Author: A.T.

Patrick Lines: “I have secured a copy of MYM 12.0 from a used software vendor —www.exchangehq.com/index.htm — so I should now be good to go!”

A used software vendor? Who knew? Does this mean you can actually SELL some of that worthless old software you’ve got sitting up in the attic? Check it out.

I do know that you’d be nuts to start with MYM 12.0 — Managing Your Money — the terrific DOS program I still use. That would be like being asked at birth which language you want to know by the age of 5 — English or Hungarian — and choosing Hungarian. But if you already speak Hungarian, and if your entire library of Hungarian books had been lost in a fire, well, this analogy is getting pretty tortured, but you know what I mean.

I just bought a used copy of Excel 5.0 for $39. How bad can that be versus $260 for the newer version?

Recently, I needled American Express for sending out a less than candid direct mail solicitation — a 4.9% credit card offer that was really 8% if you read it carefully.

And in years past, I have had my share of complaints about the GM Mastercard — as have you. (It turns out GM does not actually handle this card itself, it just reaps the ill will.)

So now comes an “Important Amendment” to my GM Mastercard account (that can’t be good, I’m thinking), disguised as just the best darn news.

On the outside of the envelope is a photo of a beach chair and umbrella and the enticing headline:

Save money every day —
and claim your 2 Complimentary Round-Trip Airline Tickets.
Find out how inside.

A blessedly brief letter from Charles F. Ugolino begins, “Dear GM Cardmember: As you know, from time to time we do something special for our best GM Cardmembers — and right now is one of those times. Now you can claim two Complimentary Round-Trip Airline airline tickets just by trying RateSaver (servicemark) risk-free for 30 days.”

Yes, the next to last little paragraph — in bold, to answer critics like me — does say, “Also enclosed, please find an important amendment to your Account.” But the PS reminds you that you can save up to $180 a year with RateSaver (servicemark) — and claim two free airline tickets.

The enclosed brochure has big type, color, and more mention of the $180 and the free tickets.

Well, it seems that the $180 consists of a some kind of savings on your electric and phone bills — it does not say how, but appears to be the result of this great RateSaver (servicemark) program, which is free for 30 days but then automatically billed to your card — $69.95 each year unless you call to cancel. And you also get an Internet connection for just $9.95 (for the first two months, $19.95 thereafter). And you get $175 cash back on a home security system and monitoring (the footnote explains, in 6-point type, that you have to buy a security system and commit to $718 in monthly payments to qualify for that $175 rebate), and “as an EXTRA Bonus, you may also claim 2 Complimentary Round-Trip Airline Tickets to use on your next vacation.” Except that to get them you have to stay a certain minimum number of nights at certain participating hotels and resorts at their full room rates (and not during peak vacation times), though to find out the specifics of just how bad the deal really is you have to affix your address label and send in the card authorizing the 30-day risk-free RateSaver (servicemark) trial after which, if you don’t call to cancel, you’ll be billed $69.95 a year.

At which point I’m guessing many folks are so confused or annoyed they just throw the whole thing out. I went all the way from K through 12 without a hitch and yet, after reading this twice, have no real clue what they’re offering. Does RateSaver (servicemark) somehow lower any phone bill? Do I have to switch carriers? Does it shut off my air conditioner at peak times to get me a discount from the power company? Do I have to buy a security system to use RateSaver (servicemark)?

Other people are so confused but curious that they affix their address label to the detachable business reply card.

Either way, Household Bank (which issues the GM card), wins — because you see what’s happened? You’ve forgotten all about the Important Amendment to your account. This is on a separate slip of paper, small type, no color, legible but forbidding, and it basically says (though not quite this way, of course): “Due to our uncontrollable desire to gouge people any way we can, we’re raising the interest rate on your balances effective June 1 to an unconscionable 23.9% if you’re even a day or two late with a single payment or if you exceed your credit limit by even twelve cents (which we could easily prevent by declining the charges — but why? We’d much rather let the charge go through and ratchet your interest rate up to 23.9%).”

And there’s more good news! Want a cash advance? In addition to the modest 19.99% Household bank will charge you for this, a 3% “finance charge” will now immediately hit your account — minimum $15. So let’s say you’re tight for cash and you use your card to withdraw $300 and pay it all back in a month. That’s an immediate $15 (the minimum) — which works out to 5% — so you’re really getting to borrow $300 (or $285, depending on how you look at it) for 30 days at a cost of $15 plus $5 in interest — $20 in all. That works out to an annualized interest rate well over 70% a year. Granted, if you hang on to the $285 for a year, the effect of the $15 minimum is spread out. Now you’re paying more like 25% a year.

But the main thing, to go back to the beginning, is: “As you know, from time to time we do something special for our best GM Cardmembers — and right now is one of those times.”

I’m so tuckered from not doing my taxes last night and worrying about how to get them done by August 15, I need a break. So what I offer you instead today are the next three chapters of Fire and Ice, my once best-selling, now long-out-of-print, biography of Charles Revson, the man who founded Revlon. Just click “BOOKS” on the header above, then scroll down to Fire and Ice, and click “excerpt.” You should find Chapters 1 through 4.

More chapters to follow soon.

Reacting to yesterday’s comments on asset allocation, my wise friend Less Antman writes:

“I, too, believe a bear is coming soon. Once again, my high/low divergence indicator is screaming SELL, and I’m turning a deaf ear.”

Less is turning a deaf ear because he believes it’s pointless to try to time the market. That if you are sensibly allocated, you should just stay the course through thick and thin.

“If people just split 50-50 US and International, they’re safe over a 5-year period as long as they don’t panic in the short interim. (Indeed, if they’re still adding new money, they’ll benefit from the lower purchase prices during that interim.) Asset allocation still works. Even with the extreme outperformance of big U.S. blue chips, a 27% return from large U.S. stocks last year would only have been reduced to 22% with a 50-50 mix of U.S.-International, yet the dangers of a big hurt from a big U.S. crash would have been massively reduced.”

Less did a little back-testing and reports:

“From the end of 1972 to the end of 1998, an all-large US portfolio would have returned 13.5% per annum, while the conservative Cash Equivalent-US Index-Intl Index equal split you recommended in The Only Investment Guide You’ll Ever Need yielded 12.1% over that time. The 1/3 cash equivalent holding softened the horrific 1973-4 worldwide crash so much that by the end of 1975 the investor was profitable again. Just 1 year to fully recover from the bottom, and 3 years from peak to new peak! (And the maximum cumulative loss was reduced from 37% to 20%). Frankly, when the difference between a nifty-fifty fanatic and a fuddy-duddy allocator is only 1.4% per year, you’re not giving up a whole lot being a fuddy-duddy. You give up more than that in management and trading expenses owning actively-managed funds instead of index funds. You also give up more than 1.4% in bid-ask spreads trading high flyers (just because commissions are trivial doesn’t mean trading is cost-free). Not to mention the extra taxes eaten away if it isn’t all sheltered.”

I’m not sure, but I think Less is calling me a fuddy-duddy.

He then quotes one of my lines from yesterday, where, after expressing my nervousness over today’s high stock prices, I said, “But I have been so wrong about this for so long, it may just be old age.”

No, Less says . . . “The problem is that you’re too young. Had you been born 25 years earlier, you would have started investing in 1942 and experienced 30 years of rising prices without significant breaks. Then you would have taken the bear ending in 1974 in stride and enjoyed the next long wave. I find it interesting that both my mother and her best friend, in their mid-70’s, are heavily invested in stocks and have been so continuously since they started invested. They’re not naive about bear markets, they just started early enough with so many winning years in a row that they understand the pointlessness of worrying about tulips every time the market gets ahead of itself. Or maybe their unrealized capital gains got so big by the time of the first bear that they couldn’t afford to panic out.

“And if you had been a little over 100 years older, you would have enjoyed the almost continuous 67-year rise in stocks from 1862 to 1929, watching a second-rate country ranked 14th in per capita wealth grow to number one and way beyond. Talk about the dangers of waiting a lifetime for the next bear market before investing!”

I love Less’s enthusiasm for all this. But I think it’s also worth noting that from 1862 to 1929, and from 1942 to 1973, the basic financial ratios — things like the ratio of stock prices to earnings, stock prices to cash flow, stock prices to sales — were a lot more conservative most of the time than they are today. So I’m heartened by his finding that the “a third, a third, a third” asset allocation referred to above, of which he approves, would not have held back performance too terribly from 1972 to 1998. It could be at least as appropriate (for the fuddy-duddies in the crowd) today.

Thad Fenton: “I’ve noticed a disconnect recently in traditional correlations between asset classes and wonder if we have entered into some new economic model. For example, there is an ongoing major political event that threatens economies in many ways (the Kosovo “peacekeeping” conflict). Historically, this kind of uncertainty would cause gold prices to go up, stocks to go down, and perhaps a flight to US Treasuries. Amazingly, through this and similar events of the last, say, 12 months, gold has not gone up. The stock market, rather than taking a dive, has actually gone up. There has been no flight to Treasuries.

“I wonder why this is? Could it be that communications and more or less efficient global markets have eliminated fear and risk in the marketplace? If this phenomenon continues, does your friend the Asset Allocation Expert think new models are warranted? Are precious metals and heavy weighting in long bonds relics of the past?”

Well, there’s no “answer” I suppose, but mine would be that a situation like Kosovo simply underscores that the U.S. is currently the sole Superpower — very different from, say, the Cuban missile crisis — and in this case shows all of NATO working together. So maybe what something like this tells the average investor is: Gosh, we’re lucky to be so strong and not to live in Kosovo. The sad, awful events there will have no impact on the sale of most goods and services around the world, nor slow down the world’s astonishing technological progress — or the breathtaking knitting-together of communications and commerce. So: full speed ahead!

I’m not saying this is entirely how I feel. I’m not comfortable when the market goes up on good news, bad news, no news, wrestling news, cooking tips . . . ANYTHING these days seems to make the market go up. So I would not rush to buy Gillette at 53 times earnings or AOL at 717 times. But I have been so wrong about this for so long, it may just be old age. And, happily, I do own some stocks.

My hope is that we will — if not forever, then at least for a long time — avoid the terrible problems and setbacks that have plagued all of human history. The spread of technology, and its acceleration, lead to increased efficiency. That leads to increased prosperity. Prosperity nurtures peace. Peace nurtures prosperity. All this really may offer a new model, of sorts. Maybe the market’s a bargain here and the new world order is: buy!

Then again, electricity was no small thing — think about it! — and neither was the telephone or the airplane or television or computers. Yet the market didn’t go up 20% a year over the last century, or anything even vaguely close. And recessions and panics did not disappear.

In short, asset allocation may not have lost its relevance.

Maybe you’ve seen the “magic” web site where you are shown 6 cards — 2 Jacks, 2 Queens, 2 Kings — and are told, with suitable graphic hoo-hah and abracadabra, to select one in your mind. Then, after some more abracadbra, just five cards are displayed — and, amazingly, THE ONE YOU CHOSE IS MISSING!

This actually astounds some people.

Of course, the trick is that ALL six original cards are missing. Yes, there are still Jacks, Queens and Kings as before, and there are still Diamonds and Hearts and so forth. They’re just different from the first six. (“That’s cheating!” “You tricked me!” Well, that is of course why they call them magic tricks.)

I mention this because the daily mail we receive is another “find the trick” kind of game, except that unlike the Magic Card Trick web site, those who miss the trick suffer financial consequences.

Some are worse than others, of course, and the one I got this morning was not so terrible — but here it is. It comes from my American Express Delta Skymiles Card, and consists of four pre-printed “checks” I can use to borrow up to $20,000 (my credit limit) at just 4.9% for eight months.

I was tempted to write a check for $20,000 and use it to invest in something pretty safe I think may earn MORE than 4.9%.

Yes, it might be hard to get the IRS to accept an interest deduction for that 4.9% (credit card interest is normally not deductible), though it might well be justified as investment interest expense. But leaving that aside — what’s the trick? How can Amex make money lending at 4.9%?

Well, the main thing is that, deep enough in the letter that you might miss it, they mention that there is a transaction fee for each check you write of “just 2%.” That’s “just $400” in the case of the $20,000 check I had in mind. So suddenly the rate jumps from 4.9% to about 8%. (If you got to borrow it for the full year at 4.9% plus 2% that would be 6.9%. But you’re paying that 2% for what may be only six or eight months’ use of the money.)

(And technically, if it’s a transaction fee not interest, then that part would presumably NOT count as investment-interest expense, even if you wrote the check to make an investment. It would be a “miscellaneous” investment expense which, because of the threshold you have to meet before deducting such things, would probably do you no good. Not to say anyone in your household or at the IRS would/should spend a great deal of time determining the tax treatment of $400.)

And the second thing is that if you should fail to pay your monthly bill on time, the promotional rate disappears and it’s all recalculated to 22% or whatever Amex is charging these days.

Amex knows that a certain number of people, through financial difficulty, sloppiness, or just being away on business too long to get back to do their bills in time, will get tripped up by this. And there is also the hope that even if you do pay the monthly minimums on time, you will not be able to pay off the balance in January, when the promotional rate ends.

Is this a terrible deal? No.

Is it “a trick” to highlight 4.9% everyplace in the mailing and on the envelope, and bury the tiny little all-but-trivial 2% transaction fee and dire consequences for being late with a payment? Sure. And, this being America, I think Amex has every right to do it. They disclosed their terms and would doubtless live up to them. No regulation or class action suits are called for . . . just a healthy skepticism whenever you get a financial offer in the mail. Many or most of them contain tricks.

Through one of the wildly complicated telephone promotions now being phased out, I was entitled to cash in my AT&T points before the program disappeared. Rather than just throw away this opportunity, brought to my attention by a mailed brochure and reply envelope, I must have selected a $10 gift certificate at The Gap. I assume so, because I just received said certificate, along with a cover note from Denise Janiec-Domino, the Program Director for AT&T Rewards.

This is a woman who believes in what she’s doing. “Congratulations!” her letter begins. In a world of humdrum commercialism, here we had something to celebrate! Enclosed, she said, was my “invaluable” reward.

Now, I don’t mean to get all Bill Safire on you, but what is there about a $10 gift certificate that makes it invaluable? Is it not one of the relatively few things in life that can be more or less precisely valued? Is it not worth, at most, ten bucks? Would Ms. Denise Janiec-Domino consider trading me, say, a week’s pay, for my invaluable reward?

I think not.

Come on, guys! Relatively soon, thanks to the Internet, everyone in the world may be speaking English. Let us not destroy the language before they get here.

“It’s fair to say that most of the people I know have accounts at AOL and my students spend a fair amount of time in AOL chat rooms. But a friend of mine did the mental gymnastics and estimated that AOL [$167 on Monday] would need to fall to $50 for P/E=100 on estimated 2001 earnings! I have no doubt that AOL will still be standing in 20 years, but there’s got to be a limit to its subscriber growth (and thus to their profit growth), no? It’s not a consumer non-durable like Gillette or Coca Cola, and it doesn’t recreate a market cycle like Microsoft or Intel. So, Andy, can you (or one of your other readers) defend the current valuation for AOL?” — Elliott Wong

Say in 10 years there are 1 billion users on the net and AOL has managed to be such an indispensable community that everybody chooses to use it. Or well, one in two — 500 million people. Is that impossible? Surely half the people who use personal finance software choose Quicken, half the people who use word processors choose Microsoft Word — no?

And say they figure out a way to extract $50/year in after-tax profit from each of us, through fees, ads and commerce. That’s $25 billion in profit. Give it a 25 multiple, and you have a $625 billion market cap, versus today’s measly $150+ billion.

And (while we’re doing preposterous math), say you don’t have to discount the numbers to account for the 10-year wait, because that $50-a-year in after-tax profit will actually increase at your discount rate.

So . . . it’s selling today for a quarter of its true value!

(Do I buy this? No! But you asked.)

If you use these same extremely if not wildly aggressive assumptions, and figured the $50 profit would be the real number in 10 years, then you do have to discount the value of that $625 billion market cap. What’s $625 billion ten-years-from-now worth today? The answer, if you expect to be “paid” 15% a year for taking risks like this (or else why not just accept 5% from a bank?), is $155 billion, or about where it was Monday.

If you think you should get 20% a year to take so much risk, then the market cap today should be about $100 billion, and it’s $50 billion too dear.

If you think internet access will essentially be free and AOL will be one of dozens of companies competing like crazy for everyone’s business and that it will be earning “just” $10 billion after tax in 10 years, then it is wildly overpriced.

And if profits even that small — $10 billion a year — should prove elusive a decade hence, then paying $150 billion for the company today will, with hindsight, have been nuts.

But it’s also possible (I suppose) that AOL and a few others will rule the world like no other companies, and only a few empires, before them. In which case these stocks are cheap.

Leave it to my excellent readers, in this case Michael Gordon, to do my research for me. Michael directs those interested in foreign stocks, or more specifically the American Depositary Receipts that represent them, to these two sites:

www.bankofny.com/adr/adir.htm

This one, from Bank of New York, has an easily accessed directory of every ADR you’ll ever need, or at least all the ones I could think of. And when you scroll to the right, you find out where it’s traded, what its “CUSIP” number is (so your broker can be sure he’s buying you the right thing), and the ratio of underlying foreign shares to each ADR.

http://www.adr.com

This one, from JP Morgan, is less comprehensive in terms of the ADRs, unless I missed something, but offers very interesting global maps and market information that allow you to “drill down” by region and industry and so forth.

The Bank of New York site is only interesting if you’re checking out a specific security. (And then it’s very helpful.) The JP Morgan site might be worth a look even if you just want to remember where Thailand IS, exactly, and how its stock market has been doing.

Thanks, Michael.

I will never forget (this is a completely true story) riding in business class someplace 10 years ago, reading a Business Week article about the Japanese stock market, which had just reached 40,000 on the “Nikkei Dow.” Even at 20,000 a year or two earlier, people were marveling at it and looking for ways to short it. (Happily, I didn’t find a way until it had doubled.) At 20,000, it seemed awfully rich. And now, as I flew out to the West Coast, it was 40,000.

Not to deny that the Japanese had the rest of the world way beat in consumer technology and production methods and management and the harmony of their work force. They did. No matter how high the yen got (or how high the price of oil some years earlier, of which they produce none), they found ways to produce more efficiently and keep their quality products competitively priced. And their kids spent more time in school than ours, and there was no crime, and their cholesterol levels were half mine, and — while there is no shame in being the number two economic power in the world — it was obviously going to take the U.S. a lot of getting used to. Yet it was a real possibility. So maybe 20,000 was justified — but 40,000? One of the Japanese money managers in the article was quoted saying the market, at 40,000, was a clear buy. I circled that quote.

Meanwhile, I kept looking over at my seatmate, wondering whether I should ask him about this, because, truth to tell, he appeared to be Japanese himself. We got into a little general conversation — it turned out he was a financial whiz — and I asked him what he thought of the Japanese market. Could it go any higher? Was it poised to fall?

He fielded the question with youthful enthusiasm, saying that he thought the Nikkei was in a long-term upswing, all signals go . . . digging into his briefcase as he spoke and pulling out the same issue of Business Week I had been reading and pointing — THIS IS A COMPLETELY TRUE STORY — to the quote I had just circled. “Look,” he said a little flushed by the headiness of it all. “They quoted me.”

Next to my Elaine May story (you’ll just have to wait for that one), or possibly Karel Urbanek (that one, too), this was surely the spookiest thing that has ever happened to me.

Even so, I was sure this young financial whiz was wrong, and a decade later the Nikkei Dow, having gotten down into the 13,000s and 14,000s for quite a while, is finally showing signs of life.

So is now the time to buy? I long since lost that fellow’s business card, and he’s probably switched jobs by now, so we will just have to dope this out by ourselves.

Doug Aker writes: “Your brief reference in your column a few days ago about investing in Japan got me wondering perhaps you were thinking the same thing I was. To those who may NOT be thinking along these lines, an exercise: go to http://quote.yahoo.com and compare 10 year charts for ^DJI (Dow) vs. ^N225 (Nikkei). Then ask yourself: Over the next five years, what’s more likely: Dow 20,000 or Nikkei 32,000 (or even 40,000)? If Japan (STILL the world’s #2 economy) is now truly poised for a rebound, the Nikkei’s got a lot of catching up to do. To those who feel BURNED about not getting into the US stock market in the early 90’s, Japan’s your chance to take a trip in a time machine.”

So I was all set to run out and add to my position in a stock called Tokyo Marine (TKIOY), which I had bought at 51 and was already up to 59, when I opened this, from Malcolm Bersohn:

“I’m the guy who went to Horace Mann 20-30 years before you and yet a couple of our teachers were the same. I also recommended Merck to you when it was about 45. [It’s 80 or so today.] Anyway, those are my two claims to fame. I strongly advise you not to hint to anybody that they should buy Japanese stocks. You are probably thinking that matters are like a pendulum, the Japanese economy swings up then down, soon up again, then much later down again etc. etc. Actually and sadly for the hardworking Japanese ordinary people, the pendulum is now broken. It might take half a century to fix.”

And when you think about it in really simplistic terms (when have I ever not?), if Japan’s index seemed very high at 20,000 ten years ago, why should it seem a bargain at 16,000 today? Is its economy in nearly as strong a competitive position as it was ten years ago? No. Has it grown since then? Not much. Have we and the Europeans gotten leaner and meaner? Yes. Have other Asian countries with much lower labor costs gotten more technologically proficient? Yes. So is there much reason to see the Nikkei run back to 40,000 any time soon? None.