Unintended Consequences March 16, 2007March 25, 2012 I loved the idea of starting Daylight Savings Time three weeks early, but now some unforeseen effects are starting to be felt. For one thing, all this extra daylight is heating up the Earth (it being hotter when the sun is out). Uh, oh. For another, the nightly news now broadcasts in the daylight, when, if any television is watched at all, it’s Ellen, Oprah, and opera. (Soap opera.) The already dwindling audience for the nightly news has dwindled even further, rendering the citizenry even less well informed. The percentage of voters who believe Iraq attacked us on 9/11 is creeping back up. Uh, oh. But mainly, with everything pushed ahead an hour, some things will inevitably be pushed a head a full day — like today’s column, which will appear tomorrow. Set your clocks accordingly if Microsoft has not already done so for you. Until then.
Bite By Bite March 15, 2007March 5, 2017 BITE ME, MR. ATTORNEY GENERAL FEMA was politicized, the Veterans Department was entrusted to the former RNC chair, George Tenet was given a medal for his work at the CIA, Donald Rumsfeld did a brilliant job, and Attorney General Alberto Gonzales always puts Justice ahead of politics. The competence and integrity are all but overwhelming. What’s next? Industry lobbyists in regulatory roles? Creationists on scientific panels? Oh – wait. But there I go off into orbit, when all I wanted to do was answer one of my donors, who asked me to find out how many of the 93 U.S. Attorneys were fired in the Clinton era. Eight? For political reasons? As it happens, the Congressional Research Service has just released a report on this. It appears two resigned under pressure – one because he grabbed a TV reporter by the throat on camera, and the second having been accused of biting a topless dancer. BITE ME, GENERAL PACE Where to begin? At least he was honest. One day, when he has time, the Chairman of the Joint Chiefs of Staff may get to know more gays and lesbians. (Or those he already knows – and respects – may be free to let him know they are gay. Right now, they would lose their jobs). When he does, I think he will conclude that they are pretty much as moral – and occasionally immoral – as anyone else. He compares us to adulterers. Leaving aside that adultery is a choice* – why doesn’t he expel adulterers from the Armed Services? Why only gay Arabic linguists? One of the reasons I expect General Pace to come around eventually is that even George Wallace came around eventually on segregation and, more to the point, General Shalikashvili -Joint Chiefs Chair when Don’t Ask / Don’t Tell was implemented – has come around. As he recently wrote in the New York Times: Last year I held a number of meetings with gay soldiers and marines, including some with combat experience in Iraq, and an openly gay senior sailor who was serving effectively as a member of a nuclear submarine crew. These conversations showed me just how much the military has changed, and that gays and lesbians can be accepted by their peers. This perception is supported by a new Zogby poll of more than 500 service members returning from Afghanistan and Iraq, three quarters of whom said they were comfortable interacting with gay people. And 24 foreign nations, including Israel, Britain and other allies in the fight against terrorism, let gays serve openly, with none reporting morale or recruitment problems. I now believe that if gay men and lesbians served openly in the United States military, they would not undermine the efficacy of the armed forces. Our military has been stretched thin by our deployments in the Middle East, and we must welcome the service of any American who is willing and able to do the job. *Can we still even be discussing whether sexual orientation is a choice? How many straight folks do you know who have spent a lifetime trying to ‘pass’ as gay? (How many gentiles in Nazi Germany do you know who tried to pass themselves off as Jewish?) In the history of all mankind I would estimate there have been exactly none. It is not a choice one would make. By contrast, how many gays and lesbians have gone to extraordinary – and often desperately lonely, painful – lengths to pass themselves off as straight? Until the 1960s, the answer has always been: most of them. Why would they have done that if, to avoid the pain – sometimes even the suicide – all they had to do was switch sexual orientations, as one might switch political parties? Happily, thanks to readers like you, and leaders like General Shalikashvili, we’ve made striking progress in the last few decades. But – thanks to Generals like Peter Pace – we still have a long way to go. OUCH, MR. MARKET! DON’T YOU BITE ME Several of you have asked about some of ‘our’ stocks. In brief . . . TXCO reported some decent results Tuesday, depending on how you looked at them [CORRECTION: I’d characterize them as “disappointing but hopeful”]:, and the stock dropped 20% (albeit still double where we started). Call me nuts, but I bought a bit more Wednesday at $8.98. FMD is down to $42 (albeit up from $25.50 where we started). David Williams: ‘I have read that the sub-prime problems will carry over into other areas affecting loans, those who issued them as well as derivative package buying and selling, and, general credit availability. Is FMD vulnerable here?’ ☞ As I understand it, these college loans are mostly co-signed by the parents and guaranteed by TERI. Indeed, one of the knocks on this stock is that the loans will be paid off early, which might be a bit less likely if we’re in for rough times. Likewise, where on the margin a parent might have leaned on a home equity loan to help finance tuition, now there might be a bit more reliance on student loans. This might be (might be) one of those nice opportunities where the baby (FMD) is thrown out with the bathwater (much riskier lenders) only to be recognized when people take a second look. (‘Wait! Is that a baby out there in the alley? Quick! Get a blanket!’) BOREF – it is to laugh. Stock holding up like a rock. (A $9.50 rock.) As always, a lottery ticket one must only buy with money one can truly afford to lose, because even lottery tickets with great odds, as I continue to think this one has, generally prove worthless. BELL BITE-EMS Remember bell bottoms? I didn’t think so. But they were the pant leg of choice in the Seventies, and if you don’t remember the Seventies – the period just after a long, failed, disastrous war called Viet Nam – you don’t remember that the Dow, which had briefly topped 1000 in 1966, bottomed at 573 in 1974 (all this from memory, but probably pretty close, because it was searing). In a real bear market, all bets are off. Virtually everything gets killed. I’m not predicting that; but the wise investor imagines possible scenarios and tries not to take on more risk than, at the end of the day, he or she can really live with.
Magic Tweak and a Case for (Some) Cash March 14, 2007January 8, 2017 MAGIC TWEAK John: ‘With respect to Abe’s question about the Magic Formula, here’s the approach I’ve taken: When I’ve had one of the stocks for a year and the price is above what I paid, I place a stop limit order to sell the stock just a bit below the current market price. That way, if it continues to go up, I participate in the further gains (and further defer any tax liability). If it slips a bit, and triggers my sell order, I still capture virtually all of the gain.’ ☞ A perfectly reasonable strategy. The downside is that the stock – having (let’s say) risen sharply in the first year, as its undervaluation was largely corrected – will indeed continue to rise, but not as quickly as some new, more-deeply-undervalued replacement would have. George: ‘Abe should read the Magic Formula FAQ.’ Q: If after one year a stock that I originally purchased is still on the current list of top-ranked magic formula stocks, should I keep it or sell it? A: That decision is up to you. CASH VERSUS STOCKS Kirk: ‘I have come to the conclusion that holding cash, CDs, and bonds does little for growing wealth. If stocks have returned 11% long term and bonds and cash now yield only 4.5%, why would anyone want to have much cash or bonds? (Except for some emergency cash.) Why not hold 90% – 95% in conservative value stock funds and a bare minimum in cash? During the 2000-2002 bear market, large U.S. value funds lost very little money. If I had gone 95% stocks when I left college 25 years ago, I would be rich now.‘ ☞ Twenty-five years ago was the perfect time to start. Interest rates were at all time highs (Treasuries briefly got up to 15%, triple today’s yield), stocks were in the toilet (the Dow was 777, DOWN 23% from its level 16 years earlier), and America was within just a very few years of winning the Cold War and reaping a peace dividend. The long drop in interest rates did an awful lot to underpin the long rise in stocks – but I don’t see it being repeated over the next 25 years (unless it were in the manner of the Japanese drop to zero, along with an 80% drop in its stock market). And what if interest rates rose? That generally hurts stocks. The 11% historical return Kirk cites is, over longer periods, more like 9% (before netting out inflation but after including dividends), which still, unquestionably, leaves savings accounts and bonds in the dust. Going forward the next few years, the stock market return (including dividends) might be more like 7% (though who knows?), with perhaps wild swings up and down along the way. Why? Well, for one thing, performance tends to return to the mean. After an abnormally good 25 years, you might expect something less good. (Though, again, who knows?) And – see, for example, Rolling Stone, yesterday – we have an awful lot of problems to dig our way out of. If you have a long time horizon, then stocks – diversified around the globe, not all here (and probably largely in the form of index funds, for most people) – should definitely be a big part of your asset mix. But if you are saving for college that starts in two years, or for a house you hope to buy if/when the real estate bargains become irresistible (or have just enough in your emergency fund to handle one big emergency), I’d keep that money someplace safe, accepting a certain 3% or 4% (after tax) rather than risking substantial loss in hope of earning 6% instead. THAT $40,000 Jeff: ‘Your advice to George – to keep three years’ worth of spending needs, say, out of the market – would, after a year in which the market went down 40 percent, require him to withdraw an additional $40,000 because three years from then, the market could be down again. And is this not a type of ‘market timing’?’ ☞ Well, it would be market timing if, having watched the market drop 40%, you decided maybe not to take that next year’s $40,000 out of the market at depressed prices – let alone selling everything in a panic. (You don’t think people panic? Ah, the short memories.) One of the reasons not to have money you really need in the stock market is that you could lose it. But a second reason is to make it less likely that you – who have a nice fat cash cushion – will panic . . . or even just lose a lot of sleep.
Two Civil Wars (One Fictional) March 13, 2007January 8, 2017 ABSURDISTAN I keep trying to decide whether to recommend this book. On the one hand, it’s a dazzling novel, hugely fun to listen to as read by Arte Johnson. On the other hand, to call it earthy would barely begin to raise the red flags. Oh, my. (And not, ‘oh, my, hot,’ oh, my, gross!) But this thing about Halliburton hieing to Dubai tipped me over the edge. Not to spoil the plot, but ‘Gollyburton’ (as Misha, our overweight protagonist, calls it) plays an important role among the Absurdstvanis. CRY, THE BELOVED COUNTRY Rolling Stone pulled together a roundtable to discuss scenarios for Iraq. It’s all worth reading, but in case you don’t have time, let me ruin your day with just a few snippets: Former Senator Bob Graham: ‘If you’re looking for an analogy, it’s going to be a heightened version of the civil war that ravaged Lebanon for fifteen years.’ Gen. Tony McPeak (retired), Member of the Joint Chiefs of Staff during the Gulf War: ‘Iran’s influence will have been increased geometrically. We’re already the losers in this, and now we become the big-time losers.’ Michael Scheuer, former chief of the CIA’s Osama bin Laden unit; author of Imperial Hubris: ‘The neoconservatives and their war in Iraq have made Israeli security worse than at any time since 1967.’ McPeak (again): ‘This is a dark chapter in our history. Whatever else happens, our country’s international standing has been frittered away by people who don’t have the foggiest understanding of how the hell the world works. America has been conducting an experiment for the past six years, trying to validate the proposition that it really doesn’t make any difference who you elect president. Now we know the result of that experiment [laughs]. If a guy is stupid, it makes a big difference.’ Tomorrow (which you can read today): Cash Versus Stocks and George’s Retirement Money
Trust Your Common Sense March 12, 2007January 8, 2017 I’m basically taking the day off – read Krugman! read Rich! But two of you asked questions that won’t take long to answer, and in the answers to which I discern this common thread: when it comes to money, don’t be afraid to trust your common sense. Abe: ‘I’ve written to you and to the Magic Formula guys and no one seems to read my mail. Maybe it’s just me. I’ve read the book twice completely. I am willing to give it a try BUT I would like to get an answer to one question: At Step 6 on page 135 it tells me to sell each stock after one year. No problem, except why would I sell winners in a taxable account IF THEY ARE STILL ON THE LIST OF TOP RANKED COMPANIES and then be forced to pay Uncle Sugar any taxes at all? Please help me out here.’ ☞ If they are still top values, there is, of course, no reason to sell and then buy them back. (It’s a magic formula, not a robotic one.) George: ‘You write: ‘If you’re in the market with money you’ll likely need to draw on in the next two or three years, remember that you shouldn’t be in the market at all.’ I don’t understand this. Suppose I have a million dollars and I want to retire in two years, and I want to withdraw $40,000 a year when I retire. How should I plan my withdrawals? Do you mean I should just put the full million in the bank now and withdraw my $40K a year from there? [No!] Since I need $40K in two years, should I take it out of the stock market today and put it in the bank to use two years from now? [Exactly.] Then another $40K next year? [Right.] Then each subsequent year should I spend $40K from the bank and pull $40K from the market and put it in the bank? [Yep.] Wouldn’t that be equivalent to putting $80,000 in the bank and then pulling the $40K from the market each year? [Uh, huh.] And wouldn’t that $80,000 provide a better return if I just left it in the market?’ [Not in years the market gets creamed.] ☞ All I’m really saying is that, over any given year or two or three, the market is quite risky – and for many people, that risk is not advisable to take. The market occasionally drops sharply. In the U.S., it has always recovered, generally within just a few years, and eventually gone on to attain new heights. I’m hopeful that pattern will continue. (And no one says you need to limit your investments to the U.S. market alone.) But if your portfolio fell 40% – say – wouldn’t it be easier to cope with, financially and psychologically, if you had no need to sell anything for at least a few years? Better, I think, to be satisfied with a guaranteed 3% or 4% after tax on money you’re going to need when your car dies or your roof leaks or the tuition bill arrives. # Now, let’s go fishing (or ice fishing, as the case may be).
Magic March 9, 2007March 5, 2017 John Boone: ‘I tried using the Magic Formula investing method for 2006 and made a 25% return. I used the Magic Formula website to choose stocks. Recently, I Googled ‘Magic Formula Investing’ and found this website which claims that the Magic Formula website is not being maintained properly. Do you have an opinion on this?’ ☞ My first-blush opinion is that if you made 25%, it couldn’t be that badly maintained. MAGIC – AND TAXES Prasanth: ‘I’ve been putting more and more money into a folio (I use FolioFN) of Magic Formula stocks since last June. (My return: 12.6%, which is ok – slightly less then the S&P500 including dividends. Would be 18+% if I had been putting the same amount into each stock purchase – again, been increasing my contributions.) However the one concern I have is taxes, because this in a nonretirement account and the magic formula is turning over a 100% each year. Yes, you are supposed to sell the losers less then one year after purchase and the winners a little after a one year to maximize tax losses vs. gains. But an average index fund has something less then 10% of turnover a year. Over the long term, couldn’t this significantly knock down the results from the Magic Formula even if does beat out the index in returns?’ ☞ Yes and no. In the first place, the idea (though obviously not the guarantee) is to beat the index fund, over the long run, by a lot. But even leaving that aside, note two things. First, while the index fund does a superb job of deferring your long-term tax liability – which is definitely an advantage, especially over long periods of time – taxes will have to be paid on those gains when you sell your index fund shares. Indeed, it’s possible that the tax rate might be higher then, although you will have had the use of ‘Uncle Sam’s’ share of your nest egg for all those years. Second, there can be advantages to the tax control that do-it-yourself provides. This is especially true if you are at the point in your life where you are able and eager to make charitable contributions each year. Use the short-term losses to lower your ordinary income; some of the long-term gains to fund the charitable giving you would have done anyway. (Only, now do it through something like Fidelity’s Charitable Gift Fund.) THE MAGIC OF CFLs Tom Kabat: ‘It’s even better than you said. You said: ‘$32 a month savings for 40 years invested in a Roth IRA at 15% a year … works out to $728,953. Less the cost of replacing the bulbs every few years.’ But if I include an average 6%/year electric rate rise (like my utility has averaged for 20 years), the Roth IRA holding the savings grows to more than $1.18 million! Also you don’t need to subtract the cost of replacing the bulbs every few years since they will have saved more than their own cost in incandecsent bulbs. At any price less than $5/CFL the CFL costs less than the 10 $0.50 incandescents it replaces in its long life. I’m still giving away CFLs to charities, house warmings, stocking stuffers, tips, etc. just like I wrote to you in 2000. Instead of banning incandescents – my daughter still needs one in her SuzyHomeMaker Easybake Oven – maybe they just need a carbon tax of about $5 per bulb placed on them.’ MAGIC? YOU DECIDE But how else can you walk on milky water?
You Give This Video 6 Minutes, It’ll Give You the Next 40 years March 8, 2007March 5, 2017 CREDIT CARD ABUSES Have you ever been charged a $29 fee for being 2 days late with a $15 payment? With the Democrats back in control of Congress, guess what? As you likely saw on last night’s news, credit card companies are being called to task for some of their more outrageous, bullying, tactics. Already they are announcing some voluntary changes. Democrats care about people struggling to make ends meet. Republicans, when they had the gavel, cared about toughening the bankruptcy laws even for victims of catastrophic illness. I am a capitalist. But to work well, capitalism needs enlightened oversight and regulation. Democrats don’t want a welfare state; but we don’t want Dickensian London, either. HECK OF A JOB, JIMBO And while I’m being partisan . . . The same ABC newscast reported: A proposal to keep seriously wounded vets from falling through the cracks of the bureaucracy was shelved in 2005 when Jim Nicholson took over as the secretary of the Veterans Affairs Department, according to the former VA employee who was responsible for tracking war casualties. As a result, seriously wounded veterans continued to face long delays for health care and benefit payments after being discharged from the military, says former VA program manager Paul Sullivan. . . . And what was Jim Nicholson doing before he was appointed to this Cabinet post? He was chairing the Republican National Committee. (Can’t get much more partisan than that.) Republicans don’t govern terribly well – be it their management of FEMA or Iraq or this V.A. disaster or applying oversight to the credit card industry – because, some say, they are pretty much anti-government. OUR EXPONENTIAL TRAJECTORY Has this six-minute video already landed in your in-box? The one about ‘shift happens?’ Some of it, especially at first, is kind of simple-minded (did we not know there are four times as many people in China as there are here in the U.S.?). But it builds. Today’s kids really ought to watch it before deciding not to do their homework.
Er, Er, Costa Rica and Iran March 7, 2007March 5, 2017 More travel, but first . . . SCOOTER Bob M: ‘Having just served five weeks as a juror in a murder trial, I know first hand the hard work and difficulty twelve people face as they seek to come to agreement on charges as serious as these. The fact that twelve people found Libby guilty on four of five charges is huge. Just huge! Libby is guilty – and who did he work for? Bush and Cheney.’ ☞ Imagine if they had worked as effectively to get Bin Laden (‘dead or alive’) as they did to get Wilson and his wife. COULTER Jeff: ‘Well, Coulter is pretty clearly a self-loathing gay man in drag, but please don’t compare him to idiots. I have good friends who are idiots.’ Andrew Sullivan was in the room when she said it. His response to her response that it was ‘just a joke.’ FORECLOZHER “In all the years I’ve done this, I’ve never seen this many foreclosures,” said Nancy Bennett, supervisor of St. Lucie’s circuit civil clerks division who has worked in the office for more than 20 years. “It has never been like this.” . . . ☞ Stories like this lead buyers to drive harder bargains and sellers to accept less . . . which drives home values partway back down to where they were a few years ago and puts more mortgages under water . . . just as introductory come-on rates are phasing out and monthly payments are rising . . . triggering more foreclosures . . . which adds more supply to the market for homes, driving prices down further . . . undermining consumer confidence, creating fears of a recession that would cost jobs and lead to more foreclosures, which . . . well, you get the idea. The optimists, like long-time observer (and newsletter publisher) Adrian Van Eck, believe the bottom has been reached or is very near. Homebuilding has been ratcheted way back, to keep unsold inventories from piling up as they might have, he argues; and Fed chair Ben Bernanke, he believes, has a strong bias against allowing a vicious cycle to start (or, if it’s started already, against letting it get very far). I obviously don’t know who’s right, but I would not rush to buy stock in homebuilders or sub-prime lenders, even though they’ve fallen sharply. And if I were in the market for a house, I’d be making aggressively low offers. And now . . . COSTA RICA Terry: ‘I just returned from an eight-day bicycle tour of Costa Rica. We rode from the San Jose airport to the Pacific. A few observations: 1. I drank only tap water and had no ill effects. 2. Although most of the bridges were one lane with no guard rail, crossing them on a bike was not disconcerting. 3. Every visitor should do a zip line canopy tour. 4. Most restaurants had a daily lunch special called ‘casado’ with a choice of either beef, chicken or fish. It cannot be beat.’ ☞ On top of which, there are no contingency plans to bomb Costa Rica! Sat Feb 24, 2007 8:10PM EST NEW YORK (Reuters) – Despite the Bush administration’s insistence it has no plans to go to war with Iran, a Pentagon panel has been created to plan a bombing attack that could be implemented within 24 hours of getting the go-ahead from President George W. Bush, The New Yorker magazine reported in its latest issue. . . . In response to the report, Pentagon spokesman Bryan Whitman said: ‘The United States is not planning to go to war with Iran. To suggest anything to the contrary is simply wrong, misleading and mischievous. The United States has been very clear with respect to its concerns regarding specific Iranian government activities. The president has repeatedly stated publicly that this country is going to work with allies in the region to address those concerns through diplomatic efforts,” Whitman said. IRAN A three-minute video.
Big Cities March 6, 2007January 8, 2017 Yes, I know the market’s been weak – do you think I live under a rock? And, yes, I know it may get weaker (all those chickens I keep worrying about) – which is why you have invested only long-term funds. Money you expect to need in the next few years you have earning 5%, pre-tax, safely in the bank, or some other such esoteric place. But that’s always true. Today, a travel montage: NEW YORK Wonderful photos from a century ago. (Thanks, Roger!) PENNY POSTCARDS Ah, the innocent Americana. Tell me this one, from 1908, wasn’t worth a penny. THE MAYORS OF LONDON, PARIS, BERLIN, AND MOSCOW Two are gay, one is gay-friendly, the fourth was gently chided for his intolerance by the first three. NEW YORK ON, WHAT, MAYBE $250 A DAY? Doug: ‘Your ‘per-diem-with-allowable-exceptions’ correspondent writes, ‘But when going to let us say New York, I can still expense those NYC-priced dinners.’ Just as a small personal finance hint to your loyal readers, I thought I’d share some hints about enjoying a visit to NYC without breaking yourself on $250 hotels and $50 dinners: Stay in New Jersey and commute in by bus or PATH each day. Get an Unofficial Guide to New York and a Zagat guide to choose medium and lower-priced dining. Get theater tickets at TKTS. The Staten Island Ferry goes right past the Statue of Liberty for free. Most museums are only $10-15; the Metropolitan never charges extra for special exhibits. An MTA day pass is $7 for the whole city all day. Visiting NYC ain’t cheap; but doesn’t have to be expensive. Eight million residents aren’t all millionaires.’ ☞ But we all hope to be.
Two Movies, One Hero, A Book, and an Idiot March 5, 2007March 5, 2017 ANN COULTER Listen to the Republican laughter and applause in this 34-second clip, mocking a presidential candidate as ‘a faggot.’ (She followed Mitt Romney – all this on CSPAN – who said, ‘I’m happy to learn also that after you hear me, you’re going to hear from Ann Coulter. That is a good thing.’) ERIC ALVA In contrast, consider Eric Alva’s story. He gave 13 years of his life and part of his right leg in service to his country, the first marine to be wounded in Iraq. (And gay.) BREACH What a good movie. Based on a true story – my favorite kind. AMAZING GRACE I went to this one having no idea what it was. It’s so rare you get to experience movies that way any more. So I won’t tell you, either, in case you’d like to experience it the same way. But it, too, is based on a true – utterly compelling – story. Wonderful. AMERICA ALONE Elliot Raphaelson: ‘I am not a conservative, but I recommend that you read America Alone, by Mark Steyn. He is a conservative but one who makes sense. He has made me think differently about a lot of issues.’ ☞ I’m for thinking. At least in moderation.