Author: A.T.

The first odd thing is that the primary air carrier between Miami, Florida, and Meridian, Mississippi — a distinctly southeast route, if you ask me — is Northwest.

It is not a nonstop flight.

And I was actually going on from Meridian to Houston — and then back to Miami. So it was:

Miami – Memphis – Meridian – Memphis – Houston – Memphis – Miami.

I felt a little like a FedEx package: Memphis, Memphis, Memphis.

No Saturday stay-over, so the whole thing was going to be $1,050 in coach. I asked about first class — sometimes when you have a full-fare coach ticket, first class is just a little more because you’re already paying five times as much as the guy in the seat next to you — and somehow wound up with a $746 first class ticket for the whole trip.

Well, when I got to Meridian I had an exciting time (no, really) and then found at the last minute that I would not be going on to Houston after all. The reason for that part of my trip had been canceled.

When I arrived at the Northwest counter in Meridian, there were just minutes before our little DC-3 was to take off for Memphis. Its little propellers were whirring to beat the band. (OK, it was a Saab or something. But it did have propellers vaguely reminiscent of Casablanca, even if the avionics were a half century more modern.)

The desk agent did not look as if he could route me back to Miami instead of on to Houston in seven minutes, so I grabbed a Northwest schedule and read it on the plane.

We were to land in Memphis at 1:10. My Houston fight would leave at 1:55. There was a Miami flight at 1:45.

Cell phones are such wonderful things. Before you knew it, even as I was wheeling my bag along the tarmac off the DC-3 and up the stairs to the extreme far end of A-Concourse, I was connected to a Northwest reservationist.

YES there was a seat on the 1:45 to Miami! YES they could make the change!

Ah, brave new world. Ticketless travel, bags with wheels . . . the aforementioned cell phones — not to mention being able to fly in the first place.

The only catch was that I’d have to go to the ticket counter to have the fare recalculated.

“But,” I explained, clutching my cell phone as I rolled down the Concourse, “there’s no time.”

A supervisor was found. By now I had made my way from A-25 all the way to the hub of the terminal and was headed toward B-concourse. The supervisor agreed to take my extra payment over the phone.

Extra payment?

The cost of not flying to Houston, added to the cost of not flying back from Houston to Memphis — the cost, that is, of making this a simple Miami-Meridian roundtrip instead of Miami-Memphis-Meridian-Memphis-Houston-Memphis-Miami — would be an additional $796, she said.

“You are saying,” I found myself unable to resist paraphrasing, “that if you only have to fly me back to Miami right now — one flight instead of three — the cost of my first-class ticket will go up $796?”

“Yes,” she replied.

By now I was yards from the Northwest ticket counter, at the joint of Concourse A and Concourse B.

“OK, thanks,” I said, hanging up (as if cell phones ever hung anywhere — how will we ever explain “dialing” and “hanging up” to our grandchildren?).

Well, I thought, as I approached “Chip” at the counter, I can always just go to Houston and come back tomorrow. But that’s a strange way to save $796.

I handed Chip my ticket, asking to get one of those nice seats leaving for Miami in 19 minutes.

Chip said not one word. He clicked and clicked and tapped and clicked and — tap, tap, tap — he then left his post and walked … deliberately … all the way to the opposite end of the ticketing trench and then all the way back with some kind of form and a ballpoint pen. Something told me I was in Chip’s hands and should just keep my mouth shut. Chip was about twice as old as you might expect from his name; Chip seemed a wise and logical old hand; Chip was, I could see reading upside down, writing me out a refund.

With 13 minutes to go, I had a first class boarding pass to Miami (and no one in the seat next to me!) and a $155 refund. Not to mention the pretzels, peanuts and unlimited diet Pepsi that would constitute the First Class meal service on the normally-two-hour flight between Memphis and Miami.

I am usually the first one on the plane — indeed, the first one at the airport — so fast-walking down Concourse B to be the last one on board was a new experience for me. But as it turned out, I had more than enough time. There was a “very minor mechanical problem that would be fixed promptly.” After half an hour, we all got off that DC-9 and onto another just like it nearby. I didn’t mind. I was not running an hour late, as I saw it, I was running a day early — and with an empty seat next to me!

We boarded, we got our emergency instructions again (oh, so that’s how you fasten the seatbelt) and, finally, left the gate.

We taxied out, then turned around and taxied back. A faulty gauge on the instrument panel. But this problem was fixed pretty quickly (and still I was almost a full day early), and off we went without further adieu.

And this, as someone noted, is how it worked before Y2K.

Tomorrow: What the Heck Were You Doing in Mississippi?

Well, I’ve been busy! But if I can get these darn web controls to work, you should have three more chapters of Fire and Ice to read over the weekend (please be prepared to discuss Chapters 4-7 in class Monday morning), with more to follow soon (and Tulipmania not far behind).

Just go to BOOKS, above; then scroll down to Fire and Ice and click “excerpt.”

Robert Doucette: “I am continually amazed by the Internet companies, whose valuations seem to have no connection with reality, and whose stock prices CAN’T get any higher, but do. Yes, we know that the stocks seem to be grossly ovepriced. (The only stocks going up these days are those that were already too high.) Yes, we know this can’t continue forever. (These are not stocks for widows or orphans or Warren Buffett.) But, how risky is an investment in these companies today? Are there any rules of thumb to guide investors about a hot market that gets cold (and goes south)? For example, when the Nifty Fifty cooled in the early seventies, how fast was their fall?”

Well, Avon was close to 140 in mid-1973 and under 20 by the Fall of 1974 (and what a Fall it was).

Disney dropped from 210 at the end of 1972 to 31 less than two years later.

And so on.

The fall wasn’t fast in the sense of its taking just a week or two. That sort of thing happens when there’s bad news — as in 1997, when Oxford Health dropped from around 70 to 25 or so in three days. (It would later dip below 6.)

But these companies were basically doing fine. No, as sharp as the decline appears on the charts now, the fall was slow-motion torture when you actually lived through it. And it must have been particularly galling to the owners of the Nifty 50 — I shunned those for a few of the Thrifty 5000, which fell even further — because, I say again, for the most part their businesses were fine. It’s just their stock price multiples that were deflating. Where once they had been selling at 60 times earnings, the world changed and now they were selling at 15 or 20 times.

But how would you have known when to get out? As they got lower and lower, did they not seem ever better buys? Whatever had kept you in at the top — wouldn’t you have had even more reason to stay in as the stocks got cheaper?

The Nifty 50 — the Avons and Cokes and Disneys and IBMs — thrived, for the most part. It was their stock prices, not their businesses, that got creamed. What’s more, in under three decades they saw their stock prices recover to and surpass their previous highs. (Well, not Avon or Polaroid, but many of them.) And now many of them are back selling at 40 or 50 times again.

Could something like this happen to AOL, selling for 650 times earnings? Or to Yahoo, selling for 1200 times earnings? Or to Amazon, selling at 225 times losses?

They’re different animals, presumably at a much earlier stage in their astonishing growth trajectories than the Nifty 50 were in 1972. But I wouldn’t rush out to buy them at these prices.

I think much of their bright future may already be discounted.

And in case one of them ever hit a snag — well, you could be talking about a price/earnings ratio under 90. (Gasp.)

I told you about the “invaluable” $10 Gap gift certificate AT&T sent me.

Tom Williams writes: “I once did a favor for someone who, as an expression of thanks, gave me a $30 gift certificate for an expensive men’s clothing store. I felt obligated to use the certificate but had to spend significant extra money just to get a necktie. The point being that a gift certificate is often worthless and may actually have a negative value. Good luck shopping at the Gap. I’ll be interested to hear what wonderful thing you are able to purchase with your $10 certificate. Maybe a Gap pocket handkerchief or some Gap shoelaces.”

Actually, I like the Gap, but knew I’d lose the gift certificate, so I gave it to a friend. But I know what you mean.

What a great business gift certificates are. First the store gets an interest-free loan until the recipients use them. And surely 5% of them — if not 20% — just never get used. And some nice proportion of the 80% or 95% that do get used get used by folks who wouldn’t normally have shopped there . . . so you draw in some new customers. And often they will, like Tom, wind up spending more than the value of the certificate anyway.

All this is innocent enough — the Gap is doing nothing at all wrong by offering gift certificates. But if I ever figured out how to charge you for this column, one of the first things I would do is find a way to sell you gift certificates as well.

Meanwhile, the ever-inventive Brooks Hilliard suggests, “You might try auctioning off your gift certificate for charity. I’ve seen $10 items go for considerably more (say $12.75 and up) in such auctions. I’d be happy to start the bidding at $7.35. This approach would add some ambiguity to the value (or invalue, as the case may be).”

Do I hear $20?

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.