Author: A.T.

[The following question and answer were written shortly before the recent market drop.]

“I know they don’t ring a bell when the market hits the top, but a fish company doubling because they whisper the word ‘internet’ does reverberate somewhat. How would you suggest an ordinary investor protect against a big market collapse? I would like to hedge against a drop without risking all or most of any potential continuing rise (in case there are more ‘greater fools’ out there.) I’m sure there were similar signs as the market struggled to break through the then unheard of DOW 3000 level, and obviously selling would have been a disaster. I have a mix of tax-sheltered and after-tax investments. What I am looking for is a way to turn some of the potential paper losses into real gains in the event of a big drop, yet at a small enough cost such that if it doesn’t happen, I will feel the price was worth the peace of mind. I know this is a tall order, but if anyone has a practical answer, you’re the man.” – Paul Berkowitz

Thanks, Paul. You are looking for the thing EVERYONE wants, and it comes under the category of a free lunch.

You can certainly buy puts or short some stocks or find a hedge fund you think will short stocks better than you could … but the simplest solution is often best. In your case, it would be to take some profits in your tax-deferred account.

If the market just keeps going up, you’ll be pleased – and may not hate me for getting just 5% or 6% on half the money in your tax-free account (in shortish-term bonds and sensibly-chosen REITs, say). After all, you’ll be getting rich in your taxable account and part of your deferred account.

If the market plunges, you’ll be glad you took some profits.

In assessing the mix between stocks and cash (or other pretty safe stuff), each person needs to find his own sleeping point. That is not the point, I should note, at which people blissfully ignorant of the risks sleep well but rather the point at which you, who do understand them, sleep well.

To buy enough puts to accomplish the same sweet sleep is very expensive (and shorts are no way, really, to get any sleep at all, witness my piranha-infested swim down the Amazon.com). What’s more, any gains, by and large, will be fully taxable.

“I have about $10k that I can invest for one month only. I was considering buying Home Depot stock, but I have never bought stock before and do not know if buying stock for only one month is worth the transaction fees. Can you tell me what you think of HD stock and if you think it’s worth investing for one month?” – Joy

Buying stock for one month is: CRAZY. Unless you totally don’t care if you lose a chunk of it and just feel like flipping a coin. In any given month, any stock could easily drop, climb or stay even. And since you have use of it for only one month, I assume you DO need this money.

The place for this money is, basically, a bank (or any other completely safe place).

And don’t feel bad: good for you for having it in the first place!

“Interesting suggestion on Japanese stocks. You recently mentioned a Korean fund that was not trading at a large premium. Is there such a Japanese fund? Can you buy the Nikkei like you can buy “spyders” here? Also, Japanese P-E ratios were sky high in the past, as you pointed out before the dive. Are they reasonable now by US standards?” – Dan Stone

I’m not sure Japanese stocks have much e these days to divide the p by.

EWJ is the symbol of the Japan WEBS (single-country index funds), but they trade with no discount.

Some believe that active management is worth paying for in Japan because a good manager will shun the stocks that are artificially propped up by face-saving old-boy-network cartel arrangements.

TKIOY is the symbol for a Japanese insurance company with a portfolio of stocks that are, theoretically, worth more in the market than TKIOY is. I haven’t researched it well enough to know whether much of that portfolio is the propped-up kind.

I don’t think it would be unwise to make a small long-term bet on Japan (and Korea and Thailand and maybe Malaysia and Russia and, well, lots of other places as well). And maybe average down a year or two from now in case things in Japan get decidedly worse. (One good sign: If you make bets like these, most people will say you’re nuts.)

Here are some links a smart friend recommends, and that I may include in the next revision of my book.

I hope you profit from one or two of them. (Please let me know if you think any are particularly useful or useless, or disagree with any of his descriptions.) Thanks!

INSURANCE

www.insureme.com is a quote service to find the least expensive health, automobile, homeowners, and life insurance policies.

www.insuremarket.com is a Quicken site with a well-written introduction to the different types of insurance a person may want to consider, and some tools for choosing good policies.

www.insure.com is another terrific site that teaches the ABCs of insurance and annuities.

TAXES

www.el.com/elinks/taxes has links to most of the very best sites on taxes, with informative descriptions of each site. This is the place to start.

www.owlsoftware.com is offering a free Roth IRA calculator to help in the decisions of which to fund and whether to convert.

www.irs.gov/formspubs/ is the place to get tax forms and instructions.

www.irs.gov/taxedu/faq/ is the extremely useful IRS taxpayer help and education site.

LOAN RATES

www.hsh.com is a good source for locating the best rates for home and auto loans, with additional assistance available for contacting lenders and starting the application process.

www.microsurf.com goes the extra mile in removing lenders from its database when they don’t honor information provided to it, and is also an excellent source for quotes on moving expenses and information to locate good realtors in your area. They are adding many other services, such as insurance quotes and apartment rental information, on a regular basis.

www.bankrate.com covers some larger lenders that don’t participate in the other database surveys.

www.banx.com provides information on other types of loans, including home equity lines, auto loans, and personal loans.

SPENDING

www.homeshark.com helps every step of the way for people who are looking for a house, including price information on homes and neighborhoods and, once again, more information on loans and rates.

www.housenet.com is all about home maintenance, repairs, and improvements, and ways of reducing all the costs of a home other than the mortgage payment.

www.classifieds2000.com is an online national forum for private party and dealer listings comparable to what you find in the newspapers and Pennysaver publications. There is a reasonably priced escrow service available to protect both the buyer and seller in transactions.

www.travelocity.com is a good source for airline prices, car rentals, and hotel information.

www.travelweb.com is another good site with similar information and the ability to book hotels directly for most chains.

www.teleworth.com provides help in choosing among all the long distance companies and plans available, based on your personal calling habits.

PERSONAL FINANCE

www.smartmoney.com is an interactive site created by Smart Money magazine, with many interesting worksheets and information on debt management, retirement planning, and other personal finance topics.

www.usatoday.com/money is the USA today money page and is becoming a very impressive start page for links to useful information.

www.forbes.com is the home of Forbes magazine’s site, with many useful tips for people who have accumulated enough wealth to worry about estate planning, and a large number of useful ideas on personal finance for people in all wealth categories. They also offer a toolbox with many useful financial calculators.

www.kiplinger.com is another excellent site along the same lines, sponsored by Kiplinger’s Personal Finance magazine.

LEGAL

www.nolo.com provides a great deal of useful and, just as important, accurate information about legal matters that will enable you to know when you need a lawyer and when you can do it yourself, as well as what fits in between those two extremes.

www.legaldocs.com lets you prepare some legal documents online and download them for a minimal fee. This is definitely worth considering for simple agreements that you want to make with others where the primary concern is avoiding misunderstanding rather than making sure you’ll be able to sue!

SUCCESS!

“I did a book search today with www.mxbf.com, which I got from one of your columns a while back, and saved over $150 on a used book order.” – Bill Nagler

If the Postage Is Exorbitant, Just Fly There
“I was so pleased to find an out-of-print book that I was looking for at Powell’s on-line (which you had alerted me to in an article on Amazon) that I wrote to tell you. Unfortunately, the thrill was short-lived — the book had been sold and Powell’s database had not yet been updated to reflect that sale. Because you published my response in a follow-up column I feel duty bound to tell you the happy ending. That same follow-up column also included a reader’s response touting www.bibliofind.com. There I found the book available at a single store in Sydney, Australia. The price in Australian dollars, $22, was about $14 in U.S. currency (better than Amazon, worse than Powell’s) but the shipping would likely have been too much. Luckily for me I was travelling to Sydney later that month. I e-mailed the store, they held it for me, and I picked up the book a couple weeks ago.” – Gilman Miller

TELENUMEROLOGY

“Here’s some additional information on your ‘700 Club’: Toll-free 877 numbers (not 887) are already available, they were released on April 4 of this year. There is a plan to continue with that type of numbering (866, 855, etc.) as numbers are gobbled up. 700 numbers, by the way, are defined as special use numbers and would be charged based upon the type of call that is being made. This is why you are seeing various stories from people who have used 700 numbers. One of the more common uses for 700 numbers are [sic] for high speed digital dial up data applications which may be video. It seems rather odd that a local carrier would block a 700 number, there have not been the same problems with 700 numbers as with 900 numbers because they are not the same type of call.” – Kevin C. Johnson, AT&T, Omaha, NE

And from Dave M: “Bellcore no longer runs the North American Numbering Plan (NANPA). Now it’s Lockheed-Martin. They’ve got a website at http://www.nanpa.com/. It’s interesting if a bit jargon-y. They do have good area code maps, as well as a list of all the codes in numerical order and by state.”

COMPLIANT AND COMPLACENT?

From Brooks Hilliard, who I finally realized was not principal of a prep school, but principal in a consulting firm:

I’ve written a report on the Year 2000 which I am hoping you will find helpful. To tell, ask yourself this question: suppose you had to shut down all your company’s computers for 24 hours and your competitors didn’t.

• How much business would you lose?
• How many critical deadlines or deliveries would you miss?
• How many of your best customers would desert you for more reliable suppliers?

How about a week? … or a month, or six months? Well, Year 2000 is worse than that.

Most of what’s out there on this issue is heavy on warnings and light on solutions. But this report contains practical advice on what your businesses must do NOW to keep operating and continue your cash flow. This means more than just making sure your PCs have the right chip in them. Check it out at http://www.bizauto.com/y2k.html for the whole story. Helping businesses cope with major computer and technology challenges is what we do for a living.

A.T.: Yeah, yeah … but wouldn’t Brooks Hilliard make a great name for a prep school? Or a military academy? (“My kid’s at Brooks Hilliard. We are hoping he will get into Yale.”)

I got so carried with my Amazon.com short yesterday, and my quest for the goggles, I forgot all about the summer fun.

Here was the deal. I was in a pool shaped wrong for water volleyball, and how are you going to play water volleyball with just three guys anyway? So, not being ones to lie around aimlessly in the sun – where’s the competition in that? – we set about devising the rules of the afternoon. There would be a series of five events, each scored 3 points for the gold, 2 points for silver, 1 point for bronze. I was thus assured of at least 5 points, notwithstanding my pals being two decades my junior. The events were to be: Underwater Distance Swimming, Underwater Breath Holding, Push-Ups, Poker, and Scrabble (there is only so much time one can stay outdoors in Miami in the summer).

I actually used to be able to swim pretty far underwater, and now that I had a pair of Nike goggles, I felt a silver medal or perhaps even a gold was not out of reach. Until it developed that David knew how to do flip turns. I need hardly point out the importance of flip turns in generating the most flowing pushshsh off the side, or the importance of that pushshsh in covering the length of a 12-yard pool. In high school, I had pretty serious trouble with flip turns, living in constant fear that I would go into mine too early (pushing off vigorously against nothing) or else too late (smashing my knees against the edge of the pool). But that was a long time ago, so even what little expertise I had developed had pretty much left me.

Making matters worse, when we did “odd-finger” to see who would go first, I “won” and had to go first. (Just in case you were wondering, it was the first time I had done odd-finger in perhaps 35 years. Yet it is an effective method for breaking a deadlock and one that should probably be used more often in corporate and diplomatic stalemates.) I adjusted my goggles, hyperventilated, and pushshshed. I embarrassed myself with three truly pathetic turns and, thus, did four laps underwater. David did six, so Marc did six-and-a-smidgen. This made David, who feels a deep need to win, crazy. “Two rounds,” he announced, meaning that each of us got a second try.

For my second attempt, I merely dipped my head underwater for a moment and brought it back up, grinning broadly.

“That’s it?” asked the pentathletes.

“That’s it,” I affirmed, knowing that I couldn’t have done better than third in this event so I shouldn’t, if you will, waste my breath.

David, who I may have mentioned is competitive, swam nearly seven lengths underwater and when he surfaced, pretended to be having a seizure of some kind. This was funny, until we realized he had so stretched the edge of his personal envelope that perhaps he was having a seizure of some kind. Fortunately, the pool is even shallower than it is short – yes, you can drown in six inches of water, but generally not if two guys are in there with you (unless they are both truly competitive) – so whatever respiratory problem David was having lasted only a few seconds, and he soon began to deny having had any difficulty at all. Marc merely repeated his previous six laps, fearing (I think) that if he beat David, David might go for a third attempt and truly do himself in.

Meanwhile, I rested.

So the score at this juncture was: David 3, Marc 2, Me 1.

“Who has a watch with a second hand?” was our shared question at the start of event #2. And then we realized none was needed. We would submerge simultaneously and simply see who could stay down the longest. “On three,” I said. “You count.” (I was hoping to trick one of them into counting out loud while I was hyperventilating, but instead we all mouthed the words.) One … two … three.

With my Nike goggles, I watched as first David and then Marc surfaced, breathless. But I was excelling at what I do best. Nothing. I was expending no energy, not moving, not breathing – that was the whole point of this competition: to do nothing. And I was doing it very well.

Soon, the other two started shouting “you can come up now.” But after my defeat in the first event, I felt it was important to make a point. I stayed underwater, doing nothing, for another 20 seconds or so, and then – still underwater – I swam over to the edge of the pool and, with my head still submerged, kicked furiously for about half a minute, watering all the plants to either side of the pool.

Aha! Triumph for the old guy.

The score, as you have already tallied, was now David 4, Marc 4, Me 4.

Push-ups are a very individual thing. I do mine on my knuckles, having once done damage to something in my wrist architecture doing them the normal way. And I go all the way down when I do them and come all the way back up. I do great push-ups. I just don’t do very many of them (or do them very often). David agreed that “form” was critical to a fair event, and offered to do his on his fingertips. Marc’s push-ups were, to put it charitably, non-standard. Though there had been a lot of them, David and I agreed to disqualify Marc’s push-ups.

The score was now David 7, Me 6, Marc 5.

And now we were coming into the “brain” events. The poker was five-card draw, and once we had agreed what beat what – an exercise I’m sure we did wrong because we had decided to leave the two jokers in the deck, which changes everything – I had my stroke of genius. Rather than just play best out of five hands or something, which would have left it entirely to luck, I realized my edge would come if we got strategy involved. (Because I’m so smart.) So I dealt each of us $50 in Monopoly money, with a $1 ante – success wouldn’t be who won the most hands, which is just luck, but who won the most money, which takes brains – and, through skillful betting, bluffing, and calculation of the odds, I proceeded to go bankrupt. Marc had all the money.

David: 9, Marc 8, Me 7.

Which meant we were tied, and a nice way to end the day friends.

(We were tied because it wasn’t even necessary to play the Scrabble – indeed, they refused, so sure were they of the outcome. This annoyed me, but I took the 3 points anyway, and Marc, who is also a writer, took his 2. We were 10, 10, and 10, although David somehow remembers it as being 13 for him. We are not quite sure how.)

I love summer. I hope you are enjoying yours.

Monday, at last: The Physics of Coffee

So I finally found a pair of goggles that work. The water stays on the outside of each goggle, leaving each of my eyeballs dry and happy. This means I will be able to swim, which means I will get the aerobic exercise I need, which means I will live forever (if my Amazon.com short doesn’t kill me first).

"What kind are these?" I asked the friend who let me try them.

"Nike," he said, which a sharper man might have deduced from the NIKE logo.

He actually offered to give them to me — he had another pair — but I would have been embarrassed to take his goggles, and I would then have had no excuse not to swim laps the next morning … let’s not rush in to physical fitness … so I said I would just pick up a pair of my own.

A week or two later, I found myself in midtown Manhattan, passing Nike Town on East Fifty-Seventh Street. Nike Town occupies an entire five-story building. It is the mother of all Nike stores, with a huge atrium and what would appear to be room for 80 different boutiques, 16 per floor. And yet it’s all Nike. Nike, Nike, Nike.

"Where would I find swimming goggles?" I asked the Nike Town crier in the atrium.

"We don’t carry goggles," he said, helpfully.

"No, no," I explained. "I’ve seen them. I’ve worn them. They’re great: Nike goggles."

I made zeroes out of the thumb and forefinger of each of my hands and placed them over my eyes — the international symbol for Nike goggles.

"I know," said the Nike guy. "We don’t carry them. Why don’t you try Sports Authority on Sixth Avenue?"

"What do you mean you don’t carry them?" I marveled, gesturing with my arms now outstretched at the extraordinary scale of this giant store.

He smiled at the irony but held firm: no Nike goggles at this store.

At Sports Authority I found only Speedo goggles, of which I bought two pair, but which I assume will leak and so haven’t tried them, because let us not, after all, begin an exercise regimen without an appropriate consultation with our doctor.

There will come a time, I have decided as a result of this experience, when Nike Town will be mainly for show, like a giant 3-D billboard, whereas actual Nike product will mostly be bought by clicking on the Internet and delivered the next morning by UPS, FedEx or priority mail. You will log on to Amazon.com, survey the tabs across the top — right now they are just BOOKS and MUSIC, but can SOFTWARE and EYEWEAR (for replacement contact lenses, mainly) and INSURANCE be far behind? — pause briefly to ponder whether Nike goggles would be under the SPORTS or EYEWEAR and decide simply to search on (category) Goggles and (brand) Nike, just as now you might search on the title and author of a book. A moment later, there would be a photo of the goggles my pal let me try and … click … in the morning the goggles would arrive by Federal Express.

Which is one of the reasons I am long Federal Express, and also a reason I am wavering in my resolve to stay short Amazon.com.

And yet I have noticed through the years, based on a series of mostly disastrous shorts, that it is when I finally "get it" — when I finally see why U.S. Surgical (which seemed overpriced at 20 and which I shorted at 60 but which is now 140) actually might blow Johnson & Johnson out of the water and revolutionize surgery throughout the world — that I cover my short, at the top, only to see Johnson & Johnson offer a little healthy competition, after all, and the stock fall back to 20.

"Trees don’t grow to the sky," is a very old saw on Wall Street. But of course a handful do (Berkshire Hathaway comes to mind) and even shorting a relatively few shares of such a tree can wind up clear-cutting your entire forest. So one is never quite sure, with a U.S. Surgical or an Amazon.com, which kind of tree this will be.

But here’s the point: Does anyone know where I can get a pair of Nike goggles?

Coming Monday: The Physics of Coffee

From Jarrett: I came upon this strategy, and for the life of me I can’t figure out how to lose money with it. I don’t mean paper losses, I mean lose actual money commonly used to buy Twinkies and the like.

After researching Pioneer Aviation (a fictional company: Symbol: PIOAV), say I decide that it is a good value (let’s assume for a moment that I am correct about this). It is currently selling at 15. I then sell the July 15 Put, and take whatever premium is offered – let’s say, since it’s selling at the money and it’s almost expired I get paid 5/8 ($62.50 for a put on 100 shares, less commission). One of two things now happens. Either the option is exercised, in which case I have to buy 100 shares at 15 where I was going to buy it anyway – but I’m $62.50 richer – or it expires and I buy 100 shares at whatever price it then is (which would have to be 21 before I see a paper loss).

[A.T.: Well, that’s the first flaw. Jarrett misplaced a decimal point. Paying $2,100 for 100 shares of this stock, instead of $1,500, sets him back an extra $600. The $62.50 he got for selling the put barely puts a dent in that. What I think he meant to say is that he could pay as much as 15-5/8 – not 21 – before this strategy gave him a paper loss.]

Several years later in January, PIOAV is selling at 85. I think 85 is plenty, and I want to get out, and I would be completely happy with $85/share. But instead of selling, I sell a June 85 Call, and get paid a premium of 17 ($1700). (Incidentally, 85 and 17 are the actual numbers from yesterday’s Intel closing price.) Three things can now happen:

1. The call is exercised and my 100 shares are called away from me at $85. So I get $8,500 plus the $1,700 plus the $62.50 I got for selling the put. (Net profit, $8,500 less $1,500 to buy the shares = $7,000, plus the two option premiums = a total profit of $8,762.50.)
2. The option expires with the stock above 85.

[A.T.: Actually, this would never happen. No one would “leave money on the table” this way. Even if the option purchaser forgot to exercise the option, his brokerage house almost surely would do so for him.]

3. The option expires worthless, with the stock below 85, so I keep the $1,700. In that case, I either wait for it to rise or sell another call and make some more money on it.

Now, I know the price of PIOAV could very well go to 125 in February, and I’d have it called away from me at $85. But if I hadn’t sell [sic] the call, I would have sold the security in January when it hit 85 – so at least I have the extra $1,700. What is wrong with my logic? If this works then why is everyone anti-option? There are LOTS of scenarios where you can lose a ton of money with options, but I don’t see it here. Help me out please.

A.T.: Well, let’s do these one at a time. If you definitely wanted to buy PIOAV, then selling the put is not dumb. You either get a small premium for doing so – but lose the chance to buy it at 15 because it shoots straight up, say. Or else you do wind up buying at 15, but with this little 5/8-of-a-point discount (in your example).

It can certainly work, and some smart people do buy stock this way. But it’s not a free lunch, because you tend to buy only stocks that aren’t doing so well and miss the ones that do indeed sprint to new highs.

There’s also the risk that you’ll get cocky and forget that for $62.50 (less commissions and taxes) you have put yourself on the hook for $1,500 – even if fraud is discovered at the company and you have to pay 15 on a day when the stock has collapsed to 3. So maybe you’ll sell more puts than you can afford to – it seems so innocent, so no-lose – and in a meltdown come home to find yourself more heavily invested in PIOAV then you like.

But if you’re careful and are truly prepared to buy all the stocks you sell puts against (because if the market melts down, you’ll get ALL of them, not just PIOAV), then be my guest.

Now, what about when it comes time to sell. At that point, I believe you should just sell. There’s no reason to hold on just to get the call premium. (Better, indeed, to buy some other stock you think has brighter prospects and, if you like, write out-of-the-money calls on it.)

Except for taxes. Taxes can be a good reason to hold on to a stock you think may be headed south – if you believe it will ultimately come back – and write calls on it in the meantime. You get the dividends, you get the call premium, you avoid forking over the taxes.

The problem is, the market is wily. It’s not uncommon for it to foil one’s best laid plans.

• You sold a call at 85, accounting irregularities are discovered, and now it’s 45 – a la Cendent. You got a little premium but missed the chance to sell at 85. Oh, no!
• Or gold is discovered, and now it’s 125. You took the risk of it falling to 45, yet reaped little or none of the gain from 85 to 125. Oh, no!

In short, your strategy could earn you a Twinkie or two and every once in a while make you too sick to your stomach even to think about Twinkies. It’s not terribly dumb to do what you describe from time to time when you feel the circumstances are right, but neither is it remotely a no-lose strategy for easy money.

Sorry!

How long can these low interest rates last?

I don’t know and I’m not making any predictions. But from 1880 to 1965, there was no such thing as a home mortgage for more than 6%, with bond rates even lower — and that was 85 years.

(Some facts are so telling, I should just shut up and get out of their way.)