Year: 2002

Dollar-Cost Averaging, Again

Harry S, who first learned of Priceline from us: ‘I went into Priceline, bid $84 on a 4-star, and got Sofitel in Beverly Hills. I called Sofitel, just to see and was quoted $329/night as a special!’

☞ Just be sure not to use Priceline if you might have to change or cancel your trip – the rooms are nonrefundable. And hotel rooms are the only one of the things they sell I can vouch for. Have never tried any of the others.

Quanta: ‘Dick Davis, Item 31, Dollar Cost Averaging made no sense to me: << If the market is unpredictable, a dollar-cost averaging approach makes a lot of sense>> … and then he says << For example, if you invested $500 every month in the S&P 500 Index during the 5 years, 1997 through 2001 when prices went way up and then came way down, your gain at the end of that 5 years would have been negligible.>> So what’s the point?’

☞ Ah, but if prices had gone way down and then come back up, instead of the reverse, your gains would have been substantial. Over time, if you buy more shares when prices are low and fewer shares when they are high, you will come out ahead.

Do the math with a hypothetical stock and you’ll see it. Buy $1,000 a year of a stock that starts at $10 a share, goes down $2 a year for three years and then back up $2 a year for three years so ends at $10. Have you broken even? No. Because $1,000 bought you more shares when it was lower, you wind up with a big profit. You invested $7,000 in this example – buying shares at $10, $8, $6, $4, $6, $8, and $10 a share – and wind up with 1032 shares of stock, or $10,320 worth once it’s back up to $10.

Of course, not all stocks that go down for three years do come back. But barring something truly catastrophic, ‘the market’ as a whole will. So this strategy with a broad index fund is awfully sensible if you have a truly long time horizon. Eat right, walk lots, and wear your seat belts.

Coming Soon: Citibank Branch 007

BULL, Says Less to the Bears

BUT FIRST A QUICK POLITICAL NOTE:

Apparently, the Jeb Bush attack ad on Bill McBride noted here yesterday had an unintended effect. Click here for Miami Herald star columnist Carl Hiaasen’s amusing report. I guess we’ll know in a few hours whether Jeb inadvertently put McBride over the top.

AND SECOND AN APOLOGY:

I promised yesterday to be ‘briefer’ the rest of the week. That apparently will not include today.

AND NOW BACK TO THE BULLS AND BEARS:

Joe Devney: ‘Your quote from John Mauldin included a reference to a ‘secular bear market.’ This is one of those terms that I come across that is never explained. What does ‘secular’ mean in this context?’

☞ It means ‘really long-term, with occasional interruptions.’ Those interruptions, in this case, would be characterized as rallies or little bull markets within the overarching bear market. Of course, you could describe our economic history as just the reverse – a magnificent truly overarching secular bull market, with little bear market interruptions.

John Hook: ‘Bill Gross avers that ‘at least 50% of the earnings growth over the past 40 years has been earnings of the ‘mystical’ kind – pro forma, operating, phonied up.’ Yet total net income of U.S. corporations as reported to the IRS in 1980 was $239 billion and in 1999 $929 billion. This is an annual rate of increase of 7.02% per year by accounting whose goal is legally to minimize net income.’

☞ John goes on to note that GDP growth is probably not phoney. GDP increased from $352.4 billion in 1952 to $10,371 billion today, 50 years later. That’s a 7% annual rate of increase, which suggests that profits would have increased at about the same rate (albeit by considerably less that 7% after netting out inflation).

But let’s give the last word (or the last substantive word, anyway) to our friend Less Antman, who found a lot to disagree with in the Bill Gross ‘Dow 5000‘ rant:

Stocks may or may not decline further over the short-term [Less writes], but that won’t remove the arithmetic, logical, and historical errors in legendary bond investor Bill Gross’ article. At least Warren Buffett is modest enough to stay away from areas he doesn’t understand.

Among the gross (sorry) inaccuracies in his piece are:

(1) A tripling of P/E ratios over the century would NOT explain 2.0% of annual market returns. Anyone with a calculator and the ability to press the equal key 100 times can determine that a 2% return over a century would require PE ratios to multiply more than 7 times. A tripling of the PE ratio adds only 1.1% to annualized returns. At least this has settled a question that has bothered me for years: now I know who calculated the stock returns of the Beardstown Ladies. [Less here adds an emoticon to signal us that he is kidding. But try it. If you ask your calculator what $1 growing to $3,000 over a century works out to, your calculator will tell you: 8.34% a year. Triple that end result to $9,000, and now your calculator will tell you your money has grown at 9.53%. All this before taxes and inflation of course. But is 9.53% two percent more than 8.34%, as Gross argues? No, says, Less, it is more like 1.1% (or, if my own sharp calculations are to be believed, 1.2%). The difference between 2% and 1.2% sounds trivial, but you won’t feel that way 100 years from now.]

(2) There is little evidence to support the view that P/E ratios in 1900 were as low as Gross has implied. For one thing, financial statements were not required and generally accepted accounting principles didn’t exist at that time. For another, in those days before income taxation, substantial dividends were expected from companies, and the typical company distributed most of its earnings every year (since the average investor DIDN’T trust the corporate executives and robber barons of the day). Using the 4.2% dividend yield cited by Gross (which appears to be correct) and a payout rate of 70%, an earnings yield of 6% probably existed at the time, meaning PE ratios averaged nearly 17.

(3) It is not true that starting valuations have to be reasonable for stocks to outperform bonds. Since stocks have outperformed bonds during 90% of all historical 10-year time intervals, it would be more accurate to say that bonds cannot beat stocks over any reasonable time period unless bonds are radically underpriced at the start of the period, which doesn’t describe an environment in which 30-year treasuries are yielding 4.9% (with no protection against inflation) and short-term bond yields are competitive with mattresses. Had the stock market in 1900 been obscenely priced at DOUBLE its actual level at the time (with dividend yields of only 2.1%), its gain over the century would have been reduced from 6.7% to 6.0%, still battering the 1.6% return on bonds. [This is one of the reasons I suggest in a forthcoming PARADE piece a couple of weeks from now, that it’s OK to stocks here for the really long run, especially if you plan to ‘average down’ if and as the market drops further . . . but only with money you can afford to tie up for a long time. Money you might need in a year or three might do great in the stock market, but it might not. If you will need it, you can’t afford the risk.]

(4) If unusually high valuations in the year 2000 and unusually low valuations in 1900 explain the 6.7% real return on stocks during the 20th century, how do we explain that both Siegel and Ibbotson, whose studies go back 200 years, found approximately the same real return during the 19th century?

(5) Gross has suggested that a dividend of 4.2% explains most of a 6.7% return. Apparently he forgot what he had mentioned elsewhere in the article, that 6.7% was the real return after inflation, while the dividend rate was the nominal, not the inflation-adjusted, return. In fact, nominal stock returns were around 10%, and the dividend yield explains less than half of the total return.

(6) Although dripping with sarcasm, Gross did concede that cash distributions resulting from stock repurchases and cash mergers did constitute actual transfers of money from corporations to shareholders, and generously allows the reported dividend yield of 1.7% to be increased to 2.0% to account for these. The only problem is that DMS, from which Gross quoted extensively, included a chart Gross failed to reference that indicated the total dollars distributed from stock purchases by corporations, which were statistically insignificant as recently as 1981, now slightly EXCEED the total of reported dividends, so that the 1.7% reported yield is actually around 3.5% right now, and is quite competitive with current, historically low, bond yields. And if the 2.0% yield conceded by Gross leads to a fair value of around Dow 5000, the corrected 3.5% yield suggests a Dow fair value of 8750, close to its current level.

(7) Even if none of the above errors applied to Gross’ analysis, they do not lead to the conclusion that one should remain out of stocks and invested in bonds until the Dow drops to 5000. The stock market might well simply grow at a slower pace while still substantially exceeding bonds (given the historical 5% superiority, even a much-diminished equity premium would be a premium). And the investor will still be sitting with everything in Gross’ bond funds waiting for his signal that it is safe to leave him.

Of course, even a perma-bull on stocks such as myself should remind investors that the market could still drop substantially from its current level, even below Dow 5000. In 1931, the stock market was clearly underpriced after a devastating 75% drop, but the Dow still managed to drop another 50% from that level before taking off. The extremes of short-term fear cannot be expected to end at rational and predictable levels, and an intelligent investor cannot wait for a signal that is safe to go into the stock market. It is never safe to invest in stocks, nor is it safe over the long-term to accept returns that will probably be near zero after taxes and inflation in bond investments.

This is why it is critical for a stock investor to be thoroughly, globally diversified (a broad domestic index fund and a broad international index fund, as suggested in The Only Investment Guide You’ll Ever Need, makes tremendous sense to me), and why only long-term money belongs in equities. For a globally-diversified all-stock portfolio, 5 years was enough to bring investors back to even if they foolishly put all their money into the stock market in 1929 or 1972 (or for a Japanese investor who did that in 1989). For a US-only investor without international holdings, it can take as long as 20 years to get back to even, but since we are talking in September 2002 and not March 2000, it is pointless to discuss investing at market peaks, since we are 2 1/2 years beyond the latest one. I’d be willing to bet my entire net worth that someone who put about half his portfolio into US stocks and the other half into non-US stocks over the next 10 years will trample the 4.1% available on a 10-year treasury note, or the 2.3% real yield on 10-year TIPS. Come to think of it, I already have made that bet.

☞ And now you see why I generally refer to Less as ‘the esteemed Less Antman.’ (Or in today’s feisty mood, esteamed.)

Randy Wolff: ‘Running in a marathon until your kidneys bleed is no way to live to 100. Neither is running five marathons in a row. That is a good way to live to 54.’

Bull or Bear

BUT FIRST A QUICK POLITICAL NOTE:

Being a DNC officer, I am neutral in Democratic primaries, and thus wish both Janet Reno and Bill McBride – and the very impressive Daryl Jones, for that matter – all the best in tomorrow’s Florida gubernatorial race. But it was with a real sinking feeling that I caught one of those stereotypical negative TV ads ripping Bill McBride to shreds, making him out to be dishonest and all the rest, which, from all I have heard about McBride, is just terribly unfair. (Much the same sort of stuff that was done so effectively to assassinate Al Gore’s character, little or none of which was true, much or all of which was deeply cynical and dishonest itself – yet all of which, when taken cumulatively, had its intended effect.) And now here was this ad ripping Bill McBride. Janet, Janet, I thought, watching it. How could you let your campaign consultants talk you into this? You? And then, because I watch these things closer than most, I saw in the fine print in the ad’s waning second or two, at the bottom of the screen, that it was paid for not by the Reno campaign, but by that of Jeb Bush.

Yech.

Yes, one might say (before you all e-mail me to say it) that Gray Davis, hoping to run against Bill Simon instead of Dick Riordan, did the same thing to Riordan. But I would reply that, in the first place, that doesn’t necessarily make it right. And that, in the second, the Riordan snippets I saw were about issues, not character assassination, and it seems to me that’s quite different.

AND NOW:

My apologies to those of you who missed Friday’s column – Dow 5000 – because I posted it late.

For those who did catch it . . . if you thought Bill Gross’s comments were depressing (‘stocks stink’), how about these, from John Mauldin, released a day later? Mauldin notes, among many other gloomy things, that:

It is not inconsistent to project a slowly growing economy and a secular bear market. The US economy grew at almost exactly the same rate from 1966-1982 as it did from 1982-1999. The stock market was flat in the former period and up over 10 times in the latter.

The big difference in those two roughly 16- or 17-year periods, of course, was that interest rates rose dramatically in the first period, to a peak of about 15% on the Treasury’s 30-year ‘long bond’ in 1981 or ’82, and fell dramatically in the second. (Today the long bond yields under 5%.)

Another difference was that most of the young money managers had no personal memory of a long, grinding bear market to make them cautious (they do now).

So it’s possible that we are now three or so years into 16 or 17 tough ones.

Or not.

I’ll never forget all the gloomy predictions of The Coming Bad Years, by one hugely best-selling author, in 1979, just as things were about to get a heck of a lot better . . . followed shortly thereafter by his Survive and Win in the Inflationary Eighties, published in 1980, the start of what would be remembered as the disinflationary Eighties. I have a whole shelf full of these kinds of books – let us not forget Ravi Batra’s The Great Depression of 1990, presciently foretold in 1987 . . . except that the Great Depression of 1990 never came.

So in the first place, we can say with some assurance: no one knows.

In the second, it is always worth remembering that the gloomsayers are rarely the only ones who see the problems ahead. There are some awfully smart central bankers and finance ministers around the world who see them too, and have considerable power, though admittedly nowhere near complete power, to change course. So, sure – we might be headed for catastrophe if we never did anything about it . . . but often we do do something about it.

My friend and B-school classmate John Hook sends some of us his sophisticated weekly market review, from which I excerpt this gripping set of hands (which we might nickname ‘the one’ and ‘the other’). Some of the jargon may not be familiar to you, but most of it becomes more or less self-evident from the context. John summarizes . . .

The bear argument is that:

1) Valuations are very high
2) There was no capitulation;
3) Sentiment is too optimistic; and
4) Valuations revert to below the mean in bear markets.

The bull response:

1) Yes, most valuations are very high. But reversion toward the mean will probably occur more from profit increases than from stock price decreases because there will probably be no oil shock, depression, or war defeat to further crash the markets now that the economy is recovering.

2) There was capitulation. Implied volatilities soared to crisis highs and reversed back down. Volume went to record highs. Interest rates fell to forty and sixty year lows. P/Es relative to interest rates fell to 1960 to 1970 levels. Bearish sentiment exceeded bullish by 50%.

3) Sentiment can recover quickly. This is not the 1930’s Depression nor the 1970’s two OPEC Embargoes that quadrupled and then tripled oil prices.

4) Valuations did not revert to below mean in the 1962, 1969-70, and 1990-91 bear markets.

Bear response:

1) Japan had six bull rallies in its ten-year bear market [which appears now to be in its twelfth year and not yet to have ended – A.T.]. Consolidations after burst bubbles take sixteen (1965 to 1981) to twenty-three (1929 to 1952) years.

2) Mutual fund liquidation has been as yet small. Ditto for foreign investment. These liquidations will occur and crash the markets.

3) Capitulation only occurs when everyone gives up. This has not occurred.

4) Valuations revert to the extreme lows after burst bubbles: in the 1930s and progressively in the 1970s until P/Es were at 7 by 1981.

Bull response:

More important that the fact that a bubble burst is the state of the economy. This is not the 1930s Depression or the 1970s stagflation. We have low inflation and moderate growth. There is no reason for the capitulation and sentiment pattern of the 1930s and 1970 to appear. The better analogy is to 1962, 1969-70, and 1990-91 when P/Es gradually came down as stock prices increased not quite as fast as profits.

Brave prognosticator that I am, my guess is that the true answer could lie somewhere in between: that we could be in for a bunch more rough sledding . . . but that – potentially at least – our technological advances and increased experience and safeguards since the 1930s (things like Federal Deposit Insurance, for example), and even since the 1970s, could keep things from being terrible. Let us not forget that Moore’s Law has been broken . . . (but in the most remarkable way! Computing power is no longer doubling every 18 months, as Moore’s Law prescribed – how could that possibly continue, after all? – but rather every twelve months now, or so I have read) . . . and that technological advance is a key driver of productivity growth . . . and that productivity growth underlies profit and prosperity.

So the truth is, no one knows. But it is not a time to buy stocks on margin or to buy stocks thinking they must all be cheap because the market is ‘so low.’ The market is not so low. Much of it is still quite high; and even if it were not, markets tend to ignore ‘fair value’ in both directions. We know we’ve had the euphoric over-reaction on the upside. It’s not clear whether we’ve had the despairing over-reaction (also known as the ‘capitulation’) on the downside. Or whether it’s inevitable that we must.

I promise to be more upbeat the rest of the week. And briefer.

Dow 5000 And Dick Davis #32: When to Sell

I am sorry to be the one to point you to this, if you haven’t already seen it. And I hasten to add that, as smart as Bill Gross is, he’s not infallible. And your stocks, if you pick individual stocks, may be the undervalued ones that do just fine, even if he’s right. I’m certainly not selling all my stocks.

Still, you could have done worse than to click the Bill Gross link I offered last year.

And where I thought Dow 36,000 was just a lunatic book title, I see nothing at all lunatic in ‘Dow 5000,’ the title of Bill Gross’s September Outlook.

Bill Gross is so smart! I got to interview him for a PBS series years ago, and he just blew me away. Here’s what I wrote about him in this space on December 11, 1997:

Bill Gross manages $90 billion or so in bonds, which has to be really boring until you realize that he somehow manages to squeeze an extra 1% return out of his portfolio year after year-an extra $900 million. But the image that impressed me even more, as we looked from his Laguna Beach living room out over the Pacific, was of a 53-year-old man determined to live to 100, getting it into his mind to run from Carmel to the Golden Gate Bridge-five back-to-back marathons over five successive days. On the last day of this run, his kidney ruptured. Blood was running down his leg. But he hadn’t reached the bridge, so he kept running. Only when he finished did he allow the ambulance to whisk him away.

Smart, tenacious people with blood running down their legs can be wrong. But not just because we hope they are. He writes:

My message is as follows: stocks stink and will continue to do so until they’re priced appropriately, probably somewhere around Dow 5,000, S&P 650, or NASDAQ God knows where. Now I guess I’m on somewhat of a rant here but come on people get a hold of yourselves. Earnings have been phonied up for years and the market still sells at high multiples of phony earnings. Dividends and dividend increases have been miserly to say the least for several decades now and you’ve been hoodwinked into believing the CORPORATION should hold on to them for you so that they can convert them into capital gains and save you taxes. Companies have been diluting your equity via stock options claiming that management needs incentives of millions of dollars just to get up in the morning and come in to work. Then they pick you off by trading on insider information, selling shares before the bad news hits and you have a chance to get out. If you try to get a hot IPO you find all the shares are taken – by Bernie Ebbers. Come on stockholders of America, are you naïve, stupid, masochistic, or better yet, in this for the ‘long run?’ Ah, that’s it, you own stocks for the ‘long run.’ We bond managers may have had a few good relative years but who can deny Stocks for the Long Run? Not Jeremy Siegel, not Peter Lynch, maybe not even Bill Gross if you stretch the time period long enough – 20, 30, 40 years. But short of that, stocks can be, and often have been poor investments. The return on them depends significantly on their beginning valuation and right now valuation remains poor. Dow 5,000 is more reasonable. Let’s see why . . . [it’s the first link on the Pimco home page]

CHEER UP – THERE’S ALWAYS SOMETHING GOOD ON TV

At least, with TiVo there is.

Michael Adberg: “I was surprised that your reader seemed to have a broken Series 2 unit – we’ve only seen one of those so far and it was a bad hard drive, not a modem. But for those older units with bad modems, we now have a way to replace a bad modem with an external modem. It’s here. This is an easy way to get it working again without having to send your TiVo anywhere. You also get a much hardier modem in the process and are much less likely to ever have a modem problem again.”

☞ It ain’t cheap, but it sounds as if it could be the simplest solution if cost is not your first priority. (I know: bite my tongue.) And now back to our regularly scheduled, depressing programming . . .

SO – SHOULD I SELL?

I don’t know. But the Bill Gross piece is, I guess, the more or less perfect lead-in to Dick Davis’s pre-ante-penultimate item, #32:

Item 32: When To Sell

The most difficult of market skills is knowing when to sell. There is no definitive answer, no formula that applies in all situations. Some investors believe good quality stocks should be held indefinitely and eventually passed on to heirs. Their rationale: “No one can time the market; there’ll be ups and downs but the long term trend will be up.” It’s a painless approach, no monitoring and no decision making. Others believe every stock, regardless of quality, is a sale at some point. Their reasoning: “No one can sell at the high but the stock’s price/earnings multiple history will indicate a reasonable price range to sell. Why ride a stock up and then down and then wait, sometimes for years, until it recovers to new highs?” A case can be made for either position. In my view, the temperament of the stockholder is the crucial factor. Which situation can you handle better? A repeated cycle of seeing a stock rise, seeing the gain erased and then waiting for it to rise to new heights again? OR seeing a stock rise, selling it at a profit and then seeing it go up, perhaps substantially, after you sell it? You can buy a stock at 40 and sell it at 48, comforted by the old saying, “you never go wrong taking a profit,” especially in trading range or narrow moving markets. But for some, the comfort quickly disappears, if the stock continues to climb to 100. Some of us by disposition, can have closure and not look back; others hang on emotionally. “Know thyself” is the key. One caveat: in deciding if and when to sell, keep in mind that once a trend is firmly established, the odds favor that trend continuing.

The trend these days in not up. To keep from going nuts with this stuff, I try always to look at “value,” hard though that is to establish.

If a stock seems to be undervalued, regardless of where the broad market is, or is trending, I like to hold it. I will often foolishly buy more as it sinks further.

If a stock seems to be overvalued, regardless of the trend of the broad market, I will often foolishly hold on, to avoid the taxes. But in my saner moments – even knowing an irrational market could take it higher (or that it might go higher for reasons the market “understands” and I don’t) – I sell. In late 1999 and early 2000, my saner moments were all too few and far between.

Have a great weekend.

Dick Davis!

TIVO

Kathi Derevan: ‘I just returned from a visit to a friend in Chicago who bought Tivo for her husband last Christmas (!!) and still it was not installed, (a) because they didn’t know how, (b) he was totally blasé about it and thought he didn’t ‘need’ the silly thing. While he was away for the weekend, I installed it and told him on the phone that his old life was now over and his Tivo life had begun. Oh, how he scoffed! But now, you and I know where he is every evening, and what he is holding in his hand. (By the way, the perfect combination is Tivo with a DVD recorder. You Tivo everything as usual, and what you want to save – for me, sadly, the whole Osbournes series! – goes right onto a DVD, which can then be viewed anywhere, anytime!)

Dennis Hoffman: ‘I finally broke down and followed your advice. I bought a TIVO (series 2) in May. You’re right – it made life better. It’s currently in the shop (Series 2 still has the same hardware problems as the original) and TV watching is miserable. The interesting thing about TIVO is that I watch less TV. Because when I got used to being able to see what I want when I want, now I’m not willing to watch a lot of the stuff I used to watch.’

SAVE THE RAIN FOREST: DRINK THE SHADE-GROWN COFFEE

Bob Fyfe: ‘Coffee grows naturally in the shade of a forest canopy. This forest supports a wide diversity of animal life. In an effort to increase coffee production, farmers in Central and South America have moved to the faster, higher producing method of sun grown coffee, where the overhanging canopy is removed (deforestation) allowing the now sunlit coffee plants to grow more quickly. The problems with this method are that it requires chemical fertilizers and pesticides, the coffee doesn’t taste as good, and the winter habitat of millions of migratory birds is destroyed. Here are two websites detailing the problem, one from Audubon, one from The Atlantic. In an effort to utilize market forces to stem the change to sun grown plantations, there is now a move afoot to promote Shade Grown Coffee. In fact, I’ve heard one environmentalist state that the one action that Americans could take that would have the greatest impact on saving the rain forests would be to stop buying sun grown coffee.’

DICK DAVIS – ITEMS #30 AND #31 OF 35

For those of you arriving late, click here and here and . . . oh, well, if you want them all, go to my archives and search on ‘Dick Davis.’

Item 30: Behind The Moves in Stocks

When news comes out on a stock, it is automatically cited as the reason for the move in the stock. It makes a logical and convenient explanation. But there can be a myriad of other reasons why a stock moves that are never mentioned. These include the mood and direction of the market that day, sympathy with the action of other stocks in the group, the scarcity of buyers or sellers, the level of interest rates, tax considerations, the size of cash reserves, short covering, the pressure on fund managers to perform, technical considerations such as moving averages and resistance and support levels, and many more. The reporter may say a stock is down because it was downgraded. What’s not reported is that it was also upgraded by another firm, and that the real reason for the decline is that the company CEO sold a large block of stock to pay for his divorce settlement.

Item 31: Dollar Cost Averaging

If the market is unpredictable, a dollar-cost averaging approach makes a lot of sense. Investing a fixed amount of money at fixed intervals in the same stock or fund is a way of taking the emotion and guesswork out of market timing. For example, in a down market, if you leave instructions to transfer ‘X’ amount of dollars from your money market account into XYZ stock on the first of every month or every 3 months, some of your purchases will likely be made when fear is causing others to sell at low prices. The result is that you buy more shares for the same amount of money and lower your average cost. One caveat: Dollar-cost averaging requires patience and discipline and confidence that the stock or fund position that you’re accumulating will eventually go higher. Otherwise it doesn’t work. Also, if and when you decide to sell, do so after a period of rising prices. For example, if you invested $500 every month in the S&P 500 Index during the 5 years, 1997 through 2001 when prices went way up and then came way down, your gain at the end of that 5 years would have been negligible.

Coffee, Tea and TiVo

Hang on – the concluding Dick Davis tips are on their way. And who knows what other divertissinvestment and investmentia. But today:

COFFEE

Monty Goolsby: ‘The day after I read your coffee column I was at this grocery store and counted coffee from over 45 countries. There were more but my girlfriend made me quit looking. I wonder how many people get their livelihood from that one store.’

Dean Cardno: ‘You might also look at a couple of books by Margaret Visser, a South African anthropologist, called Rituals of Dinner and Much Depends on Dinner. In each, she describes a pretty ordinary dinner, then goes into painstaking detail on the ingredients, their history of cultivation, and their importance to the cultures that grew them along the way. Do you know why an olive branch is a symbol of peace? Because it takes an ungodly long time for an olive grove to become productive, and it is a long and tedious time for a raw olive to be made edible. So in the days when olives first became a cash crop, they represented a civilized peaceful location where people would be willing to commit to the years of planning to plant an olive grove and wait for it to mature. Really good books – not as scientific-technical as the James Burke books others have mentioned. (They are good, too, although I get a little tired of James Burke – all bouncing from one idea to the next, and not enough thought about each one as he goes by.)

A SECOND CUP

And speaking of a cup of coffee – ‘a cup of Joe’ – did you see the really charming little profile of my friend Joe Cherner, the tobacco industry’s worst nightmare, in Thursday’s New York Times? It will make you smile.

TEA

I suppose the end of summer is an odd time to be writing about iced tea, but as many of you know, I have a small stake (equi-Tea) in a company called Honest Tea, started two or three years ago by a Yale School of Management Professor and one of his students. Well, sales have been growing like crazy (easy to do from a small base), and the publicity has been amazing (for an iced tea). It’s even been featured in Oprah Magazine. On the latest Top Tea best-seller list, in the health-food category, Honest Tea has six of the top ten.

But where I quibble is with which six. And with which varieties Barnes & Noble cafes (all of which carry Honest Tea) choose to stock.

Yes, I can see why Moroccan Mint is #1. It’s got a little caffeine kick (one-fourth the caffeine of coffee), 34 calories a pint, and the ‘green tea’ health caché. I can buy that. But where is First Nation, the caffeine-free peppermint varie-Tea? Barnes & Noble leans heavily toward Black Forest Berry and Assam, Decaf Ceylon and Kashmiri Chai, which are okay, I suppose, but hardly the stuff of Web columns. Instead, they should carry Gold Rush Cinnamon and Jakarta Ginger, which positively zing with flavor and a clean, healthy feeling.

[Note: No one likes ice more than me – I don’t care that the Diet Coke is cold, it must have an equal height of ice in the glass to be right – but, oddly, with Honest Tea it’s better to just drink it cold, right out of the bottle.]

TIVO

I am willing to grant that Honest Tea is not for everyone. There will be those who just need the sugar and the carbonation – or fermentation – of something else. Fine. But I cannot imagine someone who, once exposed to TiVo (in which I also own a few shares, but only out of wild enthusiasm for the product, not because it’s a good investment), could ever be happy again without it. Charles and I go nuts when we are watching TV the old way. Our thumbs instinctively click the replay button – what did he say? – or the pause button when the phone rings or the fast-forward button when a commercial comes on. Be honest: could you live without remote control? You could not. You will feel the same way about TiVo. It saves me 3,000 minutes a year on the Nightly News alone (which now takes a maximum of 20 minutes to watch instead of 30). And we never have to worry about missing a show we like. No, it’s not cheap, but this is why Santa Claus invented Christmas. And, no, it’s not completely simple to set up, but this is why God invented teenagers.

A Second Cup

Boy. Coffee really jolts you into action. Rarely have I gotten so much feedback. Thanks one and all. (And this is just a sampling.) If you’re pressed for time, skip to the end – it’s my favorite.

CONNECTIONS

Rob Sartain: ‘Check out James Burke. His ‘Connections’ televisions series on PBS is what you’re looking for. He’ll tell the story of how someone three centuries ago did something that, through an apparent chain of coincidences, results in supersonic jets today. His columns in Scientific American are very accessible by a non-technical reader.’

Jonathan Betz: ‘You may be interested in the VHS series ‘Connections,’ hosted by James Burke. Each video gives a history of a series of intertwined technological developments – I think I recall one that traced backwards through all the developments necessary before we could have an atom bomb. I first saw these in the eighth grade, so I think they’re about at the level you described.’

Scott Schumacher: ‘James Burke, the host of the mid 1990s PBS series ‘The Day the Universe Changed’ and current host of The Learning Channel’s ‘Connections 3’ is, in many ways, your man. Burke might best be described as a ‘thought historian.’ The title of his latest book (‘The Pinball Effect: How Renaissance Water Gardens made the Carburetor Possible‘) gives you some idea of the way that this strange and brilliant man thinks.’

☞ I love it. But please: don’t all send me the e-mail about how the size of the space shuttle traces back to width of a horse’s ass. We know that determined the width of a Roman chariot, which determined the width of the ruts in the roads, which led to the width of the railroad, which led (I forget exactly how but don’t need to know right now) to the width of NASA’s rockets.

ROMANS

Russell Turpin: ‘Of course, the Romans had running water in their cities, supplied by the aqueducts, some of which still stand in Italy, France, Spain, and North Africa. They did not have taps; but you really don’t need a tap to get water for your cup of tea. It’s just fine if the water runs continuously through your house’s basins, without ever stopping. After all, if you stop the water, then you need huge tanks to store it. And pumps to get it up to those tanks. Those tanks are not as clean as you might think. A modern water tank has all sorts of grime and dead beasties in it. You don’t think about that, when you make your coffee. Because of the chlorine in the water, it doesn’t present a health hazard. In Roman times, though, it made much more sense just to let it flow.’

Alan Flippen: ‘I don’t think Ben Franklin had running water, but the ancient Romans did. They even had flush toilets of a sort: aqueduct water ran in a trough under the public toilets so it could wash the waste away into the sewers. It was all done by gravity. You can see these toilets at a number of major archeological sites, including Pompeii and/or Ostia, just outside Rome.’

☞ See how fragile civilization is? If the Irish hadn’t saved it, we might still be living like the Visigoths.

PENCILS

Many of you linked me to the famous 1958 laissez-faire essay, ‘I, A Pencil.’

AND MORE!

David Maymudes: ‘This book is similar to the one you want: Glass, Paper, Beans. It doesn’t get as far into the basic science as you suggested, but it really is along the same lines.’

Colin Robertson: ‘I don’t know if your precise premise has been done, though there are similar books on other topics. Coffee, though, is pretty clearly gone over in Uncommon Grounds, by Mark Prendergast. Also: The Coffee Book: Anatomy of an Industry from Crop to the Last Drop by Gregory Dicum and Nina Luttinger.’

Trisha: ‘Your book has pretty much already been written, but no one wants to read it. Most people cannot imagine early calculators, bigger than today’s laptops and most kids can’t imagine a life being ended trapped down a coal mine or in a mill machine. Or that these were common as little as 100 years ago. Once you begin on what goes into a cup of coffee, it becomes hard to know where to stop. How do you justify to a kid the conditions many people have to put up with in order for you to have coffee, or the impact on the land? And then of course there’s the sticky situation of what are you going to do about it – the challenge of teaching the model citizen to conform, to behave, yet to challenge injustice. Tricky balancing act that. In Britain, the issue is dealt with by giving students a rounded education, and it takes many years, and a non-zero length attention span.’

Keith Graham, Professor of Social and Political Philosophy, University of Bristol, UK: ‘Your column is reminiscent of the most eloquent statement of our interdependence, by Adam Smith, which I quote in my book, Practical Reasoning in a Social World (Cambridge University Press, 2002, pp. 45-6).’

Barry Bottger: ‘Sounds like you have just viewed Escape From Affluenza, a wonderful PBS special from a few years ago hosted by Wanda Urbanska. If you have not seen it, you’d be surprised to see your “simple cup of coffee” essay/analogy to be a highlight of the show.’

Steve Golder: ‘Re: your coffee essay; I suspect that you, like me, get up many days and thank Fate that you live in the 21st century, in America, have food, indoor plumbing, electricity, and hot water, rather than, by chance, having been born in some God-forsaken third world hell-hole that will enter the 21st century by the time we are in the 25th. The fools who think we ‘deserve’ to drive 14 mpg cars just don’t get it. America is a great place but it breeds arrogance.’

Elliott Wong, Manhasset High: ‘Thanks for the year-long 9th grade global history assignment. It may take until June, but the book will be written. I’ll send up the best parts of my kids’ work!’

Rick Mayhew: ‘Your column today reminded me of one of my favorite quotes: ‘If you wish to make an apple pie from scratch, you must first invent the universe.’ – Carl Sagan.‘

A Cup of Coffee

I had a cup of coffee. Black.

Nothing fancy.

Not bad.

Of course, to make the coffee I had to get some water from the tap. And for that, water had to get to the tap (and I had to have a tap).

And I needed electricity to run the coffee maker (and, yes, I needed the coffee maker).

And I needed the coffee, which in this case was grown in Colombia, which required a boat or a plane to get it to my supermarket (which required a supermarket).

And grinding the beans required a steel blade which required a steel mill and, previous to that, iron ore and huge equipment to extract the ore from the ground, and railroads to get it to the steel mill.

All of which required a tremendous amount of accumulated ingenuity.

I’m not saying Ben Franklin didn’t have coffee, and he certainly had tea, so, yes, one could have done it a simpler way. After five billion years, the planet and its inhabitants had evolved by Franklin’s day to the point of organized agriculture, and cooking-by-fire and horse-drawn transport. But I don’t think there was running water.

There he was – old Ben – on his roof, flying a kite in a thunderstorm (now there’s something his mother should have warned him about), trying to make sense of – and, who knows, someday perhaps harness – electricity.

This wasn’t very long ago.

I would like to see someone write book called, quite simply, A Cup of Coffee. It would have a chapter on each element that’s involved – or at least as many as could fit (decaffeination? color printing on the sides of coffee cans?). And it would be written for a broad audience – who of us is not intrigued by how the world works? – but especially for high school kids.

And there would be two points to it. One would be to teach a lot of stuff, like how running water works and how coffee is grown and what steel is (and who Bessemer and Carnegie were) and how hot it has to be to melt – and why whatever it’s in doesn’t melt, too (or, OK, but how did they forge that?) . . . so it could be a somewhat painless, maybe even fun, high school science text.

But the bigger point would be to show the centuries of astonishing effort, sacrifice and genius that have gone into the simplest things we take for granted. The hugely complex interdependence of our world. And the cataclysmic tragedy it would be if, having come this far, we allowed our most primeval of fears and hatreds and superstitions to screw it all up.

It’s just a cup of coffee . . . but it’s a darn good cup of coffee.

Please feel free to write this book.

Are You in the Wrong Section 529 Tuition Plan?

BEWARE SUCKY SECTION 529 TUITION PLANS!

Thanks to David Maymudes and several others who forwarded the link to this important Slate story (via MSNBC.com). It shows the outrageous fees many state tuition plans charge, and concludes – as we did as long ago as March 17, 2000 – that Utah probably has the best plan. (The good news: You’re no longer stuck in a bad plan forever. Most 529 investors should now be able to switch plans as often as once a year.) For more on saving for college, go, as always, to savingforcollege.com. Lots of good stuff there, including its frequently asked questions. But it’s interesting to note that the site’s ‘5-cap’ ratings (as in caps and gowns, with five caps the best rating) seem to take no account of the investment expenses weighing down a plan’s potential performance – even though this is probably the most important consideration of all. Arizona‘s Waddell & Reed option, which the Slate story notes has preposterously, unconscionably high fees, rates the same four caps as neighboring Utah‘s rock-bottom-expense plan. (Incidentally, thanks to Less Antman and Joe Hurley for teaching me about all this in the first place.)

ERIC HOFFER

Ted: ‘By all means read the books of Eric Hoffer. His first three are pithy, insightful little books about fanaticism that are accessible and readable. However, you should be aware that he was an atheist who believed that life was meaningless. He was also an intellectual descendent of Machiavelli. If you look closely at that essay you linked to, there is no concern about Justice, merely about hypocrisy. But the question of hypocrisy is very much double-sided. I once spoke to a former longshoreman who knew Hoffer and he told me that when Martin Luther King, Jr. was killed Hoffer went around saying ‘good riddance!’ I don’t have corroboration for that, but his contempt for King does come through in his later books. He did write that Elijah Muhammad was the better realist. Hoffer was not anti-black, he just thought that the civil rights movement around King was sickly. It is the same mindset with which he wrote that essay you linked to. Hoffer had great admiration for the Jews but I have doubts whether the Jewish moralists of the past would have admired him.’