Author: A.T.

From Michael Portuesi: “I’ve read at various times about the prudence and rewards of diversified investments, asset allocation, and dollar-cost averaging.

“Now that I have a small boatload of cash – mostly as a result of sales of my previous employer’s stock (I’m a software engineer, who worked for a company that at one time was going places) – I’m thinking that I should purchase a mixture of stock and bond funds, plus keep some of the cash around. The money would remain invested for five years or more.

“But given my uncertainty regarding the near-term future of the stock market, would it be wise to put a lump-sum there at the outset, if one expects the market to go down over the next year or so? I understand dollar-cost averaging, and I would have no hesitation to invest regularly through high and low, but it seems odd to put a large amount of money into the market when you believe it to be near a local peak.

“What are the considerations here? Assuming for a moment my crystal ball is better tuned than most, why would I invest now, rather than sit out for six months or so? If I’m investing for the long term, is any time really a good time?”

A.T.: Good question! Assuming your crystal ball IS better tuned than most, you’re right: wait. But that’s an awfully big assumption, because even the brightest minds on Wall Street tend not to have tunable crystal balls. That said, I admit I’d have trouble buying the Dow at 9000, too. The stocks I tend to buy at times like these (so far, with poor results compared with the Dow) are out of the limelight, overlooked, that seem to me to represent decent value.

Like most investment questions, yours is truly answerable only in hindsight. You’re wise to recognize that the market is no bargain here, and to keep some of your money safe and relatively liquid. (Try Treasury Direct, especially if you live in a high-tax state, for your short- to intermediate-term bonds; no need for a mutual fund.) But you’re always – yes, always – wise to embark on and stick to a program of regular monthly investments in the stock market … so long as it’s truly long-term money you’re investing (five years is really only intermediate term). So if you have nothing in the market now, I would certainly start.

But I wouldn’t dump every cent into the U.S. market all at once at today’s prices. Indeed, let me go way out on a limb and suggest that, after suitable research, you put a little in Russian stocks (5% of your stake?), via a fund, and a little in Japanese stocks (10%?), either directly (many are traded here) or via a fund. In ten years, you will either hate me for this suggestion or else, if it goes really well, forget it was mine.

Good luck!

From Lorraine: “I want to know if it is possible to include software (Pitbull, etc.) and subscription costs (Investors Business Daily, etc.) as part of your cost basis for taxes. Assuming you have any profits!”

A.T.: No. Investment expenses get lumped in with any other miscellaneous deductions you may have – including things like union dues, tax preparation fees, unreimbursed employee business expenses and costs incurred in a job search – and then only to the extent they all exceed 2% of your adjusted gross income, count as a deduction if you itemize. Say you have $600 in investment expenses, $150 in union dues and $40,000 in adjusted gross income. All but $800 of your $750 in investment expenses and union dues would be deductible – i.e., none of them.

One small thought in this regard. In the example above, you might try bunching your investment expenses every second year, so you had $1,200 one year and zero the next. Timing your subscriptions and purchases to work out this way just to get a small additional deduction may seem a bit obsessive – I wouldn’t bother with it myself. But it’s an option.

And now, on an entirely unrelated subject . . .

BLACK COFFEE

I shouldn’t have to tell you this, but some people seem not to get it – every so often you go in to a restaurant where they serve coffee in clear glass cups. Transparent cups. Surely you know coffee tastes watery this way. It must be served, and will taste much more robust, in an opaque cup or mug (white is best). It’s just simple physics.

One of the smartest people I know lost $2 million recently shorting Dell, and another good chunk shorting Excite. This is instructive, because it shows just how difficult and dangerous shorting stocks can be. (I warned you!) This fellow was not born yesterday. He made his fortune early as a Wall Street trader. He lives and breathes computers. He is not reckless. (That is, he did not short 100,000 shares and watch Dell jump 10 points; he shorted 2 shares and watched it jump a million points – what were the chances of that? – or so it feels to him.)

He points out that Dell’s $60 billion market cap now rivals that of Hewlett Packard, while competitor Gateway Computer has a market cap of more like $7 billion. Is Dell that much better than the rest? Can IBM and Compaq never threaten its growth?

One interesting advantage Dell has (my friend notes ruefully, in hindsight) is that it charges no sales tax. Because it does business only in Texas, it charges only Texas customers sales tax. (Don’t hold me to this; it is his perception; I haven’t checked it.) Gateway and the others sell through retailers throughout the country and have offices in many states, and are thus required to tack sales tax onto their mail-order sales.

Right there, through no technical brilliance other than the quirks of tax law, Dell has, typically, a 6% to 8.5% price advantage over the competition.

(Theoretically no such advantage exists. Theoretically, Dell’s customers file “use tax” forms and pay the tax that way. Dell has no responsibility to collect it, but, theoretically, its customers in most states have an obligation to pay it. But do you know anyone who ever has?)

So, as we commiserate over his loss – $2 million may not be much to you, but it is to him – we plot Dell’s downfall. We envision state sales tax authorities subpoenaing Dell’s customer lists and hitting up customers for delinquent use tax plus interest and penalties. We envision cheap foreign imports, made all the cheaper by the Asian crisis, eating into Dell’s margins and market share. We envision a tornado hitting Austin, or Michael Dell being indicted for violating the Illegal Alien Act. (Anyone who has done so phenomenally well so phenomenally young must be from another planet.)

To be honest, I don’t personally put a lot of energy into envisioning these things, because I am not short Dell. I put my energy into envisioning the things I hope befall the Internet stocks I am short.

Excite is not one of them – my friend is short Excite – but after we finish persuading the local tax authorities to go after Dell customers, it is our dream to get IBM, Compaq and the others – the companies that determine how new PCs are shipped – even Dell – to begin exercising their muscle in this area. Yahoo wants to be the default start page on Compaq-shipped browsers? Fine. Compaq should charge Yahoo $100 trillion a year for this privilege. How would that cut into Yahoo’s profits (assuming Yahoo someday were to have profits)? Excite wants this privilege on IBM Thinkpads? IBM should charge Excite $100 trillion as well. IBM and Compaq, et al, have the leverage here – they just haven’t woken up to realize it and claim their share of the pie.

This is how tough short-sellers think when the going gets rough. Because you know the old saying: When the going gets rough, the tough get … margin calls.

Jay writes: “I have been in stocks for 7-8 years now. Earlier I was in options also, but after a year learned my lesson. (Enough said there.) I have been pretty good in stocks with moderate gains and very few losses. I don’t invest for long, and usually get out after a moderate gain (i.e. holding for 1 month to 6 months). I usually pick stocks after researching; by that I mean finding out what exactly they do, their p/e ratio, debt, cash they have, how well they have been doing earning-wise, etc.

“Recently, I had been hearing news on these Internet stocks, that how they have been doing really good. Their returns were great. And so, I wanted a piece of those returns. So, in late April I bought couple a of stocks: PVTR ($5.25)- PIVOT RULES – building a new online store to sell golf apparel, and TRAC – TRACK DATA CORP(for $8). The day I bought, they came out with the good news of going online, etc. So, then I waited for my quick returns. (Mind you, this was the first time I did this.) Today PVTR is at 2 1/16 and TRAC is at 4 13/32. I hold about 300 shares of PVTR and 125 shares of TRAC. Given a choice now, I would NOT invest or shouldn’t have invested in those companies. My question to you is, is it a good idea to hold these till they go back up or should I get out and save the rest of my money? Also, these web board messages are so confusing. All these people post on those messages and they at times can influence those decisions also. (I personally look at yahoo message boards for individual stocks).

“I am 27 years old with a wife going through college and not earning, so I don’t have that much cash to begin with. Usually, I am invested 100% and i.e. about $10,000.

“Give me your advice on those 2 stocks. Thank you!”

A.T.: Oy!

I know nothing about these stocks. If you’ve analyzed their prospects and believe they’re great companies, hold them or buy more. Or find other stocks you think represent great value and sell these to get the tax loss. (Your losses will cancel out taxable gains. Any excess losses up to $3,000 can be written off against your ordinary income each year, with the balance carried over.) But, Jay, I think you’re pitting your skills against some very savvy players by investing the way you do – and handicapping yourself badly by adopting a strategy of selling quickly. All your gains will be subject to ordinary income tax (both state and federal). Better to find investments you believe in for the long term and let them grow tax-deferred – or at least until you qualify for long-term capital gains rates. (I suppose if you’re in a very low tax bracket, this part doesn’t much matter – yet. But as you prosper, it will, so keep it in mind.)

From R.C.: “Tom’s account reeked of Amway. You could do worse, as you say. They do have actual products, though any discount store makes their idea of ‘wholesale’ look ridiculous. Seen their price on a 3-pack of underwear? I wanted to share a favorite quote from an Amway training tape. The man on the tape is down-to-earth, Italian, owner of a small struggling construction company. Very funny guy and tremendous motivator, especially to anyone considering a stint at cold-calling. His impression of Amway and similar prior to his getting involved: ‘I thought that was something you did just before you killed yourself.'”

And Sarah Heacock cautions: I would NOT go around suggesting that Amway was a legitimate multi-level marketing company because it actually sells goods. In my humble opinion (and my dad tried to make Amway work for MANY years while I was growing up, so much so that it nearly tore his marriage apart), what this guy was describing sounds exactly like Amway.

Sure, in Amway, you can sell the (overpriced) goods and get people to buy them as well as buying them yourself (everything I ever had except for the soaps were fairly shoddy goods). However, that is NOT what they stress to the people wanting to strike it rich. Nor is what they DO stress — recruiting other distributors and making a portion of your downline’s orders back in profit — what really makes the money.

What really makes the money for Amway is the motivational tapes and such that they sell. THAT is where people become Diamonds, etc. They are good at convincing their downline to buy the Amway-produced motivational tapes and going to Amway’s out of town functions. That is where the money is, not the products that Amway is selling.

This is evidently stuff that Amway folk learn when they get higher in the business. My father had friends who became distributors in their own right. They discovered this nugget of info and immediately abandoned the company, even though they had spent over $40,000 plus lost two good jobs and a car on the way up, telling everyone they knew how Amway made its money. Which is what convinced my father to get out. He trusted these people.

Anyway. Just wanted to let you know.

But Marie sees it (somewhat) differently: “Those ‘circles’ and ‘Diamonds’ [your correspondent writes about] are Amway. I used to be an Amway distributor — and I know exactly what he’s saying because it’s what I was told. It worked, but true … you have to work it — really hard. But yes, it does work. Now as for the people who can’t afford it being the ones who are in it the most: well, sometimes. But I can say that the scenario that George H. presented is indeed Amway. BTW, just in case you would ask … I left because I truly didn’t like ‘selling.’

You may have seen this in the New York Times Magazine a couple of weeks ago. It told the story of 21-year-old Dennis Fong, world’s best player of the murder and mayhem computer game Quake. What do his parents think of his spending all his time playing Quake? “At first they were really against it,” Fong told the Times. “Then I won a Ferrari, and now they’re like, ‘You should practice more.’ They’re pretty pumped.”

Have a good weekend!

[Correction: In response to my ode to the modern bookstore B.J. Segel writes: “Dudley R. Dewey, inventor of the Dewey Decimal System? I think not. It was Melvil Dewey — the real name’s just as funny. He was a weird guy, by the way. Also one of those early spelling reformers; he spelled his name Dui.”]

From Rodger: “Since you shorted Amazon.com and your reasoning was very sound, I was tempted to do the same. Now that Amazon stock is twice the price that you shorted it, do you think I should do the same or have you changed your mind?”

Help! I’m getting shorter by the minute. Especially my ego. I was at least half serious, though, in my warning at the outset of that column:

“Full disclosure: I’m short a few shares of amazon.com, the online bookstore. This should be an encouragement to those of you who own it, because stocks almost invariably rise strongly after I short them. Then I short more, and one of two things happens: I’m finally right, and break even, covering too soon on the way down. Or else I’m not right, and wind up with a spectacular tax loss.”

Right now, it seems I may be headed for the latter, though if Amazon.com stock keeps doubling every ten weeks, it may be bankruptcy court I’m headed for instead. (Just kidding, Charles.) The thing is now valued about $5 billion, and there are good reasons to be enthusiastic about the company; I just don’t see good reasons to be enthusiastic about the stock.

As many of you know, I’ve long boosted the company and linked my columns to its books. And now they sell music as well – a great fit – and I assume computer software won’t be far behind. This gives them more and more heft, and even makes purchasing from Amazon more economical: If you’re buying more than one thing, the shipping charge gets spread over all of them.

As a bookseller company alone, the stock market valuation is absurd. But obviously, that’s just the beginning. It may be that one day Amazon.com is selling $50 billion of books, music, software, travel, cars, boats, appliances, gourmet foods – you name it. If they can clear $2 billion in profit after tax, the company could be worth, say, $30 billion – 15 times earnings and six times today’s stock price. It could happen!

And that’s just in this country. What about when Amazon.com becomes the chief vendor of books and music and software and appliances and apparel in Europe and Asia and South America, Africa and Australia? So multiply by another six – we are talking here about one of the – perhaps the – largest, most successful companies in the world.

But something tells me a lot of other companies will want this business, too, and that the competition could be pretty fierce. Even making $200 million a year after tax may not be the easiest trick in the book (they could start by making $200 million in sales).

As for shorting it: so many people have, it may be hard to borrow the shares, and at the top (if there ever is one) it’s often impossible. But even if your broker can find shares to borrow so you can short it, think twice and three times; it truly is a risky, risky game.

Every 100th comment I get to indulge myself, usually by telling some cheap lawyer jokes. Well, the 600th comment came and went last week (“Who Votes the Short Shares?”) and I forgot to indulge myself.

To make up for that, I want to tell you very briefly about a Broadway show I never saw and whose music I don’t think I ever heard but about which I have a strong opinion anyway. It was called “Stop the World, I Want to Get Off.” Clever title, but totally wrong-headed. What was this, a suicidal musical comedy? The world is fantastic! What could they have been thinking about? Here’s the title that sums up my life: “Stop the World, I Want to Catch Up.”

Sure, it would be nice to be able to fly, though I can only begin to imagine the regulatory mess that would ensue (what would Superman have made of the FAA?). And sure, it would be even nicer to be able to be invisible — though you’d have to be able to turn it on and off reliably and even then the practical mechanics of it could get awkward if someone actually saw you abruptly appear and disappear. (An excellent novel suggesting some of these difficulties appeared several years ago, Memoirs of an Invisible Man, written with great skill by a Wall Street securities analyst. Though out of print, it shouldn’t be too hard to find. Or you might enjoy listening to it on tape — apparently that’s in stock.) But what I really would like is simply to have an eighth day in every week when you all were frozen. No newspapers, no magazines, no e-mail or junk mail or mail mail or phone calls — just a chance to catch up.

You would have Monday, Tuesday, Wednesday, Thursday, Friday, Saturday, Sunday but then, while you were frozen, I would have Andyday. Is that too much to ask? (And no, I would not mess with you while you were frozen.)

I am not what you’d call a sports fan and in my entire life have never been to an NBA basketball game – or an ABA game, for that matter, either, because it sounds too much like the American Bar Association and because even I know it’s baseball that has a national league and an American league, not basketball. (Does it?) Indeed, I have never even watched a basketball game on TV, both because I am not a fan (obviously) and because I know what will happen in any event. They will all run to the left side of the screen, and Team A will make a basket; then they will all run to the right side, and Team B will make a basket. Even if one team makes more than its share of baskets for a while, it will even out at the end – like coin tosses – and the final score will be something like 87-86.

So it was entirely by accident that, vaguely aware of the “Michael frenzy,” which I knew had something to do with bulls and bears and Chicago and Utah somehow, I happened upon the last fifteen minutes of Michael Jordan’s professional basketball career.

At least I hope it was the last 15 minutes, because, for one thing, how could you ever top that? In the 30 or so minutes it took for those 15 minutes to play out, I got entirely swept up in the frenzy and roared at the beauty of that final grace note. (Non-fans: they were down by one with no time left on the clock as Michael Jordan’s shot – a shot lofted by a tired, gracious 36-year-old – swished through the hoop and won his team the Oscar.)

The perfect way to end a career.

But the other reason I hope he follows the natural rhythm of the thing and retires is all the good he could do. I’m sure he’s doing a lot already, but with more time, he could take it to a whole new level. Not knowing Michael personally, I am relying on one of you to get this idea to him … and the idea is this: He should start a foundation called Michael’s Team and travel the country inspiring kids to “be cool – learn to read – join Michael’s team.”

“Be cool – quit your gang – join Michael’s team.”

“Be cool – crack’s whack – join Michael’s team.”

“Be cool – go to college – join Michael’s team.”

“Be cool – volunteer – join Michael’s team.”

Not many could pull it off, but judging from my brief TV acquaintance with him, Michael could. Swish.

From Bob Treitman: “Thanks for your comment on short selling. You answered one question that has always bothered me about shorting, which was who pays the dividend to the stockholder whose shares were borrowed. But there’s at least one other right of ownership: proxy voting. Who gets to vote the shares which two people each think they own? As a buyer, I don’t know whether I’m buying owned or borrowed shares; I expect to be able to vote the shares. As a stockholder, does putting shares in a margin account mean that I am willing to give up my voting rights if my shares are borrowed?”

Yes, that’s exactly what it means. But I didn’t know that until I checked it out — even my own veteran full-service broker didn’t know.

Picture it:

I own 100 Microsoft in my margin account. Meanwhile, someone else — let’s say it’s one of the Spice Girls — decides MSFT is due to fall and shorts 100 shares. That means her broker borrows 100 shares (from my margin account perhaps!) and sells it to yet a third person — we’ll call him Michael Jordan — who’s put in an order to buy MSFT. So Michael buys 100 shares from one of the Spice Girls, who borrowed them from me.

So there am I, who does not even know his shares have been loaned out (as it has no practical effect on my life — I still get any dividends and can sell at any time) and there is Michael Jordan, who also thinks he owns these shares. Which of us gets to vote at the annual meeting? Or by proxy, if we don’t attend? Michael? Me? (And if Michael did attend the annual meeting, who would draw the bigger crowds, Michael or Bill?)

Or do we both get to vote, in which case, though it is only 100 shares, there are 200 votes recorded?

If the question is confusing, the answer, as I say, turns out to be simple: Only Michael, in this example, gets to vote. Swish!

When you buy shares in your margin account, you agree that they may be loaned out for short sales. If they happen to be loaned out on the “record date,” then Michael Jordan is the owner of record, not you, for voting purposes.

If this bothers you, you are free to buy the shares in your “cash account,” which means you will not be able to borrow money against them.

But as a practical matter, the chances of this happening are slim. If a company has 100 million shares outstanding and people have sold 3 million shares short, then only 3% of the outstanding shares have been borrowed for short sales. Maybe yours were among them, but probably not. And as I say, except as regards voting, it makes no practical difference whether they were or not.