no significant incremental costs for each sale other than the author’s royalty, it can keep most of its prices under $10.” And now, as if free books were not enough for one day’s free column, how about free Brooks? Namely, a free subscription to his newsletter, CEO’s Web Review? Just click here to see his page and then, if you’re interested, have it e-delivered on the 20th of every month. It’s succinct and one of the few e-newsletters I find short and sweet enough to be welcome.
What Amazon Means January 7, 1999March 25, 2012 Action in the Internet stocks is beginning to make investing a lot easier. Yesterday morning, for example, Amazon went up by another $2 billion in a couple of hours, to what would have been nearly “11 times Barnes & Noble” – the new “p/b” ratio as I have come to think of it, except that the truth is that B&N (symbol BKS) has also been rising, and so, with its profitable 504-store chain and its own unprofitable Internet site, Barnes & Noble now commands a value nearly one-seventh, not one-eleventh, as great as mighty Amazon. One way of looking at all this is to think AMZN has gotten ahead of itself. (Was it more than a few weeks ago that an analyst made headlines predicting a target of 400 by the end of 1999? His only mistake was that word “end.” A keener mind would have targeted 400 for the “end of the first week” of 1999.) It reached its year-end, adjusted for splits, last night. (Well, 138 on the split stock, or 414 pre-split. But what’s an extra $725 million in market value? A mere rounding error!) Wall Street now values Amazon more highly than FedEx, United Airlines and Barnes & Noble combined. I am not one to quibble, and I am not going to say anything about Amazon’s losing more and more money. The market is telling us clearly that one day those mounting losses will turn to gushing profits and someday, conceivably, an actual cash money dividend. (Cash. You know, the stuff you might use to buy food or pay the rent.) Rather, with Yahoo also up 30-odd points yesterday, and many others as well (I only pick on Amazon because it so mercilessly picks on me), I am here to draw the practical conclusions. To interpret the market’s message, as it were. The first thing is: Forget all those beaten-down oil and oil-related stocks. The Internet will largely reduce the need to leave your home; far more fuel-efficient autos are just a few years off in any case; and global warming pretty well spells the end of the demand for heating oil. Next, forget most of those high-yielding real estate investment trusts, especially the ones that invest in shopping centers. Yes, there will still be shopping centers, but on the margin, with competition from e-shopping about to boom, the tenants are going to get squeezed mercilessly, and thus, in the long run if not the short, squeeze many of the REITs. And of course, forget the retailers themselves! I just placed a huge order with www.netgrocer.com. Netgrocer is hardly perfect yet – Arizona diet honey-flavored ginseng green tea is nowhere to be found, and they were out of the sliced carrots I ordered (don’t ask). But this nonetheless shifted $440 of business from the supermarket up the street onto a FedEx truck (I may have stupidly – insanely – shorted a few shares of AMZN a couple of months ago, but at least I’ve long owned a little FedEx) – and that can’t be good for the supermarket. So, bang: Oil is history, retailing is history, commercial real estate is history. With the deflationary pressure that Internet competition and efficiency will bring (it’s efficient to cut out the middleman), say good-bye, also, to inflation, which means good-bye to gold and mining stocks. It also means low interest rates, which means there’s no point putting your money anyplace safe, like a bond or a bank, so you may as well join everyone else in putting it all into the market – Internet stocks being the ones that seem to go up the most – which is why I personally think that in 10 years, Amazon.com will have a $50 trillion valuation and own the entire world. (Two good acquisitions to start with: FedEx, to control the shipping process, and Disney/ABC, to be sure of some entertaining content on the site. It might also be useful to acquire IBM, to assure solid technology, and possibly Motorola or one of the others with an interest in a global satellite system.) The interesting thing (to me, anyway) is that while I obviously think much of this is overdone or preposterous, it can’t all be dismissed out of hand. What’s more, when this impeachment uncertainty is finally over one way or another, even the stodgy old Dow, which managed barely a 233-point ho-hum gain yesterday could really begin to strut its stuff. [My apologies. Yesterday I promised you free books. I’ve pushed that off to tomorrow.]
Amazon Short Update January 6, 1999March 25, 2012 As I write this (Monday night), the stock market values AMZN at more than Federal Express and United Airlines combined. This could make sense, as Ive argued several times before, if everything goes right and Amazon becomes one of a handful of companies that control all global e-commerce. Usually that kind of thing doesnt happen, especially when competition is likely to be fierce. But it could. I sort of hope it doesnt, because I foolishly shorted a few shares of AMZN a couple of months ago. But it could. I shorted it on November 16 at 128 up from 25 earlier in the year. Thirty days later, I shorted a little more at 290. Not a bad 30-day run. Monday, it closed at 354 (and then split three for one, so now you have to divide all these numbers by three). In the meantime, for book buying, Ive begun switching to www.booksamillion.com. It charges about 20% less than Amazon, and when you buy as many books as I do, that mounts up. Tomorrow: Free Books
Dogs of the Dow With Bonds January 5, 1999March 25, 2012 Should you find yourself aswirl in a cloud of antimatter and flung, thus, back to the year 1968, I have an investment strategy that will turn $10,000 in a tax-free individual retirement account (if only there had been such things in 1968) into $5.7 million. The strategy is informally called (in a recent Barrons, anyway) "the dogs of the Dow with bonds." It is based on Michael OHiggins new book, Beating the Dow With Bonds: A High-Return, Low-Risk Strategy for Beating the Pros Even When Stocks Go South. That same $10,000 invested in OHiggins earlier dogs-of-the-Dow formulation without bonds that is, simply investing each year in the five cheapest of the Dows 10 highest-dividend-yielding stocks would have grown to but $1.4 million assuming no taxes. And yet that is still a heck of a lot better than having just put $10,000 in the Dow itself and hung on. That theoretical exercise (theoretical because the 30 stocks that make up the Dow change a bit from time to time) would have produced a mere quarter million or so. The new plan with bonds calls for you to be out of the market altogether when the yield from high-grade corporate bonds exceeds the implied "yield" from the S&P 500. If the S&P is selling for 25 times earnings, then its implied yield (even though you only get a portion of it in actual cash, as dividends) is 4%. At 20 times earnings 5%. At 10 times earnings 10%. At 50 times earnings 2%. Lately … well, even since 1980, actually, this new system would have had you out of stocks and in bonds. Thats right: no stocks in your portfolio these last 18 years. And you would have done great, because what people forget about bonds is that in addition to paying interest, when the general level of interest rates falls, bond prices go up. The added twist to OHiggins new system has you choosing one of two polar-opposite kinds of bonds (in years like 1980-1998 when the system dictates bonds): one-year Treasuries when inflation is feared; long-term, zero-coupon Treasuries when its not. (To determine this, according to the OHiggins system, you simply look at the price of gold. If its price is lower than a year ago, inflation is not in the cards. If gold is up from a year earlier, watch out.) And by following this system, there in your 1968 blue jeans and radical sideburns, if you could have conned your parents out of $10,000 (and found a way to shelter the interest and capital gains from taxes), youd have your $5.7 million today. Youd be what was it we used to say in 1968? made in the shade. All with what the author suggests could be 15 or 20 minutes effort each year. So now we know the second best way you could possibly have invested your money these last 30 years: this system. (The even better way, you will be sick by now of hearing, is to have put your money into the stock of Berkshire Hathaway and never, ever thought about it again.) The question is: How about the next 30 years? Personally, because I rarely do find myself aswirl in a cloud of antimatter (or if I do, it resets my memory chip, so I dont know it), this question is of more interest to me. And for this Im afraid the system may be nearly worthless particularly for money you dont have under the shelter of a tax-deferred account. Yes, in many years the system might do fine, just as, looking back, the Dogs of the Dow did well. (Yet in the last couple of years, when the system became widely popular, the Dogs actually trailed the Dow oh, no!) But what if you had a year when the system dictated all your money should be out of the stock market and in long-term, zero-coupon Treasury bonds? Putting all your money in one thing is risky. And long-term zeroes are riskier still. They zoom when interest rates fall, but crash when interest rates rise. So there you are, having sold all your stocks (and owing Uncle Sam and his local counterparts perhaps 30% of your profits) and having put the proceeds into zeroes, as per OHiggins, because the price of gold is lower today than it was a year ago. And now, having spent your 15 minutes on this, you go on auto-pilot for a year. Fine. But what if, even though gold didnt predict it, inflation fears should take hold mid-year? Down come your bonds, up goes gold … so come January you have to sell all the zeroes at a huge loss (only $3,000 of which serves to lower your taxable income, with excess losses carried over to future years) and buy one-year Treasuries (or else stocks, if theyve finally gotten cheap enough). So it was foolproof in hindsight (as any good system constructed with the benefit of hindsight is). But going forward? Basically, with this system you are betting you can time U.S. interest-rate movements by assuming that the price of gold will work as an inflation predictor in the future in the same way, and with the same timing, it has in the past. And it may! In which case youll do very nicely. Or it may not. In which case you wont. All that said, and taxes aside, the very broadest strokes of this idea are useful. We should be nervous about U.S. stocks at todays levels. And there are times when a safe bet in one-year Treasuries will prove a lot more lucrative than something more exciting. But beyond that, it doesnt seem to me this system is the golden key after all. Shucks! (Note one other serious problem: With zero-coupon bonds owned outside a tax-sheltered account, you have to pay ordinary income tax each year on the imputed "interest" you earned even though the actual amount of cash interest you got was: zero. So zeroes really make sense only within a tax-sheltered account.)
The Pitbull System 25 Months Later January 4, 1999March 25, 2012 Ever wonder about all those amazing easy-riches strategies that come in the mail? You know it cant be that easy … but, but …. Well, I wonder about them. And I marvel at the skill of the copywriters who prepare them. And, well …. So here was a message I got two years ago from one of you, Sandy Price: "While youre checking out stock market systems, check out the Pitbull system advertised nearly every day in Investors Business Daily (great paper, by the way). Over 200% per year! He retired in his 40s! Just thought you might get a chuckle." Indeed, Sandy signed up. "Its not making 200% per year this year for me," his message went on to say. "It does not appear to be for him either, based on the picks at the web site. But I am making money at it." Hmmm. That was November 1996. So how has it turned out? Did Sandy earn 200% a year? Does retirement loom? In his case, as it turns out, no. "Commissions on that system were eating me alive so I abandoned it," he reports. "Dont know how I would be doing now, but I was losing money too fast to continue with it." (Sandy traded with Charles Schwab, the well-known discounter but not a deep discounter. When youre trading frequently which I do not advise even discount commissions can kill you. Say you made one trade a day. The difference between, say, $13 a trade and $50 comes to about $10,000 a year.) Of the 33 positions Sandy traces on the Pitbull system, the net result appears to have been a loss of $3,663 on an investment of $83,026. The point of this is not to attempt any kind of scientific debunking of the Pitbull method. Ive actually forgotten what the method is (though I do remember being so taken by the sales literature that I, too, sent in my money, out of curiosity, but then never found time to read the material, let alone "try" it). Rather, I just mean to suggest that in the real world, you are probably doing the right thing if you resist the temptation to open these remarkable direct-mail solicitations promising the cant-lose newsletter or the money-back-guarantee seminar or the book-and-tapes-normally-an-$849-value-yours-for-just-$149. Isnt hindsight fun? Tomorrow: The New Dogs of the Dow System