Year: 2000

David Codelli: “I have been a long-term, enthusiastic investor in T. Rowe Price Science and Technology fund. Since your mutual fund calculator pretty much deflated that enthusiasm for me, I have been looking into alternatives. I have stumbled on a new theory. Since, (1) most technology funds buy the big players (Cisco, Sun, AOL …) anyway; and (2) those companies often buy small high tech startups on their own (i.e. to some extent they are mutual funds themselves); and (3) with stocks, I have less expenses and taxes to worry about than with funds . . . don’t you think for some investors (long term focus, only about 15% invested in technology), it makes sense to replace the managed fund with three or so such companies? I’m thinking Sun, IBM, Cisco. I got this idea by graphing the performance of these stocks against the performance of the funds.”

Yes. (And I would throw Microsoft into that mix if I were you, too.) I am no expert on tech stocks, but I certainly don’t think 15% is too high a weighting. And by setting up your own “Personal Fund” for these stocks, as we call it, you will, as you note, have a big advantage over the mutual funds dragged down by expenses — as well as the advantage of controlling your own tax consequences.

What you do miss with this strategy is the potential for huge gains if you catch just the right small tech stock. But that’s true with a fund, also, because although the fund may well own it, its impact will be diluted by all the other stocks the fund owns.

Tomorrow: What Every Bartender Should Know about Magic

Doug Gary: “I just learned that anyone willing to park $10,000 at DLJDirect for six months (competitive money market rates available, no trades required) by opening up a new account will be given a “free” Handspring Visor — valued at about $180. That’s quite a return! Being in love with my Palm, I signed up to get my partner a Visor. The link is: www.dljdirect.com/handspring.htm?OITSCH21K. The deal ends on July 15th. Full disclosure: no position in DLJ, but a happy brand new customer — at least for six months.”

Leaving aside the issue of being in love with one’s Palm, if you keep money in a money market account anyway — why not? Every extra $180 helps.

David D’Antonio: “In your Copyrights and Copenhagen III column, you reprint the ‘Hell’ joke wherein the student ‘proves’ that Hell is heating up (because he hasn’t (yet?) slept with Ms. Banyan so it couldn’t have frozen over). But this is not true! As you may recall, when the band the Eagles broke up, Don Henley (I think) said they wouldn’t get back together until Hell had frozen over. Yet they not only did get back together, they released an album by that name — Hell Freezes Over — signifying the event! Also, if I recall correctly, Dante’s Ninth Circle of Hell was, in fact, a frozen lake. Embedded in the ice were those servants who betrayed the trust of their masters, which Dante obviously felt was the most grevious sin, since it was the lowest Circle.”

Russell Turpin: “Re” Where Do Maine Lobsters Come From? . . .One enterprising Maine ISP set up a digicam inside a lobster trap. You can go to this webpage, and watch your (or someone’s) future dinner when it first takes its fatal turn. Seemingly, some lobsters are caught in Maine. Maybe those are the ones that get shipped to Texas?”

Tom Sasek: “I have a friend who has a large amount of excess cash (around $75,000) sitting in his checking account. He realizes the need to invest the money. However, he is concerned that a money manager or investment firm will charge excessive fees. Also, he does not have a lot of free time or expertise, so he cannot do anything complicated on his own. What is the best way to invest this money safely, without paying hefty fees?”

There is no rush, Tom. To have money in a bank earning interest when the market is falling 20% is not a bad thing. Think how much your friend “made,” relative to his friends and neighbors, by not being in dot-coms.

Your friend should transfer the money into one of those accounts at his bank that pays interest and allows him to write three checks a month. Then he should take a weekend to read my investment guide (borrowed from the library, to keep this from being a shameless plug) and maybe do something slightly more sophisticated with some or all of it. E.g., committing a portion of it to two or three index funds — in regular monthly installments over a couple of years, not all at once. And/or putting some of the money into the Series I US Savings Bonds I’ve been writing about.

Your question set three parameters: low fees, simplicity and safety. I totally agree with the first two. Simple is often cheapest and best. Keeping fees, taxes and transaction costs to a minimum puts you way ahead of the crowd. (For more on this, mutual fund owners should click here to see what a difference costs make.)

The third parameter — safety — can make sense also, but should not be accepted blindly. Safety sounds as if it’s always a good thing; but over the long run, the safest investments are likely to grow only very modestly compared to those that entail more risk. The long run could be very long, and taking risk by no means guarantees a high return — far from it. But choosing safety exposes you to a different risk: that you will wind up with less than you need.

1. Tell Me: 1-800-555-TELL (8355). Try it! Free weather, sports, stock quotes, traffic reports in some places — and more. I don’t use it often, but it can come in very handy. Say you you have no quarter for the pay phone and you left your Nokia at home. Just call TELL ME, toll free, say “PHONE BOOTH,” and make your free call.)

2. QB-Search. There are several good search engines I use — Google.com is often the one I find most useful — but why ever bother going from one to the next to the next. I always start at QB-Search and get the 1st page of hits from all the search engines, on one page. (I could get the first 2 or 20 pages from each, but never seem to need more than those first hits.) QB-Search is part of Quickbrowse.com (www.QB.com) and I own part of it. Every time you use it free, I get 50 cents, half of which I pay in taxes and the other half of which goes to the Democratic Party. Be warned.

OK, I’m kidding about that last part. I only get 30 cents. But why would anyone go to Altavista or Yahoo or Googol or any of the others, when you can just as easily go to all of them at once? Bookmark it, Danno.

3. This link, courtesy of Mike Brown, helps you make rational decisions when you’re a contestant on “Who Wants to be a Millionaire.”

Mark Bell: “Your tangential forays into the world of anything and everything are amusing, albeit unfocused. But could we swing back to a financial question for a moment? Retirement age is coming up faster every day. The jury is still out on whether I’ll pass the means test. So let’s talk money. In the spirit of diversification, how would you rate TIPS and I-Bonds as investments within a Roth IRA? I got the stocks, the bonds, 401K, the rental real estate, etc. but a few ‘secure’ things that pay reasonably well seem attractive. What do you think?”

Tangential forays? Whatever could you mean?

But just before answering your good question, here, courtesy of Dana Dlott, are the results of a contest for Great New Theories, sponsored by Omni magazine.

Omni’s Honorable mention: The quantity of consonants in the English language is conserved. If omitted in one place, they turn up somewhere else. When a Bostonian “pahks” his “cah” the r’s migrate southwest, causing Texans to “warsh” their cars and invest in “erl wells”.

4. Deforestation will cause the days to become shorter. Just as a twirling skater spins faster when she pulls her arms in, chopping down a lot of tall trees will make the Earth spin faster.

3. China is technologically backward because they have no alphabet. Therefore they cannot use acronyms to communicate ideas at a faster rate.

2. Why yawning is contagious: You yawn to equalize the pressure on your eardrums. This pressure change outside your eardrums unbalances other people’s ear pressures, so they must yawn to even it out.

1. If an infinite number of rednecks riding in an infinite number of pickup trucks fire an infinite number of shotgun rounds at an infinite number of highway signs, they will eventually produce all the world’s great literary works, in Braille.

Grand Prize: When a cat is dropped, it always lands on its feet. And when toast is dropped, it always lands buttered side down. I propose to strap buttered toast to the back of a cat; the two will hover, spinning inches above the ground. With a giant buttered cat array, a high-speed monorail could easily link New York with Chicago.

Now. “In the spirit of diversification, how would I rate TIPS and I-Bonds as investments within a Roth IRA?”

Highly. Go with the TIPS. TIPS are U.S. Treasury “inflation-protected securities.” They are completely safe and will grow about 4% faster than inflation. They make great sense inside a Roth IRA. (Outside an IRA, they’re rotten. Not only is the interest taxed each year, as you’d expect, so it the inflation adjustment — even though you don’t receive it until you sell the bonds.)

Yes, stocks might well outperform TIPS over the long run (although my own guess is that the next decade will disappoint investors who’ve been spoiled by the amazing 18-year bull run). But stocks already have very favorable tax treatment, so if you own both — stocks and TIPS — why waste the wonderful tax advantages of the Roth IRA on stocks? You should hold stocks outside the Roth IRA.

• If a stock you own does well, your gain won’t be taxed until you sell; and at a favorable rate when you do. (If you wind up leaving the stock to an heir, under current law the gain will never be subject to capital gains tax.)

• If a stock you own does poorly, you can sell it and buy a different one, using your loss to lower your current taxes. You can’t do that with a losing stock inside an IRA.

I-Bonds are swell, too — and, if you’re looking for inflation-protected Treasury obligations, the only way to go outside of an IRA. But if it’s even possible to buy them for an IRA, I see no advantage to using them instead of TIPS.

Wednesday: Should you buy TIPS and I-Bonds for your IRA?

But today, a more pressing question: Where do Maine lobsters come from?

A lot of them, as it turns out, come from . . . Long Island Sound. That’s right. You folks from Massapequa Park who drive all the way up to the great state of Maine for, among other things, that great authentic lobster are, in many cases, eating lobster that’s been trucked up the Interstate right alongside you.

And I have news for you: French fries aren’t from France, either.

But we should cut the French some slack. Their Eiffel Tower Millennial display was the best in the world — vive la France!

And back in our earliest days, the French came to our aid in the struggle against King George — a struggle that ultimately changed the world.

IN CONGRESS, July 4, 1776.

The unanimous Declaration of the thirteen united States of America,

When in the Course of human events, it becomes necessary for one people to dissolve the political bands which have connected them with another, and to assume among the powers of the earth, the separate and equal station to which the Laws of Nature and of Nature’s God entitle them, a decent respect to the opinions of mankind requires that they should declare the causes which impel them to the separation.

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness . . . .

Happy 4th. And a deep bow to our founders.

Ross Moorman: “I first came to know you when the chairman of my department (University Hospital, Jacksonville, FL) greeted us on the first day of my residency. He did NOT offer great words of wisdom about the treatment of diabetic ketoacidosis or how to tell whether chest pain was a heart attack or last night’s burritos. He actually showed us a copy of your investment guide and proceeded to tell us that we had to read it during our three years of training. I did, and have recommended it to others.

“Since those formative years, I have read many other investment books as well. I’ve used Ameritrade and Brown and Sharebuilder, and even looked at Folio(fn), which deserves serious attention as soon as they offer margin accounts. I’ve read Business Week and Forbes and watched CNBC ’til the early hours.

“The question that I pose to you is as follows: After all the study, and hype, and personalities, shouldn’t we all just invest $500 every month in Spiders, and be done with it? Is it so simple? Is that why you spend your considerable talents talking about plates nailed to the dining room table? Should we be spending our time trying to do what we do even better, and investing the difference in Spiders, or even ‘Wilshies’ (my dreamed of depository receipt that mirrors the ENTIRE U.S. stock market–or even the ‘Totally Universal Wilshires’ that mirror the stock market of the entire world in one easily managed share)?

“Is it that simple?”

Yes. Largely. Except that if you’re a doctor, you should be putting away $600 a month, not $500. And whoever you are, you shouldn’t be doing it on margin.

Of course, if “everyone” indexed, indexing wouldn’t be so smart. Terrible companies and great companies would all be accorded equal enthusiasm, which would soon make the terrible ones grossly overpriced and the good ones, bargains. But everyone will not index. So for most people, indexing (with that portion of one’s funds dedicated to stocks) is a wise choice. Attempting to do better, most people — because of transaction costs and taxes — will do worse. There’s the entertainment value, the challenge, the dream . . . what if my little speculation went through the roof! . . . and there’s the feeling of connectedness to the world around you . . . I own Cisco! I own Home Depot! (well, I don’t but if I did). But from a cold money point of view, a doctor would be better off in Spiders than in an actively managed portfolio, studying medical charts rather than stock charts. Maybe that’s what the chairman of Ross’s department had in mind.

David Letterman on why Senate candidate Rick Lazio failed to march in New York’s Gay Pride parade: He didn’t know what to wear — and he was feeling fat.

Monday: Where do Maine lobsters come from?

First, reaction to the Geodesic Oversight Dome (wherein satellites can read lips, as in, “Please G.O.D., help me — I’m drifting out to sea”):

Bill Coppedge: ” I hope it’s not a cloudy day!”

Dana Dlott: “You can’t beat the laws of physics. The ability of a space telescope to resolve features is proportional to the size of the mirror. Super spy satellites look like the Hubble Space Telescope pointed down instead of up. The mirror is 8 feet in diameter. That is about all that can fit in the Shuttle cargo bay. From 150 miles up, this mirror can (under perfect atmospheric conditions) resolve something like 6 cm, which might or might not be barely enough to read a license plate on a perfect day when it was pointed upward. (Maybe this works if the license plate is “1” or “x”). To read lips, you would need resolution of 1mm I would guess. That means the mirror has to be 500 ft across. When they start building space shuttles 500 feet across it’s time to worry. You might be able to have a smaller shuttle and assemble the mirror in space, maybe. It would be so big everybody could look up and see it even in the day.”

I can live with that. I’m more worried about the clouds.

Mike Duffy: “Too much Jack Daniels on the Cheerios this morning?”

And now a word from Dorothy Mallonee, who bought Amazon when I told her not to and watched it climb tenfold. (Not for nothing is this column free.) Did she still own it, I wondered?

“Yep, still own 800 shares of AMZN. I’ve ridden it down from the high at the first of the year. Will I sell it? Well, um, er, uh, yeah, sometime.

“This experience has helped convince me that my new full-service broker may be right: He’s pitching professional money management to me, and giving me what sounds like a pretty good deal on the fees, about 2% annually, inclusive of brokerage fees. The two organizations we’re leaning towards: Roxbury in Santa Monica, CA, with a Large Cap Growth philosophy, and Davis in NY with a Large Cap Value philosophy. Neither has a high churn rate, both are well-established. I’ve visited both in person. How ’bout a column on professional money managers? My wire house, Prudential Securities, has arrangements with a number of them by which a client can get in for $100k — much, much less than the normal minimum investment these organizations require of their private clients.

“AMZN, hey, it’s worth $100+/share, right, cuz it once traded at that price? I know, I shouldn’t be allowed out of the house unsupervised, but AMZN has been a ton of fun, and I’ve always regarded it as a pure speculation, as you will recall! Even if I end up having to dump it at the behest of Roxbury or Davis, my cash basis is about $11/share and, because of my husband’s death, my basis for capital gains tax is about $55/share.”

Wait, Dorothy! In a world where one might reasonably expect 5% or 6% a year after tax (I don’t think the next 18 years are going to be like the last 18), a 2% hit — especially as it may not be deductible — is just a terrible handicap.

And heck, you tripled your money with Amazon. You think a pro can do better than that?

Over the long run, most pros will do about as well as the market as a whole, less their (in this case huge) fees.

Why not sell at least some of your Amazon here for a tax loss? (When Dorothy’s husband passed away, she was able to boost the basis of all the stocks she inherited to the value as of his death. So even though she’s tripled her money in AMZN, she’d actually get to declare a loss if she sold.) If AMZN goes way down — it’s still valued at three times American Airlines — you can be glad you sold some. If it goes way up, you’ll have tripled your money on some of it (with a tax-loss, no less), and made an even bigger profit on the rest.

Yesterday, I was roundly corrected on my Niels Bohr column. Today, “just a little more and we’re done.” (Do I sound like your dentist?)

First, a little electron humor . . .

Anonymous: “In your Niels Bohr column, you mentioned physicist Werner Heisenberg. I’d like to invite you to the next meeting of the Heisenberg Fan Club. Unfortunately, I can only tell you where OR when it meets, but not both.”

Ba-dump-bump.

Next, a curtain call . . .

Bill Jones: “I just happened to be in New York last week attending a conference when I read your column about the play Copenhagen. Based on your review, I made a point to see the play. I was absolutely blown away by it! It’s an excellent playwright who can make even me think that I understand the complexities of atomic science. I’ll forgive your politics if you continue to make excellent recommendations like this one!

Penultimately, the physics of hell . . .

Jim Reed: “Your Niels Bohr story reminded me of this story:

The Physics of Hell

The following is an actual Bonus Question given on a University of Washington engineering midterm: Is Hell exothermic (gives off heat) or endothermic (absorbs heat)?

Most of the students wrote proofs of their beliefs using Boyle’s Law (gas cools off when it expands and heats up when it is compressed) or some variant. One student, however, wrote the following:

“First, we need to know how the mass of Hell is changing in time. So we need to know the rate that souls are moving into Hell and the rate they are leaving. I think that we can safely assume that once a soul gets to Hell, it will not leave. Therefore, no souls are leaving. As for how many souls are entering Hell, lets look at the different religions that exist in the world today. Some of these religions state that if you are not a member of their religion, you will go to Hell.

“Since there are more than one of these religions and since people do not belong to more than one religion, we can project that all souls go to Hell. With birth and death rates as they are, we can expect the number of souls in Hell to increase exponentially. Now, we look at the rate of change of the volume in Hell because Boyle’s Law states that in order for the temperature and pressure in Hell to stay the same, the volume of Hell has to expand as souls are added.

“This gives two possibilities:

“1. If Hell is expanding at a slower rate than the rate at which souls enter Hell, then the temperature and pressure in Hell will increase until all Hell breaks loose.

“2. If Hell is expanding at a rate faster than the increase of souls in Hell, then the temperature and pressure will drop until Hell freezes over.

“So which is it?

“If we accept the postulate given to me by Ms. Teresa Banyan during my Freshman year, that ‘it will be a cold day in Hell before I sleep with you,’ and take into account the fact that I still have not succeeded in said pursuit, then, #2 cannot be true, and thus I am sure that Hell is exothermic and will not freeze.”

The student received the only A in the class.

And finally . . .

Mike da Mailman: “I like your idea to ask about the source of whatever someone feels the need to forward. Such as that Niels Bohr story. Could you also express to your vast audience that, when forwarding by e-mail, it would be nice to cut and paste only the part of the e-mail that the recipient is intended to read rather than all the headers, all the addresses and all the extra comments that the past 17 readers have added? If I am worth taking the time to send me something, and the item is worth your taking time to send, then the small amount of time it takes to clean up the useless and unnecessary stuff before sending it to me would be appreciated.

“PS. If someone takes the time to delete all the >’s and spaces they have earned my endless gratitude. This action and the time spent speaks volumes of your opinion of me.

“PPS. The time saved by receiving clean e-mail will help me with my Mikeyday, and eventually spread throughout the land and you will get your Andyday.”

[Please note that, in e-mails, PS stands for pre-signatorum. You place it before the signature so it won’t be lost to a recipient who fails to scroll down to see it. PPS thus stands for pre-pre signatorum and should, by rights, come before the PS. Unless it stands for post-pre signatorum, in which case Mike has it in the right place. The committee has not yet met to determine this one. Never mind.]

Oops! Forgot to click “save” last night — sorry, to those of you who get this by Q-Page.

Anon: “Yesterday you wrote . . . ‘10:03 am — I click on to urbanfetch.com. 10:07 am — I click SEND’ . . . I guess you’ve given up on being a cheapskate and buying things in bulk, ahead of time, eh?”

No, still a cheapskate most of the time. But that’s what frugality when you’re young buys you . . . the ability, when you’re older, to splurge a bit.

Meanwhile, lots of response to last week’s Niels Bohr story about measuring the height of a building with a barometer.

Michael LeBoeuf: “Twenty years ago I used that anecdote in my book Imagineering, crediting the source as The Teaching Of Elementary Science And Mathematics by Alexander Calandra. Is the story true? I don’t know. But as for the student being Niels Bohr, that sounds like one of those made-up ‘true’ stories, like the one about the graduating class from Harvard Business School. In the Harvard story, only three percent of the class wrote down their goals at graduation. Twenty years later the three percent who wrote down their goals had amassed more wealth than the rest of the class put together. Yeah, right. Find the source on that one. It doesn’t exist, yet numerous motivational speakers tell it from the platform as gospel truth.”

Gray Chang: “I heard the same story about 25 years ago, when I was a physics major in college. I remember it because I pulled the same stunt on a homework problem. A diving bell is lowered to the bottom of a lake, and the water rises by such-and-such amount inside the bell. What is the depth of the lake? I offered two answers. The easy way is to measure the length of rope used to lower the diving bell. The hard way is to do a bunch of calculations involving the volume of air in the diving bell and the water pressure. I only got partial credit for my answer. I forgot to account for the air pressure on the surface of the lake!”

(Of course! The air pressure on the surface of the lake!)

Otto Fajen: “This story is certainly incorrectly attributed (in that form) to Niels Bohr. The era when such a question would have been posed to him in school predates the existence of either the object or the term ‘skyscraper.’ While I never met the man, I had the honor to meet one of his students, Nicholas Bloombergen, who also is a Nobel laureate in Physics. We invited him to speak at our Physics Department colloquium at the Univrsity of Missouri, Columbia, when I was a graduate student.”

Scott Nicol: “As you suspected, this story has been around for a long time, in many different forms. See this page, which traces it back to an article in Saturday Review (Dec 21, 1968). You’ll notice no mention of Niels Bohr — that part was likely added by a Danish patriot. The claim that Niels Bohr was the only Dane to receive the Nobel Prize for Physics is also false. He probably was the first, but his son, Aage Bohr, was a joint recipient of the award in 1975. Click here for a list of award winners, and here for a short bio of Aage.”

Steve Casagrande: “A neat story, but probably just that — a story. Check out this urban legends page.”

Judy Tillinger linked me to: the whole bohring story.

Thad Fenton helped me out with my Ten Commandments: “No, Andy, it’s ‘So let it be written. So let it be done. ”

And any number of you corrected my spelling. There are, of course, two Y’s and only one E in Yul Brynner.

Anonymous Tape Duplicator: “The title of your column contained the word ‘copyrights’ which reminded me of something. My boyfriend, a professor at the University of Iowa, told me that textbooks are so expensive that students often just photocopy them instead of buy them. In fact, he was recently told that the students in one class bought one copy of a textbook, made copies for everyone, and then returned it for a refund. The punch line? It was an ethics class.”

10:03 am — I click on to www.urbanfetch.com.

10:07 am — I click SEND.

10:57 am — Doorbell rings.

To wit: six fresh bagels, a quarter pound of smoked salmon, a quart of milk, a pint of Ben & Jerry’s cherry Garcia frozen yogurt. Plus, if I had wanted it, shaving cream, the newspaper, a movie rental to watch tonight, a book or CD, a new telephone answering machine — tons of stuff.

Free delivery within an hour, 24 hours a day, 365 days a year. No tipping allowed.

The implications are . . . staggering.

I may never leave the house again.

(It’s only in New York and London so far — mostly by bike in New York and motorcycle in London. Privately held.)

Amazon Update:

This past December, with Amazon trading near its $113 all-time high, J.P. Morgan Securities initiated coverage with a “buy” rating. Twelve-month target: $160. Friday, Amazon closed at $33 and change. There is the natural temptation to buy it. It’s a great brand; it delights its customers with good service; and the stock is on sale at 70% off the price J.P. Morgan thought was already cheap. Buying it here may prove wise. Certainly wiser than at $113. But note that, at 33 and change, Amazon is still being valued at $12 billion, which in the old days was considered a lot of money. Even today, that’s 33% more than the valuation of Federal Express, which, like Amazon has a great brand name and can be expected to share in the e-commerce boom — and unlike Amazon, actually makes a profit. (A large one, in fact.) I am no longer short Amazon. There is a chance it has a lot further to fall — if it fell by another two-thirds, it would still be valued at more than the country’s largest airline. But there’s also a chance that 10 years from now it could actually be worth what J.P. Morgan predicted for six months from now. And I wish it well.