Title Insurance March 3, 1999March 25, 2012 Title insurance is such a boring topic, I feel we should start with some whimsy. Today’s whimsy comes courtesy of Mike Rutkaus, who believes the following site — www.hamsterdance.com — “is the essence of the Web and the new economy.” Check it out and see if you agree. (Give it a minute – there’s music.) I actually think there’s a grain of truth to this dancing-hamster observation, but only a grain (and I’d guess Mike actually feels much the same way). To me, the web and the new economy are better captured by www.drugstore.com, from which I just ordered precisely the headache and heartburn stuff I wanted (in case Amazon.com should continue to zoom). And by www.circuitcity.com, at which I quickly located the microwave of my dreams. Unaccountably, Circuit City does not yet have a “BUY” button on its site. They seem to want me actually to rouse myself from my chair, during business hours, leave the house, find a Circuit City, find a sales clerk . . . and all that. But the web is still young. In the long run, my sloth will not be denied. Speaking of sloth, why not put off title insurance until tomorrow? Do us both a favor.
Pay Down Your 6% Mortgage? March 2, 1999March 25, 2012 I got so carried away trying to figure out how to milk a dime out of Brian Miller yesterday, I forgot to tell you (or answer) his question. Namely: “I have seen people take the stance that making principal prepayments on a mortgage is not the ‘smart’ thing to do, since stocks historically return about 10% over long periods of time, and mortgage interest is typically around 6% or so. But nowhere have I seen the advice taken to its extreme; that is, when your mortgage is finally paid off, take out a home equity loan and put the money in stocks. Have I just missed this advice? Or, is there some reason why it becomes no longer good advice at this point? “And what about the fact that since stocks historically average annual returns of ~10%, and for the past few years have performed much better than that, then the law of averages says eventually stocks will do much worse than 10%. Isn’t this reason to at least place some of your investment money into mortgage prepayments?” Maybe I didn’t answer Brian yesterday because he more or less answered himself. To begin with, I actually tend to be one of those conservative types who think pretty highly of mortgage-prepayment as a way to save. After all, a lot of money management has to do with psychology and personal choice — how you live your life. No one should be ashamed of wanting to “earn” a risk-free 7% by paying down a 7% mortgage. It can help you sleep peacefully at night. And the mortgage-burning ceremony, when that day comes, can be one of life’s joyous milestones. But there are a couple more things to say in response to Brian’s note. First, if Brian really has a 6% fixed-rate 30-year mortgage — and if he’s thinking he might actually keep this property for 30 years rather than move on in a year or two — then he’s in an enviable position. The lender is on the hook to him at 6% for decades . . . while he is only on the hook to the lender until the day he decides to pay off the loan. Should mortgage rates drop to 4%, he could refinance. But if inflation roared back and mortgage rates hit 12%, he’d still be paying 6%. It’s kind of like being an employee with a long-term stock option — but the right to “reset” the strike price if the stock price goes down. (If you have stock options, you know what I mean. If you don’t, it will just make you angry.) So I will admit that it doesn’t always make sense on a strictly logical level to accelerate the payments on a really low, fixed-rate long-term mortgage. But the second thing to say is that Brian is right (in my view) — this notion that stocks will always go up about 10% a year, with maybe some dips, but nothing much to worry about, has gotten a little scary. To me, anyway. So I sure wouldn’t hock my house (or anything else) to buy stocks at today’s prices — or at almost any other time, either. Borrowing to buy stocks might usually enhance your results a little, but occasionally wipe you out. Too risky. And the final point is this. Six or seven percent may not seem like much, especially in light of the kinds of returns you could have earned on stocks (or bonds!) the last 17 years. (Long-term bonds not only paid a lot of interest over this period, they appreciated as interest rates fell — the combined returns have been tremendous.) But in a period of virtually zero inflation, that’s a “real” 6% or 7%. After tax it may be a real return of 4% or so. (The “earnings” from paying off your mortgage should be thought of as taxable, because — assuming you itemize your deductions — you only save the after-tax cost of the mortgage.) Paying down a 7% mortgage when inflation is zero is actually a much better real return than paying down a 12% mortgage when inflation is 6%. The first way, paying down the 7% mortgage, you are “earning” 4% or 5% after tax and inflation. With the 12% mortgage you may really be saving only 7% or 8% after subtracting the value of the tax deduction. When you then subtract a further 6% for inflation, you’re really earning just 1% or 2% after taxes and inflation. Should you pay off your 6% mortgage rather than invest in some great new business that your freshly-minted M.I.T. computer scientist son wants to start? No. Probably not. But should you pay your mortgage down rather than buy an Internet stock that’s already up tenfold since last summer? Well, maybe so. I do think I can earn more than the 4% or so my mortgage costs me after tax, so I do not accelerate my own payments. But only time will tell whether this was smart.
My Word March 1, 1999March 25, 2012 From Brian Miller: “First of all, I would like for you to get some sponsorship for your web page so that I can stop feeling guilty about reading your ‘articles’ for free! (Of course, I would never pay actual money to read them, I’m too cheap. Instead, I’m willing to pay by looking at some advertisement.) This would also make me more secure in the fact that the articles will be around for some time to come.” Sponsorship? Revenue? Are you kidding? This is the Internet. If we can get enough people reading this, and once they finally get up to speed with the clickle, I will be in fat city. And where is the blasted clickle, anyway? Shouldn’t it be here by now? For those of you who’ve unaccountably forgotten my June 14, 1996, column — or not yet figured out how to access my archives — I reprise it for you here . . . and go it one better. (This is a joke. The archives are, for now, inaccessible. I’m working on it.) On June 14, 1996, a date so far not engraved anywhere in the annals of cyberspace, I predicted a new word. Clickle. “Because,” I wrote, “isn’t that what everyone’s working to come up with on the Internet — some way to charge a dime or a nickel or perhaps even just a penny or two for access to a particular page? You’d come to a page, which would show a dialog “access costs a penny” and you could either click to proceed, to cancel — or to proceed and “don’t slow me down with this message again unless you raise your price.” Sort of a high-tech cross between a trifle and a nickel. The universal monetary unit of the Internet. And although to any given user a clickle’d be just a few cents or a nickel (I suggested), the accumulated clickle trickle could become a flood. For it would come not just from U.S. nickels, but from Russian rubles, Arabian rials, Israeli shekels and Polynesian pickles (or whatever the Balinese call their loose change). “I know an access charge will make people stickle,” I conceded. “But you watch. When a simple click’ll get them where they want to go, they’ll soon be dropping clickles without a second thought. You mark my word.” The implications, I concluded, were not all bad. “Say it’s five years from now, when TV and the Internet are fully integrated somehow. There’s a show that you really enjoy like Fox’s Profit (remember that one?), but that has to be dropped for insufficient ratings. Aha! What if they could keep it going by supplementing ad dollars with clickles? I, for one, would gladly have dropped a few clickles to see another episode.” And that brings me to 1999 and to the new life I hope to breathe into the clickle. Because, yes, I know people are resistant to paying for anything on the net. I know that Michael Kinsley’s fine e-magazine, Slate, has recently dropped its modest subscription fee, and that an efficient, universal system of collecting “micropayments” is still some way off (but how much longer can it possibly take Visa or American Express or Yahoo or somebody to figure this out?). My new twist? The voluntary clickle — the v-clickle. Not a v-chip, a v-tip, really — singing for my supper — the v-clickle is the v-hicle I’d ride to riches. It would be very simple. At the end of each column would be a little “token.” Or maybe two or three. Click the little one if you want to toss a nickel into my cup, the middle one to toss in a dime, and — if you just fell off your chair laughing or learned a way to save $300 in taxes — go crazy: click the big token and tip me a quarter. Or tip nothing at all. My thought is that if this column is worth your time (which is the real precious payment you make reading it), then what’s a further dime? With a billion Internet households expected soon, if only 10% of them read my column daily, and only 50% of those liked it enough to tip me a clickle — even one of those little nickel clickles — that would be $2.5 million a day. Might even be enough to get me to write these things Saturdays.