Still More Compound Interest (But it is, after all, the name of the game) May 14, 1999February 12, 2017 Friday morning update: The market is down a bit as I write this. Presumably, it will just bounce back quickly as it “always” does (always, if you’ve only been doing this a few years). But it’s interesting, if one is looking for “signs,” that the savviest firm on Wall Street, Goldman Sachs, recently sold shares in itself for the first time in its history. Also that Treasury Secretary Rubin is leaving — not because he expects trouble, but because, well, when things are this good, it’s a good time to get out. And that Jim Cramer’s thestreet.com was brought public at an absurd $400+million valuation — and promptly tripled. The casino is at full frenzy. One day there will be a hangover. Still, over the long run, a steady program of periodic investments in stocks should serve you well. (Usually best: no-load, low-expense, tax-efficient index funds.) Which, of course, brings me back to the power of compounding. Jarett D. Chaiken: “While I’ve enjoyed reading about compound interest several times in the last 2 weeks (playing with big numbers is admittedly fun), and your point is clearly to show the power of compound interest. I’m a little disappointed that you have not pointed out some of the obvious flaws in your calculations. “First, not once were the compound tax consequences mentioned. If you put $0.01 in the bank 1,000 years ago, and paid taxes on the dividends as you received them, what drag would that have on my return?” No drag at all in the U.S. from 1776 to 1913, when (if memory serves, and it may not) the first income tax was enacted. But as to the other 863 years, I am less certain. Then again, the kinds of interest rates we were using in our examples — 2% and 5% — were low enough that we might have considered them “after-tax” rates, even in years when there was an income tax. “Second, If I had put $0.01 in a bank 1000 years ago, it would be worth nothing today, since there are to my knowledge no investment vehicles that have been around that long (or governments for that matter) so when is the right time to remove my money from a failing bank?” Ah, there’s the rub. But as optimists, going forward, might we hope there could be institutions and economies that do not fail? Might we, as a species, be getting better at this game of civilization and commerce? Maybe, maybe not. Of course, few if any of us will live for 1,000 years. (Even that, I think, may one day be possible, if not in quite the corporeal form we live today.) So this hypothetical millennial compounding is almost as silly looking forward as it is looking back. But as Jarett says, it’s fun. “Third, and maybe most importantly, if I had put some amount of money into a bank 1000 years ago, that has been paying some rate that would make my investment worth $1 trillion, how could the bank afford to pay me my interest? Finding places to put $1 trillion so that the bank can earn any money would be near impossible, and probably bankrupt the bank; and what happens when I go to withdraw this money and suddenly there is an additional trillion dollars entering the economy, what would that do to the CPI?” Well, that’s third and maybe least important. The thought being that if people 1,000 years ago had invested for the future . . . and if countries and economies had arranged themselves in such a way as to make that investment productive, and managed better to avert war and withstand disasters like the plague . . . then the whole world might be vastly more wealthy and prosperous today, with trillionaires as common as billionaires. Imagine the difference between a country like America, that has managed to attract and respect capital — financial (e.g., venture capital), infrastructural (e.g., our Interstate Highway system), and intellectual (e.g., our superb system of higher education, the hundreds of billions in accumulated R&D) — and, say, Uganda or Bangladesh. The American, capitalist model, with great good luck, might actually just keep growing for centuries. It’s possible. In Uganda or Bangladesh, until things change, you could wait 1,000 years and still be at subsistence. In those instances where people have invested for the long-term, the results have indeed been good. The most famous is Ben Franklin. At his death he left a thousand pounds each to the cities of Boston and Philadelphia. The money was to be reinvested for a century — with spectacular results I have written of elsewhere (the specifics of which I do not have handy here at 37,000 feet, let alone in my near 1,000-year-old brain). “I believe that compound interest is very powerful, and putting away money sooner is definitely better than doing it later, but using 1000 years as a reference seems to me to be very unrealistic. Better to show the (much more modest) power of what $1000 can do over 100 years in a Roth IRA starting today so your great-grandchildren (whom you might actually meet) can enjoy your success, than to fantasize about what one of your ancestors living in Rome 1000 years ago did with his winnings at the Coliseum.” I’ll buy that. Well, said. Coming soon: Chapter 9
More Stupid Mail Tricks May 13, 1999February 12, 2017 Last month I wrote about what David Letterman might call “stupid mail tricks” — except they’re not stupid at all from the vendor’s point of view. They work. So here’s another one, for your amusement, courtesy of my pal Alan Light in Iowa City. Alan writes that he got his Mileage Plus First Card Visa bill in the mail and that it included a “complimentary” offer “thanking” him for being a cardholder. Imagine that — free phone calls, just as a perk of membership. What a great loyalty builder! According to the payment envelope: YOUR COMPLIMENTARY PHONE CARDS ARE HERE! It’s our way of thanking you for Being a FirstCard cardholder. Each Phone Card provides 20 minutes of long distance calling anywhere in the U. S. A. …. …For activation, handling and shipping, $3.95 per card will automatically be billed to your First Card credit card account. Amazingly, there is no limit to the number of $3.95 complimentary cards you can ask for. So I advised Alan to ask for 100 of them — 2000 minutes of long distance FREE! (and just $395 in handling and shipping). It works out to just 20 cents a minute, or not much more than Alan pays now.
Reader Mail: Bees, Mary Poppins, etc. . . May 12, 1999February 12, 2017 THE REAL MORAL OF MARY POPPINS “I think it might be a mistake to quote Mary Poppins in *support* of the wisdom of investing and compounding. If you recall the context of that song, it was the nasty and greedy old men at the bank who joined Michael’s not-yet-enlightened father in singing that song. They then proceeded to try to steal a young child’s hard earned tuppence, even though he, with the wisdom of youth, knew that his money would be better used feeding the hungry birds, while also supporting a woman-owned small business. So, although I am as big a fan of compounding as the next person, I think the real message of that episode in Mary Poppins is not that we should always invest our tuppence, but rather that money is merely a tool, not an end in itself. Sometimes it’s more productive to spend it or even give it away.” — Marissa Hendrickson CLINT ON CLINT “Your friend Clint must have been stung by a bee at some point in his past, otherwise he never would have become sensitized to them. In order to become allergic to something, the body must have been exposed to the substance in the past, and developed an immune response to it. Therefore, the latest bee sting could not have been his first.” — Clint Chaplin THE BEES THINK IT’S RAINING Thanks to David D’Antonio for sending me the May 10 Associated Press story about a flatbed tractor trailer carrying 400 bee hives — about 20 million bees — that overturned in Falmouth, Maine. “There was one big swarm of bees over the truck, like a big black cloud,” said Falmouth Patrolman Edward Roberge. The road was shut for eight hours, as a huge swarm of bees buzzed around the truck. Firefighters were called to the scene, a handful of whom were stung but not seriously injured, and “sprayed the dumped hives with water to calm the bees as they loaded the hives onto another truck in the late afternoon,” reported AP. “‘The bees think it’s raining and they won’t leave the hives,’ Falmouth Fire Chief James Robertson said.” CAN THIS BE TRUE? “If bees are flying in a closed jar, this does not make the jar (with them) any lighter compared to if they were sitting in the jar. You can reprint this if you like, but without attributing to me.” THEY MAY BE ANIMATIONS, BUT THEY CAN COMPUTE COMPOUND INTEREST “Another example of the power of compound interest was on the new Futurama show last week (by the maker of The Simpsons). A guy is frozen and wakes up 1000 years into the future. He goes to the bank to see how much he has. ‘Just 93 cents,’ the teller tells him, as his face falls. She continues. ‘Let’s see, at 2.25% interest that brings your total to $4,283,508,449.71.’ I thought for sure they just made that number up and didn’t have any connection with reality. But at the next commercial I went and brought up MYM and did the calculation. And sure enough, they had it exactly.” — Peter Kronenberg Most of what I know about life I learned from The Simpsons. I can’t wait to watch Futurama. RICHER THAN WE THINK “One thing your writer didn’t take into consideration today (in debunking the idea that $1 invested two millennia ago would have resulted in $230 million for every man, woman and child alive today) is that we all have tremendous practical wealth in those things we own and use commonly. For example, if we were going to build the entire road system in the U.S. tomorrow, what would that cost each person? If we add the entire phone and electrical infrastructure, what would that cost? If we had to pay for the raw research and experience that are now available free in our libraries or low-cost through books, what would that add? What about the years of cultural and social progress invested in having clean water come out of my tap? That I have a life expectancy that is more than twice that of my early ancestors in spite of pollution? What is the cost savings in man hours that I can drive to work instead of walking? My net worth in dollar terms is modestly negative, but I’m amazingly wealthy compared to an average Joe in 3 B.C. Maybe to the tune of $230 million dollars richer… whatever that would mean.” — Anne Speck A negative net worth but a positive attitude. And it’s true. Though $230 million may be stretching it, most of us live better in many ways than the princes of Egypt.
Reader Mail: IRAs, MYM and More May 11, 1999February 12, 2017 RISKY STOCKS IN AN IRA “I agree with your general principle about not putting risky stocks in your IRA, but I did want to point out if one had a Roth IRA (which I do) that the proceeds will never be taxed (that is if Congress does not change the law in the future to raise revenues….I know that is a big if).” — John Bogen True. But risky stocks are risky. Many crash and burn. Inside the Roth IRA, you get no tax benefit from the losses. They just sap your precious capital. GIFT CERTIFICATES “In California it is illegal for gift certificates have expiring dates.” — Lorraine Baldwin IS “BUYING IN BULK” BETTER FOR EVERYBODY? “A walk through the supermarket will reveal many cases where larger containers cost more per unit than the smaller. Got to watch those guys every minute.” — Orval Fair enough. UPDATING YOUR MYM PORTFOLIO PRICES “I’ve developed a utility to convert various downloaded stock price quote data formats to the Managing Your Money [DOS V12] format. This utility will enable MYM users to download stock price quotes from the various online sources (Yahoo, Lycos, Quicken, MS Investor, AltaVista, Excite, etc, etc.) and pull that pricing information in to MYM. As you probably remember, for years many MYM users downloaded stock price information from Prodigy’s QuoteTrack. Well, Prodigy Classic and QuoteTrack are going away at some point in the not so distant future. When my father, a diehard MYM user, expressed his dismay at this loss of functionality and his lack of desire to switch to another personal finance program, I took a look at the problem and developed ConvertTrack. I now have a web site for ConvertTrack where folks can download a full featured demo copy of ConvertTrack and test drive it for 30 days.” — Roy Berger Tomorrow: Bees, Mary Poppins, etc. . .
The Bees’ Knees May 10, 1999February 12, 2017 My good friend Clint is the man to call if your sewer is backed up (he’s one of Mr. Rooter’s most promising franchisees) . . . he built me an outdoor shower once as a house gift (others bring Zabar’s coffee or salmon, for which Charles and I are very grateful; Clint brought pipe and a soldering gun) . . . and, I now discover, he likes bees. His apiary philosophy has always been: I don’t bother them and they don’t bother me. Plus, he and his friend eat a lot of honey. So last year he called and ordered 4 hives. Bee hives — unless this whole thing was an elaborate put-on — are quite inexpensive and are delivered by mail. Mail order bee hives. (“The Post Office calls real quick when your package arrives,” Clint tells me.) Each hive costs only about $50, if I remember this properly, and contains around 20,000 bees. One of which — the Queen — is in her own separate little compartment. Properly tended, each hive will ultimately house 80,000 bees. “What happens to the bees when they die? Where do they go?” I asked Clint. “The other bees throw them out of the hive.” OK. “And the honey?” Far from dripping down to some clever collecting pan, as I had expected (isn’t gravity what moves maple syrup to market? And isn’t maple syrup right next to honey in the food chain?), the bees apparently put it upstairs, above their living quarters. “How do they know to do this?” I asked. They just do, apparently. And this year Clint expects to get about 100 pounds (jars?) of honey from his four hives. “They sell them by mail?” I asked again, not quite ready to let this go. Not only that, you have a choice of buying them in either the one-pound or the two-pound size. (This is exclusive of the weight of the apparatus they come in — it’s just the bees.) Even the unflappable Clint had apparently asked, bemused, when he ordered them: “How do you weigh bees?” After all, aren’t they airborne much of the time? Do you whistle real loud to get their attention and then say, “Now everybody, just SIT DOWN for ONE SECOND!”? Clint says the woman he was ordering from did not find the question amusing and just ignored it. And now you are wondering — and I am going to dispel that wonder — what you do when it’s time to separate the honey from the bees. Basically, in this case, you call the same man you’d call for any other tough, potentially unpleasant job: Mr. Rooter. Clint and his friend don the stuff you see in the movies — though Clint doesn’t worry about doing it too carefully (“I don’t bother them and they don’t bother me”) — and they do that maneuver we’ve all seen on the Disney Channel. Themselves. And this last time — with 80,000 bees buzzing around him until the bell sounds to signal the end of the fire drill and it’s OK for the bees to go back into the building — a bee actually stung Clint for the first time in his life. No big deal, he said. (This is a man who rides his bike 20 miles to a yoga class. A little bee sting is not something to get all excited about.) Except that he began to feel funny and swell up and his doctor said to get to the Emergency Room right away and he now has to carry one of those “bee pens” with him wherever he goes, to inject himself in case of emergency, because it turns out Clint is allergic to bee stings. Does this mean he and his friend will be auctioning off the hives on E-Bay? (And would that make them e-bees?) Will he revert to buying his honey at the Safeway like everyone else? Hardly. Clint remains yoga-calm in his apiary philosophy. And I think the bees — with the obviously exception of that one socially maladjusted terrorist worker bee — sense it. He doesn’t bother them, and they don’t bother him. As soon as I get off this airplane (I’m writing this on a computer at 37,000 feet, which is almost as amazing as the way bees make honey), I am naturally going to the Internet to find bee-hive mail order sites. I am not suggesting any of you — let alone I — go out and order bees. (I’d like to hear what the condo association would have to say about that.) I just marvel that there is a whole world out there beyond the pavement. And someone who actually knows how to unclog sewers. And what a phlange is. (I could look that last one up, but I like to retain the mystery. Spell check tells me it’s actually spelled “flange.”)
Fire & Ice and My New Luggage May 7, 1999February 12, 2017 Craig Daniger: “Hurry up with the next chapters!” Thanks, Craig. Glad you’re enjoying it. OK — Here’s Chapter 8. (You already have Chapters 1, 2, 3, 4, 5, 6 and 7.) This is the chapter about the nuts and bolts of the cosmetics business, circa the 50s and 60s. For example: “Note the dynamics of ‘economy sizes.’ In 1962 you could buy three times as much Revlon Velvety Nail Enamel Remover for sixty cents as you could for thirty-five cents. But you weren’t hurting Revlon; the extra two ounces, including the larger package, cost a mere 3.3 cents. The markup on the extra two ounces was even greater than on the first ounce.” Buy in bulk. It’s better for everybody. Speaking of which: Last month I went to the Sharper Image web site and saw they had auctions. I put in to buy the super deluxe roll-on airplane suitcases they sell for $289 or more. The bidding was up to $90 with several days to go, so I bid $130 — for 3 of them — never expecting to get even one. Got all three for $100 each. I now glide effortlessly through the airport and have half my Christmas shopping done.
Millions & Billions May 6, 1999January 29, 2017 In my April 30 column I said that if Bill Gates had invested merely one-millionth of a penny at 5% a thousand years ago, he’d have had $15 billion today. Of course, he has a lot more than $15 billion, but that is not the point. The point is: Could that possibly be correct? Could I possibly have calculated that right? Sheepishly: no. Thanks to John Ebert for pointing this out. “I think you meant ONE-BILLIONTH of a penny,” John writes. And indeed he is right. I was not overestimating the power or compound interest but, rather, underestimating it — a thousand-fold. Had Bill invested the millionth-of-a-penny at 5% as I posited, he’d have $15 trillion today, which actually is more than he has — indeed, it is actually about double America’s gross domestic product. It all comes back to Mary Poppins, doesn’t it? (“When you invest . . . your . . . tuppence in the bank . . . safe . . . and . . . sound . . . Soon that tuppence . . . safely . . . invested in the bank . . . will comPOUND!”) HOW CAN YOU LEAVE THE TV ON WHEN YOU’RE NOT WATCHING IT AND WASTE PENNIES OF ELECTRICITY THAT COULD BE WORTH BILLIONS TO YOUR GREAT-GREAT-GREAT-GREAT GRANDCHILDREN? (In case you missed it, this all pretty well ties into yesterday’s column.)
Are You Really Worth $230 Million? And if not . . . . . . are your investment expectations unrealistic? May 5, 1999January 29, 2017 Larry Jensen: “Your April 30 column played with the long-term power of compounding. I have another example that might temper this ‘astounding’ power: “Suppose, while the three wise men were travelling to Bethlehem, a fourth wise man stayed home and deposited the equivalent of just one dollar in a trust fund for humanity. Suppose the trust fund earned a very modest return of 2.16%. (I’m choosing this rate for convenience. Using the Rule of 72 — or some more complicated math with exponentials — 2.16% will double your money every 33.3 years, or three doublings per century.) After two millennia, that dollar would have doubled 60 times, to the mind-boggling total of 1.15 billion billion dollars, or about $230 million for every man, woman, and child on the planet!” [My own calculations show that the Rule of 72 is not completely precise, and that, over 2000 years, small discrepancies can magnify. It actually comes to 3.6 “billion billion” dollars, and change.] “But it’s reality-check time. While I don’t know of a source that lists the net worth of the planet, it’s reasonable to guess that it’s not nearly $230 million [let alone $600 million] per person. That clearly implies that one dollar has NOT been able to remain invested, compounding at even this tiny rate of return, for the last 2,000 years. Consumption, inflation, depreciation, wars and disasters — what a physicist would simply call entropy — are processes that have been more than able to dampen the powers of compounding over the centuries. “Something to remember when Wall Street implies that everyone will be able to retire a millionaire by investing just a few dollars each week.” Larry believes that to have a comfortable, secure retirement, it will be necessary to save and invest more than a few dollars. “As a late Boomer,” he concludes, “I remain concerned that the great bull market of the Eighties and Nineties will turn into an equally long bear market, when money starts flowing out of private retirement accounts at the same time that Washington is called upon to redeem, out of current receipts, all of the IOU’s that are piling up in the Social Security trust fund. I also worry that the philosophy of ‘soak the rich’ will find ample opportunities to penalize me for my thrift.” These are reasonable worries. Our hopes for avoiding that equally long bear market are: continued peace (well, relative peace) combined with continued astonishing technological advance spreading increasing productivity and prosperity throughout the globe (free trade and market economics being imperatives if this is to happen) — and, ultimately, 500 million middle-class Chinese and Indian 40-year-olds, mere teenagers today, who will by then be eager to buy our shares of Coca Cola and Gillette in hope of financing their retirements. It’s also worth pointing out that the pace of productivity growth in the first 1500 of the 2000 years Larry has chosen to look at was essentially nil. And what wealth there was accumulated went mainly into building churches and forts and stuff, not labor-saving machines or research and development. (Well, a lot of R&D in the alchemy department, but this proved to be a long, unproductive dead-end.) But you start adding the printing press and the steam engine and electricity and microchips and suddenly you’re in a whole new ball game. Can investors reasonably expect 15% or 20% a year? (Or, as of late, 10% a month?) No way. Need they expect a reversion to some 2% Dark Ages mean? Not that either. (But might the market at some point drop 50%? Sure. It always used to. And rarely has it been as robustly priced as it is today.)
The Market Scale May 4, 1999March 25, 2012 Have you checked the Dell market scale lately? As of yesterday morning, Dell outweighed the total market cap of Apple Computer, Sony, Kodak, Wrigley, Toys R Us, FedEx, and Homestake Mining . . . combined. That’s all I have to say this morning. A picture (let alone a blinking, moving picture and our silent “thunk!”) is worth 1,000 words.
Quickbrowse Even Better! May 3, 1999February 12, 2017 Imagine if the music stopped every 30 seconds as you listened to your car radio and, to get the next 30 seconds, you had to reach down to punch a button on the radio console. And then wait 10 seconds. And then again, and again, and again. Forget that! Yet isn’t that sort of what you have to do now if you’re searching with one of the 411 “white pages” directories on the web? I use the one on AOL. And it’s terrific. Except that it only gives me 5 names at a time! That’s fine if I’m searching for Anton Shevarnadze in Iowa City. But what if I’m searching for Michael Smith (or Mike Smith or M Smith) — in New York? Do you know how frustrating it is to have to click “next” after each five, and then finger-strum? (You’re supposed to be reading all the ads, which is why they make it so slow, while you wait for the next five.) And then again for the next five? And the next? My friend Marc has fixed all this. (It was actually his dog Looe’s idea.) Last month I directed your attention to a new site I have a stake in called Quickbrowse. It’s still in a sort of beta phase, and if you all try it out at exactly the same time this morning it will slow to molasses. (We will shortly upgrade our server.) But BOY has it come a long way in a month. It’s now three things (soon to be four): Quickbrowse – for surfing Q-Search – for searching Q-People – for finding Michael Smith in New York Basically, all it really is is a simple tool for building one long — sometimes very long — web page that you can look at all at once without interruption. The only sensible way to find Michael Smith in New York from now on (whether with the AOL people finder or any of several others) is by using Q-People as your portal to people-finders. The only sensible way to search for information on Yahoo and Altavista and Lycos and the rest — unless you actually like being interrupted after every 20 “matches” — is by using Q-Search as your portal to seach engines. And if you like to see the same set of web pages every morning — Dilbert and the sports page from your local newspaper and the Wall Street Journal and, dare I even dream it, this column — the only sensible way to do it is by using Quickbrowse as your portal. (There’s actually a lot more to Quickbrowse, as my April 6 column tried to explain. You can set it up to email you various “collections” of web pages at specific times each day or week. You can have it send you the special weekend airline deals a minute after they’re posted. You can turn “images off” for faster browsing. And there’s an “Alt-Tab” trick — Ctrl-F6 with AOL — that’s a total snap to use and makes reading on-line newspapers far more efficient.) We have an interesting corporate structure with Quickbrowse. Looe basically calls the shots and sets the broad strategy. But, being a dog (and of indeterminate lineage), he does not write clean code. Marc does that. David feeds Looe (and cheers on Marc). I feed Marc and David (until we figure out the revenue model, which is presumably to lose an ever-increasing amount of money and watch our stock soar off into the stratosphere). In the last column I suggested that, given our dim prospects for profits any time soon, we would be willing to sell 1% for $1 million. This was a joke. Three of you, undeterred, inquired about smaller shares. But we are having fun building this, and encourage you to use it and provide your feedback — to Looe (just click beneath his photo), not me.