Author: A.T.

See? I’m still here. I’m just not getting paid.

Over the weeks to come, we’ll be tinkering with this and adding things—particularly a way to look at some (some!) of the 751 previous columns you may have missed.

Now, back to business . . .

From Cynthia: “Can I avoid the 30-day wash sale rule by trading through an IRA?”

No. Normally, if you have a loss in a stock, you can use it to offset other taxable gains and—once you’ve wiped out any gains—up to $3,000 a year in ordinary income.

So if you’re sitting with a loss, it’s tempting to “take” that loss by selling your shares. Lowers your taxes.

But often, you like that stock, and figure it’s an even better buy here, now that it’s lower, so you want to buy it right back.

Well, if you want that “loss” to stick, as far as the IRS is concerned, you have to wait 30 days before buying it back. (Nor can you “double up” by buying extra shares a day or two before selling. If you want to be able to take the loss, you have to wait 30 days after doubling up.)

Say you bought 300 shares of Blah-Blah Industries in 1968 at $50. Today, it’s just $20. You sell. That’s a $9,000 loss—$30 on each of 300 shares. Normally, you could deduct that loss against other gains and, if you still had some loss left over, up to $3,000 in ordinary income (with any excess carried forward to future years).

But not if you bought back some Blah-Blah shares before 30 days had elapsed. (And not if you had doubled up on your Blah-Blah shares any time within 30 days prior to your selling these shares.)

The sale is not considered real. You had 300 shares and now you still have 300 shares. So the IRS won’t allow the loss (until, ultimately, you go ahead and sell those “replacement” shares).

And buying them inside your IRA, if the IRS noticed, would probably be considered the same thing—you owned 300 shares, and now you still own 300 shares, albeit in a different, tax sheltered, account. So if you didn’t wait 30 days, the wash sale rule kicks in.

I couldn’t find anything in the tax law explicitly saying this, but a tax expert I know feels quite sure this is how the IRS would interpret its rules.

Nor does it work to sell the stock in your name and buy it back moments later in your spouse’s name—though it should be OK if your child or parent buys it.

Note: I’m not a tax expert. I disclaim any responsibility to do more than make a good faith effort to be helpful.

Cynthia goes on: “Also, can you just buy, sell, buy, sell, etc. without regard to the 30-day wash sale rule through an IRA because it all comes out as regular income anyway?”

Yes. You can buy and sell as often as you like within an IRA without triggering any tax consequences.

Finally: “Am I correct that you cannot realize capital gains upon an IRA distribution and have to take the proceeds as regular income regardless of how the thing has been invested?”

Yes again. Inside an IRA, a capital gain gets no favorable tax treatment, even when you begin withdrawing it.

Th is is my 750th and last daily column in this space. (Well, it’s actually my 751st, but 750 sounds better.)

My deal with Ameritrade was for three years, and if I were they, I wouldn’t renew it either. I cost a fortune. They no longer need me as a draw. Have you noticed their $8 commission? That’s a lot more draw than a quirky column from me could ever be.

My deal with Joe Ricketts, Ameritrade’s boss, was that I could write as much or as little as I wanted, on any topic that I wanted, with no editorial interference. (Ameritrade did have the right to kill a column they hated, but never did.) They didn’t endorse my opinions and I didn’t endorse Ameritrade. If people chose to assume Ameritrade wouldn’t be publishing me if they thought I was a total jerk, well, so be it. And if people thought I wouldn’t be taking their money if I thought they didn’t offer good value—they were right. But that was only implied, not stated.

Now that it’s over, I want to say that Joe and Ameritrade could not have been more upright throughout this process, or more decent to work with—even when they must surely have rolling their eyes at some of my opinions. And even though, I have to guess, I may be just a tad more liberal than Joe. (Picture the world’s largest tad.) They lived up to the deal 100% of the time and without exception. And Ameritrade’s Pam Reynolds, who has been proofing and formatting the last several hundred of these, has been a complete pleasure to work with. The best.

It was perhaps a year into this three-year deal that I figured, gosh, maybe I should open an account with Ameritrade. I was a little worried to do it, because (a) how good could it be for $8 a trade? and (b) if I didn’t like it, then what would I do? (Kind of the same reasoning that keeps one from visiting the doctor for routine checkups—no news is good news.)

I had been doing a good bit of my business with Accutrade, a precursor and sister company to Ameritrade, so I knew—at least based on my own experience—that the parent company was sound and decent. But what had seemed at first like an amazing bargain—$48 a trade—now seemed . . . well, I do try to be careful with my money.

Anyway, like many of you, I switched some of my business to Ameritrade. And like many of you, too, I was frustrated that it took a while—at the time, they were getting so many new account applications, it was hard to keep up. But ever since, I have been amazed to see that—guess what!—it works for me at $13 (I generally place limit orders) just as well in most respects as my full service account. In some respects, it works better.

I first marveled in print some 20 years ago that it cost fifty cents or so to clear a check—a unique handwritten document that had to physically travel from the merchant to its bank to my bank and back to my mailbox—but $618, or something, to buy 500 shares of GM. There was, after all, nothing handwritten about the stock. It could all be done by computer. Why $618 and not 50 cents?

Well, thanks to Joe Ricketts and others, it’s largely happened. The other day, for reasons that are beside the point, I bought 1600 shares of a high-priced stock in my full-service account and sold 1600 shares of exactly the same stock in my Ameritrade account. (A large trade for me.) Both orders were placed the night before to be done at “the open.” That assured I would get the same price on both trades. So the trades were as simple as pie and essentially identical. The confirms came. One broker charged $305, the other $8.

Case closed.

This is not to say everyone should become a do-it-yourselfer. Let alone a frequent trader. I still believe that for most people, a lifelong program of regular monthly investments in low-expense no-load mutual funds (see my book for a couple of suggestions) is the best way to invest for the long-term. (And that for anything less than the long-term, the stock market is definitely not the place to be.) But for those of us who enjoy doing it ourselves—buying, holding, and occasionally trading (with the added advantage of controlling the tax consequences more than we could in a mutual fund)—what a boon in convenience and economy is an outfit like Ameritrade.

I should also say one more thing. Over the last three years, a handful of you have written me with complaints about Ameritrade. Some complained about how long it took to set up an account—but that didn’t bother me much. As someone with an account already set up (once it was set up), I was kind of hoping Ameritrade wouldn’t activate new accounts until it was able to digest them. (Kind of like the immigrant who, once here, takes a hard line on immigration.) Of more concern to me were the handful of compaints about service and snafus. But my sense was that, in relation to the huge volume of customers and transactions involved, it was not alarming to get an angry message every once in a while. Such problems, I can tell you from personal experience, are not restricted to Ameritrade, by any means, or even to discount brokers.

So Ameritrade is losing me as a columnist, but not as a customer.

And as for you terrific people, I can’t thank you enough for the hundreds and hundreds of interesting, amusing, insightful, constructive comments, questions and, yes, criticisms. I have learned a great deal from you, and hope you will keep me bookmarked as this column moves to www.andrewtobias.com. It may or may not acquire other sponsorship, may or may not remain daily forever. But let’s just see where it goes.

See you Monday.

If you’ve never spent any time with Warren Buffett, through the many books and articles about him, here’s a site to visit: www.berkshirehathaway.com. As Jack Nettleton pointed out to me, “Its collection of Chairman’s letters is very educational. I think I recall hearing of people buying a share stock just to get the letter. The letters are now freely available online.”

I’ll leave the rest of your morning’s reading time to Warren . . .

PHONES

From Wilbur Coghill: “To answer one of your questions about free long distance (www.broadpoint.com)—according to their info, when you dial the toll-free number you can listen to as many ads as you want and each one is good for up to 2 minutes. Then after you’ve listened to as many as you want, you dial the number you want. When you are about out of time, about 30 seconds left, a warning tone will play so you now your time is about up.”

I signed up for this but am still waiting for my PIN to get started and try it. I guess they’re swamped. And I also guess that e-commerce will be a while getting the kinks out. I’m still waiting on and untangling a 1800batteries.com order from last year. One reads quite a few reports of people being dissastisfied with the quality of service received—which is why Amazon, which spares no expense to do it right (and loses money on every sale), is gaining a loyal following.

I do think it won’t be long before everyone else learns how to fulfill orders, too. This is just the first of the next thousand years of e-commerce. It’s barely begun! Still, having plugged booksamillion, one of the several ways to buy books cheaper than Amazon or BarnesandNoble, I thought I should include this feedback from Joel in Denver:

BOOKS

“I agree that the prices at booksamillion are good,” Joel writes, “but in my one ordering experience (concluded last week), they dropped two-thirds of my order WITHOUT A WORD — no e-mail, no indication on the ‘check your order’ part of the web site, nothing. My only CLUE that the order was not, in fact, ‘completed’ (as the web site would have led me to believe) was that the total amount of the order had mysteriously dropped by two-thirds.

“HUH?

“I wrote. Waited three days. No response.

“I called. Apparently some of the books needed to be ordered from the supplier, which I expected (since some of the items said they’d take some number of weeks, which was fine by me). However, apparently they’re not only fundamentally incapable of handling orders which have mixed delivery times, they’re also fundamentally incapable of letting someone know what’s happened.

“Let me be very clear: it wasn’t that they shipped some now and would ship some later. No. The helpful person on the phone suggested that, if I really did want those other books that hadn’t been shipped, I should place ANOTHER order. Otherwise, they’ve dropped them and I might as well also.

“So, anyhow, the ten books that did ‘make the cut’ arrived. One is damaged (deep pointy dents in the middle of the cover which could not possibly have happened during shipping) and one is mis-manufactured (a paperback with wavy folds along the glued spine). I’m underwhelmed.

“Finally, they used UPS, which wasn’t possible to anticipate from their shipping info page. A word about UPS: for all practical purposes, they’re useless for delivery to residences. Really. They deliver only during the week and only during normal working hours. If you and anyone else at home are, say, AT WORK during these times (imagine!), you get a helpful yellow sticky note instead of your package. Ok, well, I’d rather not have the package left out to be stolen, so I’ll just go pick it up, right? No, the depot is only open during business hours. Well, surely it’s nearby, since it had to be on the local truck, right? No, it’s miles and miles from Denver in Commerce City — there’s no hope of getting there on time. Well, you could ask them to deliver it when you’re home on Saturday, right? Heck no. The only option is to have it re-directed to another address — work. Which is in fact the only option that works well, THUS PROVING THE POINT that UPS is useless for residential delivery to modern families in which people are gone to work during the day. [In many areas, I believe they do leave packages outside or on your porch, etc.—A.T.] Give me USPS or FedEx any day.

“And retailers: give me the option of who I have delivery from. Don’t hide it from me. I know what works and doesn’t. If you ONLY ship via UPS, I’ll either go elsewhere, or if your offer is compelling enough I’ll know up front that I’ll have to have it delivered to work (which my employer grudgingly allows on occasion), without doing the Yellow-Sticky-Note-Shuffle. It’s much easier to pick up a package from the USPS post office nearby, though. Yes, there are interesting issues around the quasi-privatization of USPS and their potentially unfair competitive edge in already having all of these locations. That’s perhaps academically interesting. But as a real person getting a real package here-and-now, they win. FedEx seems to be more flexible on when they deliver and have drivers who are more polite. They win, too.

“As an interesting anecdote to the UPS situation, I’ve had several people on the 1-800-PICK-UPS line (the number on the UPS yellow sticky notes) agree with me that UPS is fairly useless for residential delivery. Apparently handling calls centered around this set of issues is a very large portion of their 800 number’s work.

“Thanks for letting me rant. [Why should I be the only one who gets to? – A.T.] If you ever want to use any portion of this in a column, go ahead, just ID me as ‘Joel.’”

And remember: www.books.com , as described a couple of weeks ago has this super neat COMPARE PRICES button that automatically drops its price to beat the others.

CARS

From Rick Mayhew, occasioned by A Day in the Life of Bureaucratica: “My Dad was on the city council when it came time to buy a new vehicle for the dog catcher. They got bids on a brand-spanking new truck and were sorting through them when ole Dad raised the question, ‘You mean our fine citizenry in their older and used cars are going to see our dog catcher in his brand new pickup truck? Would it hurt if we just bought a used truck for the dog catcher?’ Strangely, no one had even considered that possibility.”

From David Lebovitz: “There was just a very interesting article in the San Francisco Chronicle regarding why there are so many horrible drivers in California. One reason was that school budget cuts (during the Reagan era) eliminated drivers ed from most public schools. The other reason, which I really liked, was that so many drivers were flunking their driving tests that they had to make the tests easier, since it was creating a back-up at the DMV. So they eliminated testing people at parallel parking (since no one could do it!).”

No wonder the traffic’s so bad. Everybody keeps driving around because they don’t know how to park.

Have you ever been treasurer?

I clearly did not have the cool or charisma to be class president—seventh graders somehow sense this without having to be told—yet my older brother had been a big shot four years before me, so I knew I was supposed to be something. Rather than run for president or “veep,” I ran for treasurer. It was not a hotly contested position. I was soon the 11-year-old treasurer of my class. Likewise, grades eight through twelve. Indeed, the last couple, I ran unopposed.

The duties of class treasurer, as I recall them, consisted of just one: to collect the annual dues. I was less the treasurer than the bill collector. And with dues set at $6 a year (less, I think, that first year; more by the end—you know how government tends to grow), I was a kid with some serious walkin’ around money.

Of course, I didn’t get to keep it. But 40 years later I have no recollection of depositing it in the bank, either. I don’t think we had a bank account. (And how would an 11-year-old get to the bank?) Perhaps there was some kind of account with the school itself—I would hand in my take at the end of the day to Mrs. Somebody. I just can’t recall. There was no audit committee.

Well, completely out of the blue, I was put up last week to be treasurer of the Democratic National Committee. For this there is a bank account. The DNC raised $53 million last year. Not as much as the Republicans—never as much as the Republicans—but still enough to open a bank account. (Indeed, $53 million is small potatoes. In a presidential-election year, it explodes.) We need campaign finance reform. But until we get it, neither party can disarm unilaterally.

So there I was at my first C-Span-televised DNC executive committee meeting Saturday morning (attending as a guest—the 445 members of the DNC make their determination March 20), sitting next to a nice woman named Mary Ellen Withrow. I knew her name because of the giant cards in front of each of us. When the meeting was over, she turned to me and very graciously introduced herself.

“I didn’t realize you were our new treasurer,” she said. “It’s nice to meet you.”

Mumble, mumble. (I am never at a loss for a distinctive comment.)

“You know, we have something in common,” she said.

It developed that she, too, is a treasurer—Treasurer of the United States.

“Oh, wow!” I said, thinking of free samples.

She was out of business cards, but in a sense I already had several of her “cards” in my wallet. And so do you. Check it out: Mary Ellen Withrow.

Can’t wait to know her better.

“Is there any scenario, with a reasonable probability of occurring, in which investing in index funds as one’s core mutual fund holdings would not be smart?” — Dana Nibby

No. Over the long run, the much-lower-expense-drag of the index funds give them a huge advantage over actively-managed funds. It’s like comparing horses with 20-pound jockeys versus horses with 150-popund jockeys.

“I.e. [he persists], what happens if everyone, more-or-less, gets the idea that investing in the S&P 500 is the thing to do; similar to the group-think of the ‘Fools’ running up the stock of Iomega. Wouldn’t that be an inherently unstable situation?”

Well, if literally everyone did it—and especially if they all chose just S&P 500 index funds rather than spreading their money across a broader range of index funds—then prices would become less rational and efficient, giving active managers a better chance of beating the index funds despite their higher expenses.

This is an argument for looking beyond just the S&P index funds, and, for that matter, beyond just the US market (of which the S&P 500 companies make up a large share).

But naturally, long before it got anywhere near the impossible extreme I just described, it would self-correct. People would see “bargains” outside the universe of indexed stocks. They would sell their index funds (driving the price of S&P stocks back down toward fairer valuations) and buy the bargains (driving up their price).

The paradox is that, on the one hand, we need investors and money managers actively trying to beat the market in order for the sum of their collective judgements to set sensible, rational stock prices. Yet, on the other hand, when they do, it becomes very hard for any of them consistently to beat the market, let alone by enough to justify (for example) 1.5% annual expense charges—150-pound jockeys.

My recent column of “cheap long distance” was ill-advised (so I won’t compound the error by linking to it) for two or three reasons.

For those of you who missed it, that was the column where I basically just passed on to you a piece of junk e-mail I had gotten with one of those “10-10” numbers offering very cheap long distance. “Even if this one doesn’t make sense for you,” I concluded, “isn’t this a good time to haul out your phone bill, try to make sense of it, and find a way to cut it significantly?”

Well, that part I am happy to stand by. But as to passing on the e-mail, Larry Jensen wrote: “Why did you ever publicize this ‘offer’? I don’t care how legitimate it might otherwise be, I would never do business with anyone who spammed my e-mail box, nor do I recommend that anyone else do so. You’ve expressed a principled position that any junk mail you receive goes into your wastebasket, unopened. I would hope you’d have at least as much contempt for those who see the Internet as a free pipeline for invading our privacy.”

And Brooks Hilliard added: “You should NEVER (need I be clearer?) respond to an e-mail solicitation, much less publicize it. There are some very good reasons for this: (a) If you respond to one, you’ll be put on the responsive list, which will increase the amount of spam you receive. (b) It only encourages them.” (Brooks notes the famous old lady who, when asked whom she’d voted for, replied: “I never vote … it only encourages ’em.”) “But (c) the most important reason is that studies have apparently shown that there is a much higher percentage of fraud by spammers than by merchants who advertise in other ways. It makes sense: (1) they’re breaking the terms of service rules of the ISPs they use to send out the spam, so you know they’re not 100% on the up and up to begin with, (2) they have no known address so you can’t send Lenny out to break their face if they don’t deliver, and (3) their e-mail addresses are either fake, untraceable or both (like the bigfoot.com/usa.net address on this one).”

To wit, Tomas Saulys added: “The number in the spam message is 10-10-629. You can confirm that this belongs to a company called CTS/Worldxchange by looking at their web site: http://www.worldxchange.com/products/pennypln.asp. Then read all about them at: http://www.thedigest.com/shame/cts.html.”

This is a bit scary, because these folks get a terrible review. So if you did decide to try 10-10-629, keep a close watch on your phone bill the next few months and jump on any shenanigans fast. Then again, on the same site, AT&T is accused of forgery, so it’s possible the current charges are overdone. But why risk it? Not least because (as several of you were good enough to point out to me), if you go to www.broadpoint.com, you can register for free long distance. That’s right: free long distance.

The catch is that you have to listen (“or pretend to listen,” as one of you put it) to a 15-second commercial for each two minutes of free calling.

After you register and tell them about yourself – so they can gauge what 15-second spots most effectively to inflict – you just dial 1-800-FREEWAY, punch in your PIN, and … free long distance.

I’m sure these ads would get annoying real fast. And I’m not yet clear what happens after the first two minutes. Do you and the party you’ve called BOTH have to listen to the next ad? But if it works from pay phones, I can see it being more than a little helpful when you’re short of a quarter. I’m eagerly awaiting my PIN to try this out.

#

Chances are, you already knew about www.broadpoint.com. It’s the kind of thing that spreads across cyberspace like a flash of light. But some things are too good not to risk repeating. And so I leave you with one more:

5759    Year according to Jewish calendar
4696   Year according to Chinese calendar (years since 2637 B.C.)
——
1063    Total # of years that Jews went without Chinese food

HOUSEKEEPING NOTE: Currently, an alternative route to this column is www.andrewtobias.com. As of February 1, that will be the ONLY way to reach it. To keep reading, please adjust your bookmark. Also, please note my new e-address: atobias@andrewtobias.com.

BUY AND HOLD

“I have a friend,” writes an e-mail correspondent, “who was a stockbroker (prior to that he was a lawyer). He later made his fortune as his own full-time trader of options, and now is the CEO of a software company. So he’s no idiot. He recently said, ‘I set up little stock portfolios for my children. After I bought the stocks for their portfolios, I just let them be, and didn’t touch them. For my own portfolio, I actively bought and sold stocks, and watched the market closely. AND I’M AMAZED TO SEE HOW MUCH BETTER MY KIDS’ PORTFOLIOS HAVE DONE THAN MY OWN.’ More evidence that the buy and hold strategy seems to be a good one.”

A.T.: Yep.

VARIABLE ANNUITIES

An amazingly expensive way to translate what would have been lightly taxed long-term capital gains into more heavily taxed ordinary income at withdrawal. And yet they still sell like hotcakes — including a not inconsiderable number that get bought for … hold on to your hat … IRAs, which are already tax-deferred. As reported last year in The Wall Street Journal, “17% of the $627 billion in variable annuities are in Individual Retirement Accounts.” The only thing dumber would be buying low-interest, tax-free municipal bonds for an already-tax-sheltered IRA.

EXTROVERTED ACTUARIES

Q. “Do you know the difference between an introverted actuary and an extroverted actuary?”

A. “The extroverted actuary looks down at your shoes when he’s talking to you.”

OK, that was a cheap joke. And not true, either.

Tomorrow: free long distance (in case you’re the last to hear), and an apology for passing junk e-mail on to you.

HOUSEKEEPING NOTE: Currently, an alternative route to this column is www.andrewtobias.com. As of February 1, that will be the ONLY way to reach it. To keep reading, please adjust your bookmark. Also, please note my new e-address: atobias@andrewtobias.com.

“I found the www.companysleuth.com that you recommended particularly helpful. The ‘short interest’ feature it offers on all NASDAQ stocks is particularly useful. My question for you relates to investing in American Depository Receipts. In many cases the performance of a company’s ADRs diverges from the stock price in its home market. For example, Colt Telecommunications quoted on the London Stock exchange has had a significantly different performance the past six months from its ADRs, traded here on NASDAQ. How come?” – Brian Riordan

A.T.: First of all, what’s an ADR? From a U.S. investor’s point of view, it’s a convenient way to buy shares in some big foreign company without having to open a brokerage account over there or persuade his U.S. broker to call up the Finnish Stock Exchange, or whatever. Often, each ADR will represent more than one share of stock in the underlying company. (That stock is held by a custodian, like J.P. Morgan, which takes care of things like getting you your share of dividends.)

That’s the basic idea. And the basic answer to your question is: nevva happen.

ADRs never perform much differently from their underlying securities. The minute they began to diverge in any significant way, international arbitrageurs would jump in and grab the profit to be made from the difference, thereby bringing them back in line.

It is possible for there to appear to be a major discrepancy, however, for one interesting reason: ADRs declare stock splits at times that are totally unrelated to stock splits in the underlying securities. As I say, one ADR doesn’t necessarily equal one share of the underlying foreign security. Especially because London securities sell at much smaller unit prices than U.S. securities, a common ADR might equal 10 shares of the London stock. If the London stock happens to declare a 2-1 stock split, the ADR will simply equal 20 shares of the London stock instead of 10. In the U.S., stocks rarely go over $100 per share without a split, so when an ADR goes into triple digits, the U.S. sponsor may well declare its own 2-1 stock split, and suddenly an ADR only represents 5 shares of the London stock instead of 10.

ADRs are a safe and convenient way to invest in the shares of overseas companies, and any apparent differences in performance should be explainable as (1) currency fluctuation, (2) minor effects of different closing times of exchanges, and/or (3) stock splits in both countries. Comparisons of ADRs with their securities consistently show correlations exceeding 99%.

HOUSEKEEPING NOTE: Currently, an alternative route to this column is www.andrewtobias.com. As of February 1, that will be the ONLY way to reach it. To keep reading, please adjust your bookmark. Also, please note my new e-address: atobias@andrewtobias.com.