Author: A.T.

“Your article today reignited a thought about us all getting older. I am a 1957 boomer and a contrarian. So with all this success of the stock market, I see gloom coming. This is especially true when I think of my generation retiring (more importantly, those slightly older than me). Who is going to buy all these shares? My broker says we’ll cross that bridge in ten years, selling before the wave hits. Haven’t other people thought the same thing?” — Steve H

Yes, and it could be a (huge) problem. But as I’ve suggested, 500 million emerging middle-class Asian and Latin American investors could begin to take up the slack.

Also, the “selling wave” will not hit all at once — most people don’t want to “Die Broke,” and so would rather live off income than sell. (Is it possible Yahoo might not only one day make a profit, but even pay a dividend? I frankly doubt it, but others will. Especially once all us voting seniors force Congress to end the double-taxation of dividends.) Too, if they hold on, they avoid capital gains tax. But yes, there would be some selling, and some shifting of assets from stocks to bonds. No question.

Finally, if technology continues to race along, as is likely . . . and we don’t spoil it with shooting wars or trade wars or labor/management wars (and it isn’t spoiled by a plague of natural or manmade environmental disasters) . . . then productivity and prosperity will rise markedly, and THAT could rescue us.

Say cars get 100 miles to the gallon instead of 20 by then, as is very possible. Suddenly, other things being equal, what we spend on gas goes down 80%. That lessens the need to sell stocks to pay Exxon. Certainly the need to sell stocks to pay for long distance phone calls to the grandkids has plummeted in the last 50 years, and will plummet further. The cost of today’s elder-care drugs will be much lower, once patents expire. And so on. (Except, of course, by then we won’t be satisfied with today’s medications — we’ll want tomorrow’s, pricier ones.)

Still and all . . . yes: it’s absolutely an issue. Demographics giveth (as they are these days), and demographics taketh away. Save your money. And not all in stocks selling at 80 times earnings or 25 times sales, either.

“Staples, the company (SPLS), has announced that they are going to issue 50% more stock. Dilute not split. I voted my proxy against this, but it looks like it is going to pass anyway. Why would anyone vote for this? Are the big institutions (Fidelity, et al) getting information that I am not? My 0.18 millionths of this company is soon to be only 0.12 millionths. This might not seem like much, but hey, it’s the principle!” — Wayne A.

There is a world of difference between authorizing shares and issuing them. I suspect they are authorizing. But if they ever do issue additional shares (of those authorized to be issued), they — and you — will presumably get something in return . . . such as another company.

Right now Staples has 464 million shares outstanding. I am too lazy to look this up, but I’m guessing maybe 500 million are authorized. So in case they want to — quick! acquire Rubberbands.com for 50 million Staples shares — well, you can see why they’d want authorization to go beyond the 500 million. (And no, don’t rush to day-trade Rubberbands.com — I made it up.)

The “float” on SPLS currently is around 390 million shares. That’s a different number, referring to the shares that are unrestricted for trading and out in public hands.

(With a new company, there might be 10 million shares issued out of 100 million authorized, but 8 million of them — 80% of the company — might still be in the pockets of the founder and her husband. Maybe the company went public by selling just 2 million of those 10 million shares. So in this example, the “float” would be just 2 million shares, making the stock very scarce if there were a lot of interest in it. It can be tough to buy large blocks of stock with a small float — in trying, you drive the price up.)

Meanwhile, the short interest in SPLS is under 5 million shares, with a short ratio of about 1.7. This means that, relative to the 464 million shares issued and outstanding, few have been borrowed by speculators and sold short. Relative to the float, it’s still trivial. But the “short ratio” many short-sellers look at to see how hard it will be to cover their shorts, should they feel the need, is the ratio of the “short interest” — the nearly 5 million shares that have been borrowed and sold short — to the stock’s average daily trading volume, which for SPLS is about 3 million shares.

In other words, in this case, if no one else were buying (which would not be the case, but just by way of example), and if sellers were selling the same 3 million shares a day they have been selling on average, it would take the shorts just 1.7 days to “cover” their shorts (i.e., to buy back the shares they borrowed and sold short, and return them to their rightful owners).

“Authorized” is one of those formalities only a little less archaic (if you ask me) than a stock’s “par value,” which by now as best I can tell, means absolutely nothing. Yes, the shareholders must approve any increase in the authorized number of shares. But authorizing more shares has no impact on the size of the pie or who owns what proportion of it. What matters, and can dilute or enhance your ownership stake, is the issuance of new shares. There the crucial question is: what is the company getting in return for issuing them? Is it a good deal? Could Rubberband.com really be worth 50 million shares?

Sometimes yes, sometimes no.

Here’s Chapter 9. (You already have Chapters 1, 2, 3, 4, 5, 6, 7 and 8.)

How quaint that Revlon super model Suzy Parker was earning $120 an hour back in the Fifties. Even with inflation, what could that be? Supermodels today earn $60,000 to $100,000 a day. It’s almost as if they were SuperModels.com.

Susan Carpenter:  “I have been interested in the question of who, i.e. manpower, is going to physically take care of 79 million baby boomers when they become infirm. Will we open our gates to the 3rd world so that helpers can pour in? Certainly the next generation is going to be so busy working at jobs that will fund the baby boomers’ social security that they will not be changing Depends, cooking meals for the boomers etc. The only answer to this question, i.e. physical care not the $$$ to pay for it which is another problem, is from some futurist who said that by 2025 there will be a federal law that stating that children will by law be responsible for their parents. What do you think?”

Well, if today’s kids don’t learn to vote, we by-then seniors might indeed get such a law passed. But your scenario may be too dire. In 25 years there are an awful lot of jobs that won’t need doing. Remember how many people used to be employed as 411 operators? (And the incredible Mike Nichols/Elaine May skit on the subject? “Sir, In-for-MAY-shun is a free service. In-for-MAY-shun would not STEAL your DIE-yum.”)

As the demand for senior-care workers rises, the free market will likely adjust. Not to mention all the labor saving devices for seniors themselves. E.g., this new pet dog you have probably read about from SONY. No need to feed it, walk it, bathe it, take it to the vet — already you’re way ahead of today’s seniors’ pets. And by 2025 it will likely be a great comfort to its owner and able to perform such rudimentary tasks as calling for help if you’ve fallen and can’t get up . . . fetching your cane so you can get up . . . smelling the gas if you’ve left it on accidentally. And quite a few other elder-care chores.

There is no substitute for the human touch. I’ll grant you that.

But it may just be that by 2025, though we will be living longer and more of us will be old, the length of time any of us needs help will be shorter, not longer. (I grant that the reverse may be true, but I’m an optimist.) At 95, we may be doing quite nicely on our own, most of the time; touching each other; and then, blessedly, keeling over on the shuffleboard court real quick, with our SONY pet programmed to lead the paramedics to the DO NOT RESUSCITATE clause of our living wills.

It’s an old idea, but — in my view — worth frequent repetition. So recently I repeated it:

In many ways, even the lowliest of us, or at least the reasonably lowly, live better than the royalty of old.

Predictably, you had some interesting things to say.

Eric Batson: “My favorite is just how easily we access ice on demand. Ice water is free in any restaurant. I was taught in elementary school that the Roman emperors had an outpost in the mountains. At midnight they sent out a chariot with a chest full of snow so the emperor could have ice for his morning orange juice.”

Russell Turpin: “You wrote: ‘… most of us live better in many ways than the princes of Egypt.’ Well .. I’ve developed some skepticism of this kind of claim. The modern economy and its accompanying technology are wondrous, indeed, letting most of us live far better than common folks of past times. But better than the Princes of Egypt? I will argue otherwise by looking at what the modern economy brings the average person.

“1. Material well-being. In the US, the average person does not want for the material necessities: shelter, food, and clothing. But as wonderful as are the products of industrial economy, I think the Princes of Egypt had it better. A modern house is not a palace, off-the-rack clothing is not tailored fare, and no grocery store will be quite as accommodating as your own chef. True, the Prince lacked ice cream. But we don’t know what delicacies his chef prepared.”

I have just two words for you, Russell: air conditioning.

And if those two aren’t enough, I can think of a million more. E.g., Shakespeare. Seinfeld. Telephones. Bright reading lights. Nintendo. And of course most important by far: longevity.

I am not arguing people today are happier. I tend to agree that ignorance is bliss, and all that. (Are we miserable today because we lack tomorrow’s wonders?) And I recognize that with TV news casts and the competition for ratings came TV violence, new fears, the loss of innocence, and so forth. But I still believe that in many ways most of us live better than the princes of Egypt.

“2. Service. The service economy is much lauded, but the average person still spends a lot of time doing their own chores. She vacuums her own floors, makes her own bed, mows her own yard, buys her own groceries, prepares her own meals, and maybe even changes her own oil. This is much better than the farmer a century ago who had to sweep his floor, grow his groceries, and feed his horse. The average person undoubtedly pays for *some* of these services *some* of the time, but even there, mass supplied services involve the customer arranging, verifying, and waiting. Going to Jiffylube is more convenient than changing your own oil, but it is still a chore. And only someone who is fairly well off can indulge in all the kinds of services the modern economy offers on a routine basis. The Prince had it much better. He had a staff of lifelong servants who did for him whatever he needed, AND who knew what this was without him having to explain it each time. Automation is starting to make *small* headway here, but it will be a long time before the modern economy provides this degree of luxury.”

Yeah, well, there’s something to that. But how about their boredom? What about those stories — not Egyptian, but still — of royalty that longed to get out among the commoners and live a “real” life. I love grocery shopping! I wish I had time to do more of it. Imagine the prince’s wonder at the thousands of amazing choices, all an arm’s reach away. That’s not a chore, it’s a marvel! (Have you seen the new chocolate-dipped Tropicana frozen orange-juice bars?)

“3. Entertainment. This is where the modern economy excels. Not only are shows and music pumped into the average home, but theatres are convenient to almost every neighborhood, and even those of moderate means can afford to travel to distant lands. But those shows and movies typically focus on the interesting people of this and past times. One visits Egypt to glance in awe at what the Prince of Egypt did, where he lived, and what was built for him. Somehow, I suspect there is no entertainment quite like being one of the most important people of your society, and knowing it. You don’t get Spielberg, but you do get your own theatre troop. You don’t have TV, but you do have your own harem. You don’t get PBS, but you do get to hobnob with the learned and important people of your time. And for the Prince, this all comes at *your* convenience.”

I’m not saying being a prince was all bad.

But how about, also, the decidedly unentertaining aspect of being treated like a prince and feeling you don’t deserve it? I suppose most of them were not guilt-ridden by the inequality. But I know some “princes” today who, handed their millions simply by virtue of birth, spend a great deal of time in psychotherapy.

“4. Social belonging and affirmation. It is fun to travel on vacation, and financially rewarding to open the geographic scope of one’s vocation. The downside of the latter is that people often live great distances from family and old friends, and many adopt migratory lifestyles to the service of their career. Even those who live in the ‘same place’ may commute an hour or more each day, and while they may restrict their careers to one metropolis (and even one large company), they are still likely to change jobs every two or three years. They are financially rewarded for the commuting, travel, and disruption they endure, but it also creates stress, alienation, and faux community. Modern communications somewhat compensates, but talking with friend or family on the phone is not the same as continual, personal interaction [Yes! If only our parents lived with us full-time! — A.T.], and Internet communities are not real communities. Undoubtedly, the new arrangement is better for most people than being stuck as a serf in a poverty-stricken, disease-ridden Medieval village. But being Prince of Egypt is better. True, I can fly cross-country four times a month. Indeed, I must. And therein lies the rub.”

But also the frequent flier miles.

“5. There is only one area of life where I think the average, modern man clearly has it better than the Prince of Egypt: medical care. If the Prince of Egypt was diabetic, he died. The modern man takes insulin. The examples are well-known and plentiful. But even here, keep in mind the difference between being an average person of times past and a Prince of Egypt. The Prince did not suffer as a great risk from bad water, bad food, and infectious disease. Much of this century’s lifespan increase is not due to *individual* medical care, but to better sanitation and public health measures. Even though the ancients did not know about sanitation, the Prince enjoyed it by accident of wanting and having a more pleasant environment, further from animals, crowds, and dirt.”

The part about the harem may not have helped, however. Yes, they were probably all virgins. But that’s still a lot of different germ-sets to be exposed to. (I am not a doctor, but I am Jewish, and thus have strong feelings about germ-sets.)

“Bottom line: If it did not come with an inherited disease, I think it would be better to be Prince of Egypt. The state of the average person has advanced tremendously, but don’t underestimate the benefit of being a Prince!”

Or the difficulty of learning Egyptian.

Thanks, Russell.

“Big money is being made every day it seems on IPOs. How can I get into the action? A recent article in Smart Money paints a somewhat gloomy picture for guys like me with not a lot amount of money to risk. Should I just give up and watch the few people with the right connections just continue to rake in the dough?” — Walt Gunnison

Yep.

But Smart Money or one of the others also had a good story recently about catching these same IPOs a year or two later after, in many cases, reality has set in, original shareholders have sold to take their profits, and discouraging news may even have emerged.

An example from my own life is having been pitched on Compaq when it first went public at 10. Oh, please, I thought — how is it ever going to compete with IBM? And whomever else was out there at the time.

It did go up for a while. But then it stumbled and the stock fell to 3. Which, adjusted for splits, was somnething like 25 or 50 cents. Last year it hit $51. (Needless to say, I wasn;t smart enough to buy it at 50 cents — or short it at $51.)

So one strategy might be to note the IPOs you really believe in, if you’ve researched them. Then keep following them, and wait until the excitement has subsided and they return to more like the IPO price — or even well below it. This obviously cannot be done indiscriminately. But at least you’re buying when people are no longer mesmerized by the stock — perhaps even disgusted with it — and not when they’re participating in a feeding frenzy. And that’s a better time to buy.

Friday morning update: The market is down a bit as I write this. Presumably, it will just bounce back quickly as it “always” does (always, if you’ve only been doing this a few years). But it’s interesting, if one is looking for “signs,” that the savviest firm on Wall Street, Goldman Sachs, recently sold shares in itself for the first time in its history. Also that Treasury Secretary Rubin is leaving — not because he expects trouble, but because, well, when things are this good, it’s a good time to get out. And that Jim Cramer’s thestreet.com was brought public at an absurd $400+million valuation — and promptly tripled. The casino is at full frenzy. One day there will be a hangover.

Still, over the long run, a steady program of periodic investments in stocks should serve you well. (Usually best: no-load, low-expense, tax-efficient index funds.)

Which, of course, brings me back to the power of compounding.

Jarett D. Chaiken:

“While I’ve enjoyed reading about compound interest several times in the last 2 weeks (playing with big numbers is admittedly fun), and your point is clearly to show the power of compound interest. I’m a little disappointed that you have not pointed out some of the obvious flaws in your calculations.

“First, not once were the compound tax consequences mentioned. If you put $0.01 in the bank 1,000 years ago, and paid taxes on the dividends as you received them, what drag would that have on my return?”

No drag at all in the U.S. from 1776 to 1913, when (if memory serves, and it may not) the first income tax was enacted. But as to the other 863 years, I am less certain. Then again, the kinds of interest rates we were using in our examples — 2% and 5% — were low enough that we might have considered them “after-tax” rates, even in years when there was an income tax.

“Second, If I had put $0.01 in a bank 1000 years ago, it would be worth nothing today, since there are to my knowledge no investment vehicles that have been around that long (or governments for that matter) so when is the right time to remove my money from a failing bank?”

Ah, there’s the rub. But as optimists, going forward, might we hope there could be institutions and economies that do not fail? Might we, as a species, be getting better at this game of civilization and commerce? Maybe, maybe not. Of course, few if any of us will live for 1,000 years. (Even that, I think, may one day be possible, if not in quite the corporeal form we live today.) So this hypothetical millennial compounding is almost as silly looking forward as it is looking back. But as Jarett says, it’s fun.

“Third, and maybe most importantly, if I had put some amount of money into a bank 1000 years ago, that has been paying some rate that would make my investment worth $1 trillion, how could the bank afford to pay me my interest? Finding places to put $1 trillion so that the bank can earn any money would be near impossible, and probably bankrupt the bank; and what happens when I go to withdraw this money and suddenly there is an additional trillion dollars entering the economy, what would that do to the CPI?”

Well, that’s third and maybe least important. The thought being that if people 1,000 years ago had invested for the future . . . and if countries and economies had arranged themselves in such a way as to make that investment productive, and managed better to avert war and withstand disasters like the plague . . . then the whole world might be vastly more wealthy and prosperous today, with trillionaires as common as billionaires.

Imagine the difference between a country like America, that has managed to attract and respect capital — financial (e.g., venture capital), infrastructural (e.g., our Interstate Highway system), and intellectual (e.g., our superb system of higher education, the hundreds of billions in accumulated R&D) — and, say, Uganda or Bangladesh. The American, capitalist model, with great good luck, might actually just keep growing for centuries. It’s possible. In Uganda or Bangladesh, until things change, you could wait 1,000 years and still be at subsistence.

In those instances where people have invested for the long-term, the results have indeed been good. The most famous is Ben Franklin. At his death he left a thousand pounds each to the cities of Boston and Philadelphia. The money was to be reinvested for a century — with spectacular results I have written of elsewhere (the specifics of which I do not have handy here at 37,000 feet, let alone in my near 1,000-year-old brain).

“I believe that compound interest is very powerful, and putting away money sooner is definitely better than doing it later, but using 1000 years as a reference seems to me to be very unrealistic. Better to show the (much more modest) power of what $1000 can do over 100 years in a Roth IRA starting today so your great-grandchildren (whom you might actually meet) can enjoy your success, than to fantasize about what one of your ancestors living in Rome 1000 years ago did with his winnings at the Coliseum.”

I’ll buy that. Well, said.

Coming soon: Chapter 9

Last month I wrote about what David Letterman might call “stupid mail tricks” — except they’re not stupid at all from the vendor’s point of view. They work.

So here’s another one, for your amusement, courtesy of my pal Alan Light in Iowa City. Alan writes that he got his Mileage Plus First Card Visa bill in the mail and that it included a “complimentary” offer “thanking” him for being a cardholder.

Imagine that — free phone calls, just as a perk of membership. What a great loyalty builder!

According to the payment envelope:

YOUR COMPLIMENTARY
PHONE CARDS ARE HERE!

It’s our way of thanking you for
Being a FirstCard cardholder.

Each Phone Card provides 20 minutes of long
distance calling anywhere in the U. S. A. ….

…For activation, handling and shipping, $3.95
per card will automatically be billed to your First
Card credit card account.

Amazingly, there is no limit to the number of $3.95 complimentary cards you can ask for. So I advised Alan to ask for 100 of them — 2000 minutes of long distance FREE! (and just $395 in handling and shipping). It works out to just 20 cents a minute, or not much more than Alan pays now.

THE REAL MORAL OF MARY POPPINS

“I think it might be a mistake to quote Mary Poppins in *support* of the wisdom of investing and compounding. If you recall the context of that song, it was the nasty and greedy old men at the bank who joined Michael’s not-yet-enlightened father in singing that song. They then proceeded to try to steal a young child’s hard earned tuppence, even though he, with the wisdom of youth, knew that his money would be better used feeding the hungry birds, while also supporting a woman-owned small business. So, although I am as big a fan of compounding as the next person, I think the real message of that episode in Mary Poppins is not that we should always invest our tuppence, but rather that money is merely a tool, not an end in itself. Sometimes it’s more productive to spend it or even give it away.” — Marissa Hendrickson

CLINT ON CLINT

“Your friend Clint must have been stung by a bee at some point in his past, otherwise he never would have become sensitized to them. In order to become allergic to something, the body must have been exposed to the substance in the past, and developed an immune response to it. Therefore, the latest bee sting could not have been his first.” — Clint Chaplin

THE BEES THINK IT’S RAINING

Thanks to David D’Antonio for sending me the May 10 Associated Press story about a flatbed tractor trailer carrying 400 bee hives — about 20 million bees — that overturned in Falmouth, Maine. “There was one big swarm of bees over the truck, like a big black cloud,” said Falmouth Patrolman Edward Roberge. The road was shut for eight hours, as a huge swarm of bees buzzed around the truck. Firefighters were called to the scene, a handful of whom were stung but not seriously injured, and “sprayed the dumped hives with water to calm the bees as they loaded the hives onto another truck in the late afternoon,” reported AP. “‘The bees think it’s raining and they won’t leave the hives,’ Falmouth Fire Chief James Robertson said.”

CAN THIS BE TRUE?

“If bees are flying in a closed jar, this does not make the jar (with them) any lighter compared to if they were sitting in the jar. You can reprint this if you like, but without attributing to me.”

THEY MAY BE ANIMATIONS, BUT THEY CAN COMPUTE COMPOUND INTEREST

“Another example of the power of compound interest was on the new Futurama show last week (by the maker of The Simpsons). A guy is frozen and wakes up 1000 years into the future. He goes to the bank to see how much he has. ‘Just 93 cents,’ the teller tells him, as his face falls. She continues. ‘Let’s see, at 2.25% interest that brings your total to $4,283,508,449.71.’ I thought for sure they just made that number up and didn’t have any connection with reality. But at the next commercial I went and brought up MYM and did the calculation. And sure enough, they had it exactly.” — Peter Kronenberg

Most of what I know about life I learned from The Simpsons. I can’t wait to watch Futurama.

RICHER THAN WE THINK

“One thing your writer didn’t take into consideration today (in debunking the idea that $1 invested two millennia ago would have resulted in $230 million for every man, woman and child alive today) is that we all have tremendous practical wealth in those things we own and use commonly. For example, if we were going to build the entire road system in the U.S. tomorrow, what would that cost each person? If we add the entire phone and electrical infrastructure, what would that cost? If we had to pay for the raw research and experience that are now available free in our libraries or low-cost through books, what would that add? What about the years of cultural and social progress invested in having clean water come out of my tap? That I have a life expectancy that is more than twice that of my early ancestors in spite of pollution? What is the cost savings in man hours that I can drive to work instead of walking? My net worth in dollar terms is modestly negative, but I’m amazingly wealthy compared to an average Joe in 3 B.C. Maybe to the tune of $230 million dollars richer… whatever that would mean.” — Anne Speck

A negative net worth but a positive attitude. And it’s true. Though $230 million may be stretching it, most of us live better in many ways than the princes of Egypt.

RISKY STOCKS IN AN IRA

“I agree with your general principle about not putting risky stocks in your IRA, but I did want to point out if one had a Roth IRA (which I do) that the proceeds will never be taxed (that is if Congress does not change the law in the future to raise revenues….I know that is a big if).” — John Bogen

True. But risky stocks are risky. Many crash and burn. Inside the Roth IRA, you get no tax benefit from the losses. They just sap your precious capital.

GIFT CERTIFICATES

“In California it is illegal for gift certificates have expiring dates.” — Lorraine Baldwin

IS “BUYING IN BULK” BETTER FOR EVERYBODY?

“A walk through the supermarket will reveal many cases where larger containers cost more per unit than the smaller. Got to watch those guys every minute.” — Orval

Fair enough.

UPDATING YOUR MYM PORTFOLIO PRICES

“I’ve developed a utility to convert various downloaded stock price quote data formats to the Managing Your Money [DOS V12] format. This utility will enable MYM users to download stock price quotes from the various online sources (Yahoo, Lycos, Quicken, MS Investor, AltaVista, Excite, etc, etc.) and pull that pricing information in to MYM. As you probably remember, for years many MYM users downloaded stock price information from Prodigy’s QuoteTrack. Well, Prodigy Classic and QuoteTrack are going away at some point in the not so distant future. When my father, a diehard MYM user, expressed his dismay at this loss of functionality and his lack of desire to switch to another personal finance program, I took a look at the problem and developed ConvertTrack. I now have a web site for ConvertTrack where folks can download a full featured demo copy of ConvertTrack and test drive it for 30 days.” — Roy Berger

Tomorrow: Bees, Mary Poppins, etc. . .