Reader Mail March 3, 2000January 28, 2017 Jack Ratcliff: “Reading your column on shorts, I felt as though you had interviewed ME! I really did experience most of the same frustrations as those you mentioned. I might add that I had some GUILT feelings that I was profiting from the pain inflicted on those who had bought the stock in good faith. Then too, I was helping to destroy, something that might otherwise create jobs and useful products. Anyway, I have learned my lesson the hard way and I thank you for helping me better understand the horrific odds of shorting — especially in a run-away Bull Market.” Well, I think a lot of us amateur short-sellers have felt the same thing. But I disagree about the guilt part of it, and disagree that by shorting a stock you were helping to destroy anything. I suppose if you colluded to (illegally) drive the price of a stock so low it could not sell more stock to finance its expansion, etc., you’d be destroying something, and have every reason to feel guilty. But ordinarily, short-sellers provide, if anything, liquidity and a little healthy balance to the market, supplying stock to eager buyers at less than they would otherwise have to pay for it. Dwight Weaver: “It seems strange to me that you approve of mandatory minimum wage increases, given my perception of your feelings about free markets.” It may have seemed equally strange that Henry Ford arranged to pay his workers enough so that they could afford to buy Model T’s. But the point is that, in addition to the issue of fairness — no small thing — there’s probably economic benefit from providing some reasonable distribution of incomes. Having 100 people with all the money and everyone else in poverty (to take an extreme) does not a healthy economy make. So unions, especially when they are run responsibly and with foresight (which they now often are and in years past often have not been), are good not just for the short-term wages of their workers, but for the health of the economy as a whole. And the minimum wage is — to me — almost like a bare bones union contract for our very least powerful workers. Especially in a society where we wind up helping the lowest-income folks anyway, with food stamps and the like, the minimum wage to a certain extent doesn’t cost us anything! To a certain extent, it just shifts the subsidy from a self-respect-deflating hand-out to an empowering paycheck. Clearly, it wouldn’t work to set the minimum wage at $30. (Or even $10.) And clearly, in a global economy, we should work equally hard at encouraging developing nations to institute, and then gradually raise, minimum wages of their own, even if they have to start at 10 cents an hour in some countries. This would be good for those economies, not bad, and ultimately good for the rich investors who own companies that could sell to those poor people, if only they had some money to spend. So, yes: I’m a big believer in relatively free markets. But not completely free, Ayn Rand-type markets. Dan Nachbar: “Although it is fun to characterize the HK telephone takeover as an ‘Internet’ thing [Three Signs], I think it’s misleading. This is a plain ‘old fashioned’ 80’s-style takeover where the assets of the target are used to fund the takeover. Although the security PCCW offered is ‘junk stock’ rather than ‘junk bonds’, the scheme is essentially the same. Sticking the word ‘internet’ in the story no doubt helped PCCW’s valuation, but it’s really a diversion. Another point to remember is that the ‘kid’ who is running this so called ‘start-up’ is, according to CNET, ‘the son of Hong Kong’s best known tycoon, Li Ka-shing’. So this isn’t some techno-geek running wild and hunting down a real company. It’s an experienced business family making yet another killing.” Fair enough. Andrew [a gay Republican who asks that his last name not be used — possibly because if a Republican wins, it may become a less friendly environment in which to be known to be gay]: “I read your column for your financial opinions and investment advice, not politics. Today’s article [John McCain] was pure politics, as you well know. In addition, I think that it was somewhat disingenuous of you not to state within the article that you are an official of the Democratic Party.” If I had thought about it (and truthfully, I don’t think I did), I think I would have just assumed most readers know this, as you do, because I do mention it from time to time. Also, I’m not sure that even consciously failing to disclose it is a conflict of interest (although I agree, readers should know where I’m coming from), because it’s an unpaid post and I get no bonus if we win — other than the bonus I think we would all get, with four more years of moderate, effective, progressive government. Some might snicker that of course I’ll get a bonus — an ambassadorship, perhaps, or Undersecretary of Something or Other. But in truth I can’t imagine anything worse. I’d like to be ambassador to Boston, or possibly LA, but any other post would be like exile. It astonishes me anyone wants these jobs. And as for Undersecretary of Something or Other, the only such post I might be remotely qualified for is Undersecretary of Auto Insurance Reform, and even if there were such a thing, it sure would pale in appeal beside sitting home in shorts and a polo shirt writing self-indulgent columns like this one.
And Still It’s Indiana March 2, 2000February 15, 2017 NO, NO, NO, NO One of the TurboTax help screens, I’m told, tells users that interest on Treasury securities and federal agency bonds are exempt from federal tax but subject to state and local income tax. FYI: This is exactly backwards. INDIANA AGAIN I’ve been suggesting that those saving for college consider Indiana’s QSTP (Qualified State Tuition Plan). This does not mean you have to go to Purdue. The plan is open to people from any state, and the funds you accrue can be used to pay tuition inany state. Indiana’s QSTP used to be pretty rotten, but they’ve fixed it. Now it seems to be pretty good. [And now, in January of 2002, it doesn’t seem so good anymore. Sorry. — A.T.] Russell Ackerman: “Forbes has an article about the State College Saving Plans. They seem to be a lot more critical of Indiana’s plan than you are.” I threw this one back to Less Antman, who has studied this subject in some detail and generously shared his findings. (Executive summary: Forbes goofed. Feel free to jump to the blue headline if you’re an executive.) Less responds: “The sensationalistic and attacking tone of the article is totally inappropriate in my mind. The comparison in the article is based entirely on the maximum expenses of all the funds, totally ignoring the major restrictions and inflexibility of the lowest cost states, rewarding states that offer no choices, and punishing a state like Indiana which offers alternatives. Their winner ‘by the numbers,’ Iowa, limits contributions to $2,054 per year, requires all funds to be distributed before the beneficiary reaches 30, and requires everyone to use a conservative LifeStrategy approach that will cost the average investor about 2% per year in returns, dwarfing the cost advantage. But Iowa did give Forbes his best election results, so I will chalk it up to gratitude. “At the time of my comparison, only Arizona, Indiana, and Utah allowed 100% equity choices (while also permitting less aggressive allocations). I deleted Arizona because it only offered actively-managed investments from an obscure fund company with a lousy track record charging high fees. That left Indiana and Utah. Either could be an excellent choice, but Utah has some restrictions that could be DEVASTATING in some cases: once the beneficiary enrolls in a qualified college (even before any money is withdrawn), ALL the money must then be spent on THAT child’s education. If there is money left in the Indiana account, on the other hand, it can be rolled with no problem to another family member (not just siblings, by the way). If I ever recommended Utah to someone and they later found out they couldn’t roll the funds to their younger children when their eldest ended up not needing all the money, I’d feel terrible. I’d feel even worse when they found out that Utah would then take 10% of their earnings as a penalty and that the remainder would be taxed on THEIR return at their top tax bracket. “This alone is reason enough to justify the higher Indiana fees, which AREN’T 1.4%, as Forbes implies, but 0.9% in an apples-to-apples comparison. Both Indiana and Utah offer an S&P 500 index fund (Utah offers nothing else). Utah’s maximum allowable fees are actually higher than those of Indiana — not lower — but they are currently charging less than the maximum. That’s great, but there is no guarantee how long it will last. For a $5,000 index fund account, Utah charges a total of $40.50 per year (reserving the right to charge up to $78) and Indiana charges $45 per year. For a $10,000 account, Utah charges $56 per year (reserving the right to charge up to $106) and Indiana $90 per year. I’ll pay the extra few dollars for the right to roll one child’s excess funds to other family members; for it’s minimal age restrictions; and for the ability to shelter an additional $25,000 on the off-chance the student might want to go on to grad school.” Thanks, Less. As before, visit the excellent savingforcollege.com for more information. It rates the plans of both Indiana and Utah — but not Iowa — among the very best. [See March 13, 2000 update: Indiana downgraded for poor customer service, administrative errors.] But should you bother with any QSTP? One of you asked why I — who always try to shave expenses to the bone — would recommend even the Indiana or Utah QSTPs. Why give up nearly 1% a year, or even more, rather than “do it yourself?” It is a fair question. If you just bought and held a few stocks that went up, there’d be no fees, and your growth would be deferred from tax until you eventually sold — at which time you would likely be subject to a light long-term capital gains tax. (Any dividends would be taxed at your ordinary income bracket along the way.) Advantages of a QSTP: You get wide diversification and the ability to shift among different funds sheltered from tax. (As college nears, especially if the market is high, you could begin shifting some of the money into bonds.) When the money is withdrawn for tuition, it’s withdrawn at the student’s presumably-lower tax rate — a rate that may well be lower even than your capital gains rate. Your dividends are sheltered and tax-shifted to a lower bracket right along with the appreciation. Many of the plans allow for easy periodic contributions, starting as low as $25. It’s an easy way to segregate your savings so the college nest egg is less likely accidentally to get spent on a boat.
The Short Story March 1, 2000February 15, 2017 Long-time readers will know that I recommended consideration of an obscure stock — Calton Homes, symbol CN — about 18 months ago. It subsequently rose from 60 cents to $2.75 or so (this doesn’t happen to me very often), whereupon I wrote that I had begun selling it. But it continued to rise and soon broke $5. That’s when I wrote that, in my view, the lunatics had taken over — day traders who buy something with no idea what it is. (Which was fine by me, because I still had a little left to sell, as I do even today.) Writes Gordon: “CN was fun buying at $1.00 and selling at $5.00. Buying, holding on, and later selling at a profit or loss is something I’m comfortable with. But what about shorting? Would CN at $5 be a stock to short?” No. Short selling is a very tough game to win: All your gains, no matter how long you hold the position, are taxed as short-term. So immediately your winnings, if any, are chopped in half if you are a high-income New Yorker, or by maybe 30% or 35% if you’re a more typical taxpayer. And on the off-chance the stock you shorted pays a dividend (e.g., Philip Morris), you have to pay the dividend, rather than receive it. (Think of short-selling as the anti-matter of finance. Everything is backwards.) A lot of people are working hard to see you fail. They are the management of the company, who really, really don’t want to see the stock crater. Often you will be right and it will crater. But sometimes they find a rabbit to pull out of the hat. Look at a company like CompUSA — CPU — that savvy investors, who had done their homework, were shorting at 6. Suddenly there is an announcement of a takeover by a large Mexican company, at 10. Ouch. (Four points may not seem like much, but it’s the same as a 60-dollar stock being taken over at 100.) Even when you’re right, you can get killed. Say CN is really worth only 2 or 3. Really. And say that, because of this column, you don’t short it at 5. But say that a week or two from now the lunatic day-traders run it up to 8, and now you can restrain yourself no longer (and you’re thrilled it has that much farther to fall) — and you short it. Now, there’s a slim possibility it’s not lunacy — that ultimately CN’s tiny Internet bets will be truly successful, making actual cash money profits (as was once necessary to sustain a going enterprise) — huge profits, even — and the stock at 8 will appear, with hindsight, to have been a bargain. But forget that. For the sake of this example, we have stipulated that in a year or two CN will be 2. Great to have shorted it at 8, no? Not necessarily. Picture it: You’ve shorted it at 8 and, because the market, especially these days, can often go nuts, it rises to 15. Now what do you do? You either take your loss or hang on — or short more. But I know you (because I know myself). You are beginning to feel very rotten about this, and beginning to realize that at 8 CN could fall, at most, to 0, making you a taxable profit of $800 on each 100 shares you shorted . . . but that at 15 it could, theoretically, rise to 1,000, losing you $99,200 on each 100 shares . . . and maybe they have some unlikely patent you didn’t imagine that could bring the world to its knees (you begin to think crazy, preposterous thoughts, in other words), and so you . . . well, what do you do? My guess is that you dig in and hold your ground, but probably don’t short more. And that when the stock gets back down to 8 or 9 you heave a sigh of relief and get out with a small loss. Unless, with the stock back down at 8 or 9, you realize that you were right and the stock really is worth bupkus, so — now that the nonsense has subsided a bit, and you feel that your instincts have been confirmed — you short some more at 9 (wishing you had done so at 15). After all, most professional short-sellers wiol tell you that the biggest mistake amateurs make is shorting too early (that has certainly been my story), and that you are far better off shorting after a stock has broken down. But now it goes back to 15 (it wasn’t supposed to do that!), except that now you’re short twice as much, and even if your broker doesn’t force you to cover your position at a loss (because the assets in your account are insufficient to meet the margin requirements for maintaining this short position), YOU’RE ACTUALLY HAVING TROUBLE SLEEPING. Which is nuts — life is too short to get all stressed out over this stuff — so you should cover it, but that’s even more nuts, because it will be $2 in a year or two, so why take a big loss instead of a nice profit? And around and around you go, tossing and turning, and now it hits 19¼ — in part because of all the short-covering (short-sellers forced by nerves or margin calls to buy CN to cover their positions) — and you cover half. And then when it gets back to 9 you cover the rest, or most of the rest, vowing to short it again when it gets back to 19, but it never does, it goes gradually to 2, just as you always knew it would. YOU WERE RIGHT! And it cost you $13,000. (Or whatever: I don’t know how many shares you shorted, in part because you were too embarrassed to tell anyone.) So is CN overpriced at 5? Probably. Do I think you should short it? Absolutely not. And the same holds true for hundreds of other overpriced stocks these days.