If Only Methuselah Had Lived 100 More Years April 30, 1999February 12, 2017 Blake Meyers: “I found your calculation of Bill Gates’ income since time began to be quite remarkable. [Click “Gates $$$ Clock” at left, and note that it was broken for a while because we forgot to account for the last split.] However, in discussing this with my officemate, we agreed that the real calculation should include compound interest. After all, Bill is savvy enough that he would put his money in an interest-bearing account, even if he was quite young when time began. Perhaps you could calculate how much he much he would have had to save each year, assuming a conservative rate of, say, 5%, to end up with the little pile of money that he has today?” → Good point. Though the investment choices billions of years ago — even 1,000 years ago — were quite limited. But the power of compounding never ceases to astound. (Me, anyway.) Do you know that if Bill had been born just 1,000 years ago, and if he had invested a mere one-billionth of one penny — not every year, just once — it would have grown by now, compounding at 5%, to $15 billion? Still not as much as he has today, but had he been able to bump the return up just a tiny bit, to 5.2%, he’d have over $100 billion. This is why it pays to save when you’re young, even if you can’t count on living 1,000 years. (Neither, I think, should everyone NOT count on it — technology is racing along.) And it is also why the 20% and 30% annual returns people have come to expect from stocks . . . or in some cases 20% a month these days. . . are wholly aberrational and perhaps even a little worrisome. Five percent, let alone a mighty 5.2%, only seem low.
More Reader Mail: Gift Certificates and E*Trade April 29, 1999February 12, 2017 Rich Cullen: You wrote about gift certificates [April 12]. Well, the Walt Disney Co. has something like that called, ‘Disney Dollars,’ which is a printed currency that can be used in their theme parks and Disney Stores throughout the world. Of course, people use this currency. But many, especially ‘Disneyana’ collectors, hoard their ‘character cash’. Now how’s that for marketing?!” George Berger: “My own pet peeve about gift certificates is that most of them have expiration dates. If you don’t use them within a year or two, the company gets to keep your money without rendering any services. I won’t buy them if they have expiration dates. “A nice alternative I figured out is American Express Gift Cheques. These are basically pretty travelers checks, intended for use as gifts. I recently wanted to give a friend a Harry and David’s Gift Certificate, but since I wasn’t sure she would enjoy Harry & David’s, I instead sent her a gift cheque along with a Harry & David’s catalog. I included a card explaining that I was sending the cheque in lieu of a gift certificate (so as to make it seem a little less like just a cash gift), but explained that if there was anything else she would prefer to buy for herself she could feel free. She ended up ordering from the catalog, but this way she got to keep the change. (Disclaimer: Believe me, it is purely coincidence that I am currently working for American Express as a consultant.)” Michael Roxborough: “With the current market cap of etrade [about $12 billion last I looked, roughly triple the value of United Airlines], you could own controlling interest of every listed company on the stock exchange of Thailand. Would you like to own all of etrade or control an entire country??” → Well, would I actually get to control the country? Could I make all its citizens buy my books?
Reader Mail April 28, 1999February 12, 2017 THE DELL SCALE “Am I missing something, or can you ONLY use DELL for the comparison?” → You are missing something, but it’s our fault for making it unclear. After you click SCALE on the menu bar above, click the “ADD MORE COMPANIES” box and you’ll see the option to replace DELL with whatever you want — AMZN for example. Soon, my web wizard will be making this a little more intuitive. FIRE AND ICE “It may be an old book and long out of print, but wanted you to know I just finished it a few weeks ago and really enjoyed it. I buy books by the bagfuls at the annual Goodwill book sale here in Atlanta, and this year got F&I in paperback for only 50 cents.” — Carolyn B. McGough → Well, you overpaid by 50 cents. As you know, the entire book will soon be accessible here for free. (So far, we’ve posted Chapters 1 through 7. Click “BOOKS” above and scroll down to Fire and Ice and click “Excerpt.”) But you did a heck of a lot better than another e-friend of mine, who wrote to say Amazon had located and sold her a copy for $55. LONG-TERM LOSERS “I bought 4 stocks: PSFT, IOM, NAII, and SHG. ALL are down from what I bought them at, and I’m PISSED! *smile* Do most stocks really go up over the long term on average?” — Eric Lewison → Not most risky ones. I only know one of these four reasonably well, and it’s down 80% from three years ago — and headed, a smart fellow tells me, lower still (though who knows?). He has been short the stock all the way down, and what he likes best is that he’s convinced it will fall further, yet never go out of business. That’s the perfect short, because it means he never has to “realize” — i.e., pay tax on — his gain. And that’s important, because gains on short sales, even if you’ve been short 500 years, are always heavily taxed as short-term. If the stock ever does become truly and totally worthless, as many do, then you have to declare the gain. So remember two things about risky companies (and risky stocks — even a solid company may be a risky stock if that stock has been bid up to crazy heights). First — they’re risky! Second, you should not buy them inside your IRA. Because if they go way up, you get no benefit from the long-term capital gains tax break . . . eventually, when you withdraw your profit, it will all be taxed as ordinary income. And because if they crater, you get no tax benefit from the loss. Instead, it simply cuts into your precious tax-deferred retirement fund.
What the Heck Were You Doing in Mississippi? April 27, 1999March 25, 2012 There are actually a lot of good things to say about Mississippi, and I don’t mean just Elvis Presley, William Faulkner, and Eudora Welty. There are a lot of awfully nice people. There are the magnolias. There is the Reverend M.C. Thompson, Jr., pastor of the Mt. Nebo Missionary Baptist Church in Philadelphia, Mississippi — a church that was burned by Klansmen in the summer of 1964 and then rebuilt — whose singing could make anyone a Baptist. And there are the good race relations in the state, arguably among the best in the nation. I was in Mississippi for a brief part of Jesse Jackson’s 8-day statewide bus tour. The service at Mt. Nebo was to commemorate the deaths of Michael Schwerner, Andrew Goodman, and James Chaney, the three young men (two white, one black) murdered that summer as they joined 1,000 students in trying to register blacks to vote. It is Reverend Jackson’s view that it’s no longer about race in Mississippi. The good people of that state get along just fine, for the most part. It’s about economics. And that affects both blacks and whites. Did you know that Mississippi is last in education — 49th or 50th — but that its powerful senator, Trent Lott, thwarts legislation that would help build and modernize Mississippi schools and fund more Mississippi teachers? That it’s the poorest state in the nation, but that Senator Lott opposed the hike in the minimum wage from $4.25 to $5.15 and opposed hikes in the earned-income tax credit for the working poor? (Mississippi does have a spectacular new air conditioned ultra-modern prison in Yazoo City — about the best prison facility money can buy — so you can’t accuse the state’s leaders of doing nothing for the people.) The good senator has every right to oppose these things and the Family Leave Act and all the rest. He has every right to associate with the white supremacist Council of Conservative Citizens (the CCC), a group that even the John Birch Society has disavowed, and to write articles for its newsletter. But it was Reverend Jackson’s point that the good people of Mississippi have every right not to reelect him.
Mississippi is Northwest Territory April 26, 1999February 12, 2017 The first odd thing is that the primary air carrier between Miami, Florida, and Meridian, Mississippi — a distinctly southeast route, if you ask me — is Northwest. It is not a nonstop flight. And I was actually going on from Meridian to Houston — and then back to Miami. So it was: Miami – Memphis – Meridian – Memphis – Houston – Memphis – Miami. I felt a little like a FedEx package: Memphis, Memphis, Memphis. No Saturday stay-over, so the whole thing was going to be $1,050 in coach. I asked about first class — sometimes when you have a full-fare coach ticket, first class is just a little more because you’re already paying five times as much as the guy in the seat next to you — and somehow wound up with a $746 first class ticket for the whole trip. Well, when I got to Meridian I had an exciting time (no, really) and then found at the last minute that I would not be going on to Houston after all. The reason for that part of my trip had been canceled. When I arrived at the Northwest counter in Meridian, there were just minutes before our little DC-3 was to take off for Memphis. Its little propellers were whirring to beat the band. (OK, it was a Saab or something. But it did have propellers vaguely reminiscent of Casablanca, even if the avionics were a half century more modern.) The desk agent did not look as if he could route me back to Miami instead of on to Houston in seven minutes, so I grabbed a Northwest schedule and read it on the plane. We were to land in Memphis at 1:10. My Houston fight would leave at 1:55. There was a Miami flight at 1:45. Cell phones are such wonderful things. Before you knew it, even as I was wheeling my bag along the tarmac off the DC-3 and up the stairs to the extreme far end of A-Concourse, I was connected to a Northwest reservationist. YES there was a seat on the 1:45 to Miami! YES they could make the change! Ah, brave new world. Ticketless travel, bags with wheels . . . the aforementioned cell phones — not to mention being able to fly in the first place. The only catch was that I’d have to go to the ticket counter to have the fare recalculated. “But,” I explained, clutching my cell phone as I rolled down the Concourse, “there’s no time.” A supervisor was found. By now I had made my way from A-25 all the way to the hub of the terminal and was headed toward B-concourse. The supervisor agreed to take my extra payment over the phone. Extra payment? The cost of not flying to Houston, added to the cost of not flying back from Houston to Memphis — the cost, that is, of making this a simple Miami-Meridian roundtrip instead of Miami-Memphis-Meridian-Memphis-Houston-Memphis-Miami — would be an additional $796, she said. “You are saying,” I found myself unable to resist paraphrasing, “that if you only have to fly me back to Miami right now — one flight instead of three — the cost of my first-class ticket will go up $796?” “Yes,” she replied. By now I was yards from the Northwest ticket counter, at the joint of Concourse A and Concourse B. “OK, thanks,” I said, hanging up (as if cell phones ever hung anywhere — how will we ever explain “dialing” and “hanging up” to our grandchildren?). Well, I thought, as I approached “Chip” at the counter, I can always just go to Houston and come back tomorrow. But that’s a strange way to save $796. I handed Chip my ticket, asking to get one of those nice seats leaving for Miami in 19 minutes. Chip said not one word. He clicked and clicked and tapped and clicked and — tap, tap, tap — he then left his post and walked … deliberately … all the way to the opposite end of the ticketing trench and then all the way back with some kind of form and a ballpoint pen. Something told me I was in Chip’s hands and should just keep my mouth shut. Chip was about twice as old as you might expect from his name; Chip seemed a wise and logical old hand; Chip was, I could see reading upside down, writing me out a refund. With 13 minutes to go, I had a first class boarding pass to Miami (and no one in the seat next to me!) and a $155 refund. Not to mention the pretzels, peanuts and unlimited diet Pepsi that would constitute the First Class meal service on the normally-two-hour flight between Memphis and Miami. I am usually the first one on the plane — indeed, the first one at the airport — so fast-walking down Concourse B to be the last one on board was a new experience for me. But as it turned out, I had more than enough time. There was a “very minor mechanical problem that would be fixed promptly.” After half an hour, we all got off that DC-9 and onto another just like it nearby. I didn’t mind. I was not running an hour late, as I saw it, I was running a day early — and with an empty seat next to me! We boarded, we got our emergency instructions again (oh, so that’s how you fasten the seatbelt) and, finally, left the gate. We taxied out, then turned around and taxied back. A faulty gauge on the instrument panel. But this problem was fixed pretty quickly (and still I was almost a full day early), and off we went without further adieu. And this, as someone noted, is how it worked before Y2K. Tomorrow: What the Heck Were You Doing in Mississippi?
More Fire, More Ice April 23, 1999March 25, 2012 Well, I’ve been busy! But if I can get these darn web controls to work, you should have three more chapters of Fire and Ice to read over the weekend (please be prepared to discuss Chapters 4-7 in class Monday morning), with more to follow soon (and Tulipmania not far behind). Just go to BOOKS, above; then scroll down to Fire and Ice and click “excerpt.”
How Fast Did the Nifty 50 Drop? April 22, 1999February 12, 2017 Robert Doucette: “I am continually amazed by the Internet companies, whose valuations seem to have no connection with reality, and whose stock prices CAN’T get any higher, but do. Yes, we know that the stocks seem to be grossly ovepriced. (The only stocks going up these days are those that were already too high.) Yes, we know this can’t continue forever. (These are not stocks for widows or orphans or Warren Buffett.) But, how risky is an investment in these companies today? Are there any rules of thumb to guide investors about a hot market that gets cold (and goes south)? For example, when the Nifty Fifty cooled in the early seventies, how fast was their fall?” Well, Avon was close to 140 in mid-1973 and under 20 by the Fall of 1974 (and what a Fall it was). Disney dropped from 210 at the end of 1972 to 31 less than two years later. And so on. The fall wasn’t fast in the sense of its taking just a week or two. That sort of thing happens when there’s bad news — as in 1997, when Oxford Health dropped from around 70 to 25 or so in three days. (It would later dip below 6.) But these companies were basically doing fine. No, as sharp as the decline appears on the charts now, the fall was slow-motion torture when you actually lived through it. And it must have been particularly galling to the owners of the Nifty 50 — I shunned those for a few of the Thrifty 5000, which fell even further — because, I say again, for the most part their businesses were fine. It’s just their stock price multiples that were deflating. Where once they had been selling at 60 times earnings, the world changed and now they were selling at 15 or 20 times. But how would you have known when to get out? As they got lower and lower, did they not seem ever better buys? Whatever had kept you in at the top — wouldn’t you have had even more reason to stay in as the stocks got cheaper? The Nifty 50 — the Avons and Cokes and Disneys and IBMs — thrived, for the most part. It was their stock prices, not their businesses, that got creamed. What’s more, in under three decades they saw their stock prices recover to and surpass their previous highs. (Well, not Avon or Polaroid, but many of them.) And now many of them are back selling at 40 or 50 times again. Could something like this happen to AOL, selling for 650 times earnings? Or to Yahoo, selling for 1200 times earnings? Or to Amazon, selling at 225 times losses? They’re different animals, presumably at a much earlier stage in their astonishing growth trajectories than the Nifty 50 were in 1972. But I wouldn’t rush out to buy them at these prices. I think much of their bright future may already be discounted. And in case one of them ever hit a snag — well, you could be talking about a price/earnings ratio under 90. (Gasp.)
My Invaluable $10 Gift Certificate – Part II April 21, 1999January 29, 2017 I told you about the “invaluable” $10 Gap gift certificate AT&T sent me. Tom Williams writes: “I once did a favor for someone who, as an expression of thanks, gave me a $30 gift certificate for an expensive men’s clothing store. I felt obligated to use the certificate but had to spend significant extra money just to get a necktie. The point being that a gift certificate is often worthless and may actually have a negative value. Good luck shopping at the Gap. I’ll be interested to hear what wonderful thing you are able to purchase with your $10 certificate. Maybe a Gap pocket handkerchief or some Gap shoelaces.” Actually, I like the Gap, but knew I’d lose the gift certificate, so I gave it to a friend. But I know what you mean. What a great business gift certificates are. First the store gets an interest-free loan until the recipients use them. And surely 5% of them — if not 20% — just never get used. And some nice proportion of the 80% or 95% that do get used get used by folks who wouldn’t normally have shopped there . . . so you draw in some new customers. And often they will, like Tom, wind up spending more than the value of the certificate anyway. All this is innocent enough — the Gap is doing nothing at all wrong by offering gift certificates. But if I ever figured out how to charge you for this column, one of the first things I would do is find a way to sell you gift certificates as well. Meanwhile, the ever-inventive Brooks Hilliard suggests, “You might try auctioning off your gift certificate for charity. I’ve seen $10 items go for considerably more (say $12.75 and up) in such auctions. I’d be happy to start the bidding at $7.35. This approach would add some ambiguity to the value (or invalue, as the case may be).” Do I hear $20?
Used Software April 20, 1999February 12, 2017 Patrick Lines: “I have secured a copy of MYM 12.0 from a used software vendor —www.exchangehq.com/index.htm — so I should now be good to go!” A used software vendor? Who knew? Does this mean you can actually SELL some of that worthless old software you’ve got sitting up in the attic? Check it out. I do know that you’d be nuts to start with MYM 12.0 — Managing Your Money — the terrific DOS program I still use. That would be like being asked at birth which language you want to know by the age of 5 — English or Hungarian — and choosing Hungarian. But if you already speak Hungarian, and if your entire library of Hungarian books had been lost in a fire, well, this analogy is getting pretty tortured, but you know what I mean. I just bought a used copy of Excel 5.0 for $39. How bad can that be versus $260 for the newer version?
Mail Call — Another Trick April 19, 1999January 29, 2017 Recently, I needled American Express for sending out a less than candid direct mail solicitation — a 4.9% credit card offer that was really 8% if you read it carefully. And in years past, I have had my share of complaints about the GM Mastercard — as have you. (It turns out GM does not actually handle this card itself, it just reaps the ill will.) So now comes an “Important Amendment” to my GM Mastercard account (that can’t be good, I’m thinking), disguised as just the best darn news. On the outside of the envelope is a photo of a beach chair and umbrella and the enticing headline: Save money every day — and claim your 2 Complimentary Round-Trip Airline Tickets. Find out how inside. A blessedly brief letter from Charles F. Ugolino begins, “Dear GM Cardmember: As you know, from time to time we do something special for our best GM Cardmembers — and right now is one of those times. Now you can claim two Complimentary Round-Trip Airline airline tickets just by trying RateSaver (servicemark) risk-free for 30 days.” Yes, the next to last little paragraph — in bold, to answer critics like me — does say, “Also enclosed, please find an important amendment to your Account.” But the PS reminds you that you can save up to $180 a year with RateSaver (servicemark) — and claim two free airline tickets. The enclosed brochure has big type, color, and more mention of the $180 and the free tickets. Well, it seems that the $180 consists of a some kind of savings on your electric and phone bills — it does not say how, but appears to be the result of this great RateSaver (servicemark) program, which is free for 30 days but then automatically billed to your card — $69.95 each year unless you call to cancel. And you also get an Internet connection for just $9.95 (for the first two months, $19.95 thereafter). And you get $175 cash back on a home security system and monitoring (the footnote explains, in 6-point type, that you have to buy a security system and commit to $718 in monthly payments to qualify for that $175 rebate), and “as an EXTRA Bonus, you may also claim 2 Complimentary Round-Trip Airline Tickets to use on your next vacation.” Except that to get them you have to stay a certain minimum number of nights at certain participating hotels and resorts at their full room rates (and not during peak vacation times), though to find out the specifics of just how bad the deal really is you have to affix your address label and send in the card authorizing the 30-day risk-free RateSaver (servicemark) trial after which, if you don’t call to cancel, you’ll be billed $69.95 a year. At which point I’m guessing many folks are so confused or annoyed they just throw the whole thing out. I went all the way from K through 12 without a hitch and yet, after reading this twice, have no real clue what they’re offering. Does RateSaver (servicemark) somehow lower any phone bill? Do I have to switch carriers? Does it shut off my air conditioner at peak times to get me a discount from the power company? Do I have to buy a security system to use RateSaver (servicemark)? Other people are so confused but curious that they affix their address label to the detachable business reply card. Either way, Household Bank (which issues the GM card), wins — because you see what’s happened? You’ve forgotten all about the Important Amendment to your account. This is on a separate slip of paper, small type, no color, legible but forbidding, and it basically says (though not quite this way, of course): “Due to our uncontrollable desire to gouge people any way we can, we’re raising the interest rate on your balances effective June 1 to an unconscionable 23.9% if you’re even a day or two late with a single payment or if you exceed your credit limit by even twelve cents (which we could easily prevent by declining the charges — but why? We’d much rather let the charge go through and ratchet your interest rate up to 23.9%).” And there’s more good news! Want a cash advance? In addition to the modest 19.99% Household bank will charge you for this, a 3% “finance charge” will now immediately hit your account — minimum $15. So let’s say you’re tight for cash and you use your card to withdraw $300 and pay it all back in a month. That’s an immediate $15 (the minimum) — which works out to 5% — so you’re really getting to borrow $300 (or $285, depending on how you look at it) for 30 days at a cost of $15 plus $5 in interest — $20 in all. That works out to an annualized interest rate well over 70% a year. Granted, if you hang on to the $285 for a year, the effect of the $15 minimum is spread out. Now you’re paying more like 25% a year. But the main thing, to go back to the beginning, is: “As you know, from time to time we do something special for our best GM Cardmembers — and right now is one of those times.”