Year: 2000

“I hear this Republican message that we’re rich as hell and we’re not going to take it any more. That doesn’t make a lot of sense to me. I’m paying taxes at a lower rate than my secretary … and frankly I think that’s crazy.” — Warren Buffett

I watched the two candidates on Larry King and, I’ll be honest: Governor Bush looked relaxed and seemed to be having a good time. This is appealing. The Vice President, by contrast, looked to me as if he might prefer to be somewhere else.

That’s by no means always the case. The Vice President seemed to be having a ball on David Letterman — he was very funny and relaxed. Often, his warmth and humor come through just fine. But sometimes they don’t. In case tonight Governor Bush should win the popularity contest part of it, as he may, there are a couple of things worth noting.

First, I suspect Bush does have more fun with this than the Vice President, because, heck, it must be kind of a kick. If he wins, he gets to be President! How cool is that? And if he loses, he’s said it won’t much bother him, and I believe it (truthfully, it can be a lot of work being President) — he’ll get to enjoy his ranch. So, sure, he’d like to win. But is it that big a deal to him? I don’t think so. Which is why he can often just be himself, be relaxed, let the chips fall where they may. For the Vice President, by contrast, it is a very big deal. Partly, no doubt, that’s because he has been working toward this much of his life; partly it’s because his personality is just more intense; but largely, I expect, it’s because he believes, as I do, that it really matters a great deal who is entrusted with the Presidency, and what policies that person is committed to pursue.

So that’s the second thing to say: we make a mistake if we turn this into a contest of personalities. The fact is, both men are charming in private. And, as the President frequently notes in commenting on the race, both candidates are good, bright, decent people who love their families and love their country. But they have huge policy differences, huge philosophical differences. And it’s those different visions we should be choosing between even more than trying to divine which man we think would better command the respect of his counterparts at the G7 economic summit, or which one we’d rather watch on TV.

There are a lot of specifics. The Republicans took pride in killing the Comprehensive Test Ban Treaty that most of the other nations of the world have ratified; the Democrats wanted to pass it. The Republicans opposed hiking the minimum wage from $4.25 to $5.15; the Democrats fought to get it through. The Republicans oppose a woman’s right to choose; the Democrats support it. The Republicans opposed the Brady bill and closing the gun show loophole; the Democrats advocate these things. The Republicans appointed not one openly gay or lesbian American in their last two administrations; the Democrats, with 170, have drawn upon the talents of all Americans. The Republicans do their best to protect the tobacco industry (choosing, among other things, not to cite for contempt the seven CEOs who swore they thought nicotine was not addictive); the Democrats have been the tobacco industry’s worst nightmare. And on and on.

Not to mention the stark difference in the kind of Supreme Court we will have depending on who wins. (Yes, sometimes Justices turn out to be a surprise. But generally, they do not.)

I know quite a few of you favor the Republican side of these issues. I’m not asking everyone to agree with me. What I’m asking is that people make their choice based on substance. Both men can be trusted to try to do more or less what they say they will do. And they say they will do very different things.

So the question isn’t whether someone intentionally put something subliminal in a TV ad or whether the Governor can pronounce it . . . or whether the VP did anything wrong at that Buddhist temple (it turns out, if you read Jeffrey Toobin’s detailed recent account in the New Yorker, he did not). Both men are bright and honest and love their country. (Gore never said he invented the Internet, so isn’t it Bush who’s the truth-bender, if anyone is, for suggesting that he did? Gore was clearly joking when he told a labor group that the “union label” song was his lullaby, so isn’t it Bush who’s the truth-bender, if anyone is, for suggesting otherwise? Gore never did say he discovered Love Canal, and the high school kids whom he was addressing have been appalled and outraged to see how the truth could be completely misreported by the press and then, even once corrected, perpetuated by the Republicans. And, yes, Gore did claim to have been the model for a character in Love Story. But the author, Erich Segal, has said that’s true. Character assassination is a really rotten, dishonest thing, and both sides should refrain from it.)

As you watch the debates, I hope you’ll bear in mind one overwhelming difference that sets the stage for much of the rest. At the heart of Governor Bush’s economic plan — the plan you and I and the rest of the world hang our hopes on for continued prosperity — is a huge tax cut for high-income people like me (and even more huge for high-income people like Bush, Cheney, Forbes, the Forbes 400, Pat Robertson and the rest). It is a tax cut that would add stimulus to the economy exactly when you don’t want to add stimulus. But more than that, it is a tax cut that even conservative Republican John McCain has said is far too heavily weighted to the rich.

I would love to see my taxes slashed. I would! But when I look at all the things that need doing in the world — improving health care for kids and seniors, improving education, paying down the national debt to give us a cushion when times are not so good, I just don’t see a big tax cut for me, let alone Dick Cheney or Steve Forbes, as a top priority.

(The R’s say government should get out of all these social programs and let private charity do it. Did you see what Governor Bush’s chosen running mate, an exemplary Republican, has given to charity? It is revealing. Here’s a clip from Lycos News: “Dick Cheney defended his charitable giving Tuesday, terming it ‘appropriate’ that he has donated 1 percent of his income over the past decade. The amount is less than half of the national average. Cheney and his wife, Lynne, donated $209,832 out of an adjusted gross income of $20.9 million from 1990 through 1999.”)

So, yes, I’d love an extra few tens of thousands of dollars each year — I’m a good guy, why not? But how about preserving or even expanding our pathetically small foreign aid budget, which is a tiny investment in world peace and prosperity? (The average person thinks a huge portion of his taxes goes to foreign aid. It’s barely 1%.)

And what about spending a little to confront our environmental challenges? The North Pole melted this summer! The ozone layer is thinning! These things may not matter. But what if, perchance, the scientists are right and they do? Is it really a gamble we want to take? One wonders whether the dinosaurs, 65 million years ago, didn’t take a somewhat similar position.

A big tax cut for the wealthy can’t be a top priority.

That’s why I was struck by Buffett’s quote. Warren Buffett is not an unwise or imprudent man. Nor is he a man who despises free markets or eschews wealth. But he recently said he considers himself “very undertaxed.” As I quoted him up top: “I hear this Republican message that we’re rich as hell and we’re not going to take it any more. That doesn’t make a lot of sense to me. I’m paying taxes at a lower rate than my secretary … and frankly I think that’s crazy.”

At the heart of the debate tonight and in this election is the large portion of the hoped-for surplus that Governor Bush has committed to lowering taxes on the wealthy. This drives everything else, because by making this choice, he can’t possibly have as much money to spend on education or health care or the environment or defense or paying down the debt.

And what does he plan to do if we should ever have a recession? The budget surplus would dry up — less tax revenue, more food stamps — and could well turn back into a deficit. Would he cut taxes further, increasing the deficit and scaring the bond market, to stimulate the lagging economy? Would he cut back on education and health care to make up the deficit? Would he raise taxes — in the middle of a recession — to try to balance the budget? I’m sure we would survive; but why back ourselves into this unnecessary corner? Are we that sure we’ll never again have a recession?

When you’re with your friends watching the debates tonight, I hope you will encourage them to focus not on who’s a more skillful debater (who cares?), or who gets in the funniest zinger (you know that’s what will dominate the TV coverage — and our memories), let alone who’s more telegenic . . . but, rather, whose positions are most likely to be good for you and your kids and your country and your planet. And which guy is most likely to have the vision required to grasp looming problems and craft the best solutions in what has become an ever more highly complex world.

One of you suggested a brilliant bumper sticker I mentioned once before that captures it all very well. AL GORE: DESIGNATED DRIVER. He might or might not be the most fun guy at the party (he is more fun than you think); but who do you want driving home from the party, with your kids in the car?

Tomorrow: Adventures in IPO Land

I discovered this completely by accident.

Yes, you can buy seedless watermelon, just as one day you will be able to buy self-scraping carrots and beds that make themselves.

But somehow there was a large container in the refrigerator filled with big heavily-seeded watermelon chunks. This is the kind of watermelon one buys from the Korean markets in Manhattan. It comes not in a thick rind but in a thin see-through plastic container, alongside chunks of other fruit in their own containers, sitting on beds of ice chips. (Ah, city life.) And at this particular moment, it was stacked on top of two other such large containers, one cantaloupe, one honeydew, on the top shelf of the refrigerator, in front of something I was aiming to retrieve. While I was on the cordless phone. So I was doing it with one hand.

In my mind, I was lifting the stack of plastic containers out of the refrigerator and temporarily setting it down on the counter, to retrieve my grail, which in this case was an Arizona fizzy chocolate egg cream (I forget their exact name for it, but it’s good), and then putting the melon stack back in its place.

That was the intended scenario.

Instead, because of the maldistribution of the melon chunks at various levels of this tri-containerized stack, an instant later I had the phone jammed between my should and ear, as with my second hand, now free, I was vainly trying to catch the top container — the one with the watermelon chunks — as it slid off the top and fell — splat — to the blue tile floor.

It was not unlike the moment that guy retrieved the film that had been near the radium with his handprint on it (sorry — but you know what I mean), or even, although I am first to grant I may be overstating the importance of my discovery, the time Archimedes jumped into the bath tub and — scalded by water hotter than he had expected — let out a shriek (Eureka!), which led to the invention of the single-handle hot-and-cold water faucet.

What happened, quite simply, is that, upon inspection of the juicy mess on the floor, I realized, in beginning to clean it up, that the seeds, with few exceptions — having a mass greater than the melon — had all jumped out of their slippery sockets and flown clear of the mess. With this simple splat, the melon had de-seeded itself.

It was — perhaps even more than a seedless melon would have been — delicious.

And I must tell you, in the interest of science if not the interest of getting you to hire my steady hand for some delicate task, that I somehow managed to do the exact same thing a few weeks later, a second time — and again the seeds flew clear.

So I think I am really onto something here.

Obviously, not everyone has a tile kitchen floor. And not everyone will be comfortable walking on the stickiness that remains when the juice dries. But with the principle established and confirmed, the rest is just refinement.

National Presto (NPK) — the $30 New York Stock Exchange-listed perennial underperformer with no debt that sells at one times cash (full disclosure: I own a little) — may finally win some respect if, instead of electric “bread slicing systems” and corn poppers, it sells an electric Watermelon Slab. No moving parts, just a slab on which to drop your watermelon chunks from a great height. With raised edges to keep the seeds from flying beyond its perimeter. Just drop and — Presto! — ready to eat.

With no moving parts, electric consumption would be minimal, adding to the Slab’s appeal.

A company with no debt selling at one times cash is essentially a company selling for free. Presto! You get your 6.5% dividend while you wait to rake in the profits from the electric Watermelon Slab and, you hope, a bump in the stock. The question is, what might such a company — “free,” when you net out its cash horde — actually be worth? And that depends on your opinion of electric corn poppers and such, which in turn depends on the amount of space you believe people have remaining way in the back of their closets for stuff like this, beside the fondue maker they never used, either.

Steve Meyer: “I wanted to write to get your thoughts on what I like to think is a novel approach to capital punishment. Personally, I don’t have any problem with the idea that some acts are so heinous that the perpetrator deserves to die, but I do think it is an imperfect instrument for a number of well discussed reasons. I oppose capital punishment on the practical grounds that, after all of the appeals, protests, etc., it costs more to put someone to death than to incarcerate them for life. (And I think ‘life without possibility of parole’ does give closure to the families of the victims.)

“One of the pernicious problems that makes the death penalty in the US so imperfect is that it certainly looks racist. Here’s my proposal to solve that problem and, I’m willing to bet, wipe out white collar crime at the same time; I propose a system in which the death penalty is a possibility for white collar crime. The way it would work is this; after a conviction for a white collar crime, the judge would spin a big wheel (I like to call it the ‘Wheel of Misfortune’ — not too imaginative, but quite accurate) on which there are 99 slots which say ‘regular sentencing’ and one which says ‘death penalty.’ In the event that ‘death penalty’ comes up, the defendant has the right to all the normal appeals, but if the conviction sticks they must face the death penalty.

“The reason I think this would end white collar crime is exactly the reason that I don’t think the death penalty deters; murder is quintessentially a crime of passion, so the perpetrator doesn’t stop to think of the consequences. White collar crime, on the other hand, is a crime of calculation: the embezzler (for example) figures that the chances of being caught are low enough that the immediate gratification outweigh the risks of punishment (the punishment may be something like 6 months in Allenwood since it is presumably a first offense and non-violent.) If, however, the punishment included the possibility of electrocution the calculation changes quite considerably!

“As I’m sure you know, there is an entire branch of economics which deals with the calculus of questions such as ‘if you had a 99.99% chance of successfully embezzling a million dollars and a 0.01% chance of being put to death for trying, would you try it.’ I have not conducted the studies required under this discipline to prove my claim that my idea would eliminate white collar crime, but I feel confident that it would and (here’s the kicker) if it failed to do so, it would bring a more representative demographic to death row!

“I’d be interested to hear your thoughts. If you want to propose this as a belated plank in the Democratic ‘get tough on crime’ platform, please be my guest.”

☞ Thanks, Steve. I think all would agree (including you) that this is a fascinating, exceptionally creative, terrible idea.

Tomorrow (as we build to the de-seeding): Recipe #6

The estimable Less Antman: “People who are looking to invest in a variable annuity should know that TIAA-CREF, which is well known for its teacher’s retirement plans and extremely low costs, is now offering annuities that are available to anybody. Their Personal Annuity is available in most states and will undoubtedly be available in all of them relatively soon. Check out tiaa-cref.org. The minimum investment is only $25 per quarter!”

☞ Well, this is worth a look. TIAA-CREF has a lot to recommend it, even if variable annuities — no matter how low the costs — remain a way to translate what could otherwise be lightly-taxed long-term capital gains into more heavily taxed ordinary income at withdrawal. But while you’re looking, don’t miss the part of the prospectus that notes that the low costs are the product of “waivers.” Given TIAA-CREF’s good motivating principles, you would probably be OK. But the prospectus says: “Without the waivers, the maximum expense charges for Personal Annuity Select accounts would be: Stock Index Account, 1.50%; Growth Equity Account, 1.66%; Growth & Income Account, 1.64%; International Equity Account, 1.73%; Social Choice Account, 1.59%.” So the low cost is likely but not guaranteed.

Meanwhile, the low minimum investment is nice, but small savers might do better opening a Roth IRA. There, as with an annuity, the money you put in provides no tax break. But — unlike an annuity — the money you eventually withdraw is free of federal income tax.

Tomorrow: Steve Meyer’s Wheel of Misfortune

This week will build slowly toward an amazing new way to de-seed your watermelon. But first . . .

Don Steinhart: “A coworker and I got into a discussion about investing money he obtained by refinancing his house. I contend that he effectively borrowed money to invest, which is essentially the same as investing on margin. He argues that he is only using the equity in his house, which is his anyway, so it’s not the same as borrowing. His monthly payment did not increase, because he simply extended the term of the loan. He views his house as an investment, so he’s just shifting investment dollars from one vehicle to another, while I see my house as a place to live, and any investment and tax advantages I gain are a side benefit. I say the bottom line is: he borrowed money to invest, and it’s a bad idea. In the name of avoiding having to read one fewer political column, perhaps you can help us to settle this argument.”

☞ Well, in my view, you’re largely right. The riskiest kind of borrowing would be with no collateral. There, if you can’t make payments on time, you get sold into slavery or, worse, featured on one of those ShowTime specials like the Sopranos. You don’t want this. Your coworker, by contrast, has 15 or 30 years to repay his mortgage; and the interest rate he’s paying, especially after tax, may be less per year than the loan sharks charge per week. So what he’s done is not insane. But it is borrowing to invest — you both seem to agree he is investing money he obtained by borrowing against his house. If he doesn’t see this, something tells me he may not fully appreciate the risks of the stock market, either.

This strategy could work out very well for him. But I think many people would be better served with a two-track strategy: Track One — The forced saving that comes from gradually paying off your mortgage, until one day, Praise the Lord!, you own your home free and clear. Track Two — The higher return you may well get (but may not) from a steady program of investing in stocks.

Are you registered to vote?
A lot of people do mean to vote, they just never get around to registering. Because, well, how do you even do it? Easy!
Just choose your state (from the lower of the two pull-down menus), and click GO.
And hey: Where will you BE November 7? Unless you’re certain to be in town, act now to get an absentee ballot.

TRADING OPTIONS

Joe Cherner: “The most important reason you are not likely to come out ahead trading options [yesterday‘s comment] is COMMISSION. Seat holders or ‘professionals’ (like I was) pay pennies per trade. Retail guys (like 99.9% of your readers) pay at least $29.95 per trade. The more you trade options at $29.95 or higher per trade, the more likely you will lose.”

DIVERSIFYING OVERSEAS

David P. Frankel: “I’d like to refer you and your readers to an excellent article distributed by T. Rowe Price on the benefits [mentioned recently] of investing in international stocks. While I recognize that international stocks in general have lagged behind U.S. equities in recent years, it is only a matter of time before the situation changes. Please click here and click on the first item: INSIGHTS REPORTS, and then the fourth item, INTERNATIONAL INVESTING, and then, finally, THE CASE FOR INTERNATIONAL STOCKS. The argument for diversification into international stocks seems pretty compelling to me.”

CLAIMING WHAT’S YOURS

Subliminable message: Gore/Lieberman would be exemplarary.

Mark Bell: “Thank you, thank you, thank you for the unclaimed property lead. If Mark Twain considered his most glorious money to be $50 found on the street, imagine how I felt when my name came up a winner on the unclaimed property lottery! Adjusting for inflation since Mark Twain’s 19th century $50 discovery, my $290 discovery isn’t too shabby. Now I just have to pry it away from the tight-fisted grip of the State of Georgia. I have to wonder, in the age of the World Wide Web and the ability to find a person’s whereabouts in less than ten seconds, why the state guardians of these coffers of unclaimed property can’t just tap in a name and ask if we want our money? Don’t these people work for us? I haven’t been hiding my identity from anyone. Go figure.”

Monday: Betting the Ranch

Tuesday: The Wheel of Misfortune

Steve Stermer: “I have a basic question about call options that I’ve never understood. Say I have 100 shares of IBM which is trading around $130 right now. The strike prices for September calls range from $80 to $150. What could be the benefit of selling a covered September $80 call when the stock is trading at $130 today? Of course, I would receive a $5000 premium for selling the call, and I’d certainly be called out next month and receive another $8000 from that sale, for a total of $13000. But why would I do THAT when I could sell a $140 call instead, receiving a $300 premium now, and (worst case) another $14000 from the sale next month, for a total of $14300 (10% more return in the same amount of time)? Why the market for all these low end call options?”

☞ You’re right. No one would initiate the sale of a new IBM 80 call when the stock is 130. That is, no one would call his broker and say, “I want to write some IBM 80 calls.” But what you’re forgetting are the people who bought IBM 80 calls, back when IBM was selling closer to that price. Some of those people may want to sell. Maybe they need cash to put down on a new house. Maybe they think IBM is going to drop.

If someone who bought an IBM 80 call now wants to sell, he will take what he can get. Which in this case will be roughly the intrinsic value of the option, plus maybe a hair of premium. (The longer it has to run, the thicker the hair.)

Let me not forget the larger point, however: Buying and trading options, you will, gradually or spectacularly, lose your money.

Not all of it, perhaps — and perhaps none of it writing covered calls (that is, owning IBM stock and then selling someone the right to call it away from you).

But even writing covered calls, you’re unlikely to come out ahead in the long run: First, you still expose yourself to a large loss if the stock should plummet. Second, you limit your potential gain if the stock shoots up. Third, you risk getting whipsawed if the stock rises and — to avoid having it called away and exposing you to a taxable gain — you buy back the call at a loss. You do that and, invariably, the stock goes back down, to taunt you.