Author: A.T.

Richard Factor: “I just read an article about an experimental program in Texas that puts your ‘pay for auto insurance at the pump’ to shame. There is an insurance company that is actually using GPS to track the location of your car and the hours that it’s driven. They then charge according to how much you drive, the risk of the location, and the time. For example, daytime driving is safer, so the charge per hour is less. The more you drive, the more you pay. They don’t mention tracking such things as speed, but it could be done easily, and they could charge speeders more even if they were never cited.”

The experiment is by Progressive Insurance, which always has been progressive. But while very possibly good for Progressive, which may gain market share and profit, and definitely good for low-mileage drivers, this actually wouldn’t do much of anything to make auto insurance as a whole less of a mess. In most states (Michigan is the prominent exception), you would still have the same incentives to inflate or invent claims that you have now (there is no such incentive in Michigan), the same high costs overall, and thus the same levels of uninsured motorists.

The two modest systemic advantages I see:

• To save money, those who signed up for such a plan might drive a little less or at less dangerous times or less dangerous routes (or slower). But I think this effect would be slight, and it would come with a cost — having to curtail their driving. With pay-at-the-pump, by contrast, you could cut your insurance cost without driving less, by choosing to buy more fuel-efficient cars.

• Because they felt they were getting a fairer shake, those who benefited from this plan might be a little less likely to inflate or invent claims. But the kind of driver who would find this plan appealing might not be the kind of driver most likely to inflate or invent claims in the first place.

With this new system, you would still have states like California and Florida where half or more of the liability portion of your auto insurance premium goes to pay the costs of lawyers and fraud. Basically, the system would (not unfairly) lower costs for some kinds of drivers, who drive less or in safer places or at safer times (or slower speeds) and shift them to the rest of the driving public. But not lower the overall cost of the system.

I hope it catches on, because I don’t drive much.

PS: After yesterday’s column, a few of you wrote to tell me that PS stands for Post Scriptum and belongs after the signature. Not any e-more. It stands for e-Prior Signatorum. Please reread that column.

ANNUAL REPORTS III

Randy Mahoney: “As a shareholder of Service Corporation International (SRV), I was delighted to receive their annual report today. Considering their share price dropped over 70% in the last year, they have begun some much needed belt-tightening. This year’s report is simply the SEC ‘plain-Jane’ annual filing, stapled to the inside of a white paper jacket. Probably saved millions!

“One good thing, though: Since SRV is the largest provider of death care services in the world, I’m glad they didn’t include free coupons!”

FIRST CLASS II

Aaron Stevens: “This is in response to your column today. I am a Premier Executive 100K with United. I generally get the free upgrades for the best flyers, but yesterday, I declied the upgrade on my flight from San Francisco to Chicago, realizing that I had a window seat, and it’s only 3 1/2 hours, and I’m keeping kosher for Passover, so I wouldn’t eat the first class food anyway… So the flight was fine.

“So we arrive in Chicago, and as we’re leaving the plane, this old guy sitting in front of me asks me, ‘So, you work for Cisco, huh?’ To which, my standard reply ‘How did you guess?’ (I’m wearing a Cisco golf shirt, my employee badge, and my briefcase luggage tags are business cards.) So we make small talk a minute, and then I notice he’s wearing a ‘Cisco 1996’ jacket. ‘You work for Cisco?’ I ask. ‘Yes, I do,’ comes the reply. So I venture, ‘what do you do there?’ ‘I’m the Chairman. John Morgridge,’ he introduces himself with a gentlemanly handshake.

“Interesting. This man was CEO of Cisco for 8 years, took the company public, grew sales from very small numbers to the hundreds of millions of dollars range… and owning roughly 43,000,000 shares of Cisco, he’s got to be about the tenth richest man in the USA.

“And do you know what it feels like to shake the hand of a $15 Billionaire? Just like shaking any other guy’s hand feels, after he’s been on a plane for 4 hours, and in coach to boot!!

“I guess this serves as good testimony for our corporate value of frugality. Everyone flies coach at Cisco.”

FREETRADE II

Last week we got a peek at a new free all-electronic trading sit, sans humans, called Freetrade. I said I wouldn’t be signing up any time soon, but that I thought it was fascinating and worth a look. I still do, but have encountered another reason not to sign up just yet.

Rob: “One really, really nasty red flag, in my opinion, is where they say: ‘We will not accept account transfers. We do not want securities sent to us, nor do we want to send any out.’ If they won’t do a transfer out, that means that if you don’t like their service, you get to choose between just putting up with it . . . or else having to sell everything and take a tax hit — and then buying it all back with another broker, thus paying some of the fees you avoided in the first place. That really sucks, IMO.”

Yes, that would be nuts, and I assumed it was not the case. (I assumed they wouldn’t transfer specific shares out, but that, naturally, if you ever wanted to shut down your account, they’d transfer all your positions to the new broker.)

But we asked Freetrade, and they promptly and candidly replied, “Rob: Your red flag analysis is correct. Freetrade.com only promotes procedures that can be utilized from the Internet, i.e., does not promote any procedure that requires paper. Transfers of Account are a paper process at this time and thus are not processed. We’re working on automating this and other services/procedures and when these additional services are automated we’ll roll them out.”

I think Freetrade has to fix this. In addition to taxes and commissions, you’d even have the hassle of wash-sale rules for those stocks you sold at a loss but then bought back in the new account. (The IRS requires that you to wait 31 days, or postpones the loss until you eventually sell the position.) And if you wanted to give long-term appreciated securities to charity, you couldn’t do that, either.

Freetrade should raise this red flag very clearly on its web page, or — better — offer to transfer securities for some fee . . . and offer to close out an entire account for free after 2002 (by which time they would have worked out an electronic way to do this, or else absorb the cost if they haven’t). Something like that.

A couple of other points . . .

In its description of its revenue sources (how do they make money if you trade for free?), Paragraph 4 is confusing. All its really meant to do is criticize the stock exchanges for charging for trading information, because the information they’re charging for (the price and volume of each trade) is information, in Freetrade’s view, that came from you (and people like you), who make the trades. Freetrade wishes they could make this information freely available. But because the exchanges charge Freetrade (and everyone else) for stock quotes, Freetrade gives you a quote only when you’re in the process of making a trade, but not if you just want to check on stock prices. When you’re offering free trading, you have to keep the perks to a minimum.

Finally, Freetrade doesn’t sweep cash balances into a money fund the way many brokers do. It does pay interest on credit balances over $1,000. That first $1,000, you are loaning Freetrade interest-free.

But first: If you fly American Airlines and — because you have a gold card — qualify to buy upgrade stickers, be advised that they jump Monday from $200 to $250 for a pack of eight. So you can “earn” 25% on your money by buying a bunch now. And if the travel you do is not tax deductible, then it’s like earning 25% tax-free. Of course, tying up money has a cost, so you wouldn’t want to buy a 10-year supply (unless you thought they’d keep rising in price). In my own case, I just bought about a two-year supply.

Mary A. Black: “Hey, you are missing all the fun in the annual reports. In this week’s mail, AT&T had a 10-minute phone card, Compaq had a discount on laptops. McDonalds usually has fries or sandwich, Wal-Mart and K-Mart have had 10% discount coupons. (Like dividends in general, the little goodies and discounts are not what they used to be.) But, what I do like is seeing the incredible incestuous world of directors. There are lots of swaps — I am on your board and you are on my board. There are people with supposedly full-time jobs that are on six boards at $40,000-$50,000 per year each. Some of these people seem to make a nice living being on boards. Where do I apply? I would be happy to give them fresh outsider stockholder opinions. I recognize that voting my little shares against the professional directors is futile, but it makes me feel better and it is a toll-free call. So I am off to read a few this evening and vote!!!”

“PS,” Mary writes (appropriately placing the PS before her signature, Pre Signatorum, like every good reader of this column and, soon, e-mailers everywhere), “My personal favorite was from an international fund that did horribly. The opening line from the fund manager was: ‘The best thing about the last year is that it is over.’ Got to give him credit for honesty — but not my money.”

Several of you noted that I could stem the flow of annual reports and the Save the Earth a little by reading this year’s crop at least far enough to find the place, either in the report or the proxy statement, where they offer to take you off the physical mailing list and put you on the e-mail list for future reports.

Jon Raymond: “I agree with your assessment of company financial reports, although there is one company I own (Cognex) which has performed well despite the fact that its annual report invariably fits firmly in the category of ‘Kute to the point of Kloying.’ This year’s entry was in the form of a fitness program, I kid you not. I would also add that most of the proxies I receive lately offer the opportunity to vote online and register to receive future reports via E-mail. I’ve been reasonably diligent about doing so. Given the elaborate (and glossy) nature of so many of these annual reports, this seems like an easy way to give Mother Nature a breather. (For the record, in view of a recent discussion on this site about the importance of metal, I’d like to make it absolutely clear that I in no way wish to belittle the tremendous contribution paper has made to the progress of mankind, or to insult anyone involved in the usage or production of paper. I am merely suggesting that breaking the cycle in which these specific pieces of unwanted paper are shipped from the printer to my mailbox to my recycling bin and back again might be beneficial, and — who knows? — might even free up more time for us all to enjoy the wonders of mining.)”

Speaking of saving the earth, it’s really worth picking up TIME’s slim but very important Special Issue on that topic, on newsstands now, I believe. It’s also worth noting that Texas has the worst recent environmental record of any state in the country.

Tomorrow: A Couple of Other Freetrade Caveats

Cheerful bum sitting next to businessman in First Class: “I got my ticket for three dollars over the Internet. Are you going to eat that salmon?” — Leo Cullom cartoon in The New Yorker

Brooks: “On March 15 you wrote that you generally fly first or business class. ‘But,’ you wrote, ‘like most others up front, I don’t pay for it.’ How about devoting a column inch or so on HOW?”

If you’re Gold or Platinum on American Airlines, you can buy stickers (electronic) for $25 and, if a seat is available, use them to upgrade. It’s one sticker for each 500 miles of a flight, or fraction thereof, so the typical flight costs me 3 stickers — $75. If you fly a lot, they give you some free ones, too.

John T: “I just came back from an ‘around the world’ tour from Cleveland, to London, to Tokyo, and back to Cleveland. The cost of this was $5500 in business class. My partner and I discovered that we could take the same flight in coach for $1100. When we approached our company travel department and suggested that we would be willing to fly coach to save the company $8800, they said, ‘Sorry, it’s company policy to fly business class.’ Dilbert really is alive and well.”

Andrew Leschak: “My motto is ‘it only costs a few more dollars to fly first class.’ You can always find a bargain. I fly a LOT for business and usually fly first class. I am always upgraded due to my status of Chairman’s Preferred with US Airways (fly 100 segments or 100,000 actual miles). It doesn’t cost anything for the upgrade, regardless of your coach ticket price. Which is why I always fly with US Airways and our free market economy keeps all ticket prices the same among different airlines (I do need to fly the “cheapest” major air carrier). Also, for those traveling on business paying full fare coach, US Airways will upgrade you to first if available, regardless of your frequent flier status.”

Muriel Horacek: “At a recent Exxon Retirees’ luncheon the speaker said ‘If you can afford to travel first class, but choose not to, be assured your heirs will.’ On my visit to New York last week, I paid $333 round trip. The men in my row paid $1400 and $1700 respectively. And I had the aisle seat!”

(My guess: The men were just thrilled when Muriel pointed this out. But I actually know Muriel, and suspect they became big fans by the end of the trip.)

Of course, the real first class is . . . private jet. I can count on one hand the number of times I’ve gotten to fly on one of these; but it is, without question, a guilty pleasure. Given a billion dollars, it could grow on me very quickly. Todd Jennings: “Surely you know that Warren Buffett renamed his corporate plane The Indispensable from its original name, the Indefensible.”

Margot: “This may be too personal a question, but how do you stay positive in the face of all the negativism in the world? Just by reading your book, My Vast Fortune, I became more convinced that the world is run by self-serving, mean people. ‘The People’ have a voice, but money speaks louder. It can be pretty depressing.”

It’s not too personal, but my answer is so goopy I hesitate to share it. Now is your chance to Alt-TAB to something — anything — with more edge.

No?

OK . . . here goes.

1. Hey: things are great! Most of us in the developed world live with a level of comfort and security and technological wizardry that have been five billion years in the making, yet commonly available in only the last fifty. And some of it, in only the last couple. My cell phone has Caller ID!

We are alive at the magic moment.

(Which is why it is our extraordinary responsibility not to screw it up.)

2. In the main, the good guys — and there are lots of them — are winning more than they’re losing. The Cold War is over. Apartheid has fallen. Water and air are cleaner than they were in many parts of this country. There has been tremendous progress in acceptance of people who are different. Tobacco executives are a bit less smug. The gun show loophole may one day be closed. And on and on.

(OK, so auto insurance reform has proved intractable. But one must constantly keep reminding oneself: there’s more to life than auto insurance reform.)

3. Lucky chemistry. This is probably the biggest part of it. Thanks, Mom.

Sorry there was no column Thursday. Overcome by guilt, I did put one up Friday night. But it was one of those cooking ones, so you missed nothing.

Looking for historical stock quotes? The price of Intel stock on January 15, 1974? Bookmark this great site. It accounts for splits, so you get both the price as of whatever date you choose ($86, in this case), plus the more meaningful “split adjusted” price (21¢).

Looking for a Mother’s Day gift? That would be my friend Marie Brenner‘s new book, Great Dames. (“For Mom, the greatest dame of all.” — You get the picture.) May 14 will be here before you know it.

Looking for a great Republican? Look no farther. Senator Mitch McConnell, Republican from Kentucky, has just invited me to become one of the 400 members of the Republican Presidential Roundtable. “My colleagues and I agree we must bring more people of your caliber into the decision-making process,” he writes. He hopes that I am “as pleased to accept the honor as [he] is to present it” to me — and that I will send $5,000 to get my lapel pin and confirm my acceptance. It really is a big tent.

Looking for financial clues? “I’ve been getting a number of annual reports in the mail lately,” writes Craig Furnas. “I’m wondering whether you look yours over, or any part of them, with much scrutiny? Which parts?”

I do not.

I do worry about reports that are particularly eye-popping, not just because of what they must have cost the shareholders to produce, but because . . . well, you know the line about “methinks she doth protest too much?”

But basically I recognize that the information in these reports is several months old, and thus already discounted by the market.

I read the management discussions of a few where I have (for me) a big stake and want some feeling of reassurance (worthless, but still a good feeling), or to get some sense of management’s tone of voice.

And I read the Berkshire Hathaway report, even though I’ve never been bright enough to own shares, because that’s just good reading.

But the good stuff in annual reports is in the footnotes and requires a pretty intimate knowledge of the industry and its accounting conventions to analyze it as competently as the research analysts who cover the industry for a living. That’s a lot of work, and I assume I won’t be able to out-analyze the pros (who don’t do terribly well analyzing it, either).

There are a lot of trees in an annual report. Given limited time and talent, I prefer to try to spy the forest. With, thus far, limited success.

Tomorrow: Goop

Roses are red, violets are blue, I’m taking the day off — and so should you.

It’s nice to see high-techs jumping 30% a day again. I guess sanity has returned to the market.

Meanwhile, I promised you yesterday to be the first people on the planet to preview a new brokerage site. It went live at 6pm last night, Omaha time, with no advertising or fanfare, and you will find it at www.freetrade.com.

I take your time with this, as I said yesterday, not because I endorse Freetrade.com or recommend that you sign up, but because it is intriguing. And because, for a serendipitous reason explained below, you and I get first peak.

Here’s the background:

As many of you know, this column first appeared on what is now the Ameritrade web site. I did not endorse Ameritrade and they certainly did not endorse all the crazy things I wrote. But for three years they paid me handsomely and let me say any damn fool thing I wanted. (Such as: you’re nuts to buy and sell actively; just buy and hold — or stick with low-expense no-load mutual funds.)

I realized, in accepting the gig, that — for all my disclaimers — some people might in fact sign up with Ameritrade on the assumption that I had checked them out. But that was OK with me, because in fact I had checked them out and had been a satisfied customer for some time. The accounts were insured (not that anyone should relish the prospect of his broker going under, insurance or no). And the commission rate was a then unheard of $8 a trade. How wrong could you go at $8 a trade?

I did get some complaints over those three years from a handful of people who were not happy with Ameritrade. A few of them were substantive, but most were from people who were angry it took so long to open an account. They were not angry customers, in other words; they were angry it was taking so long to become customers.

Once my account was opened, way back when, my own experience has been fine. In some ways not as good as with a full-service broker; in some ways better. And, of course, much cheaper.

(I expect this might also have been the case with E*Trade or several of the other competitors.)

Anyway, after three years of lovely monthly checks, the gig was up. Yet I had come to enjoy writing this column, and getting to know some of you, and so I set it up on my own, with Ameritrade graciously allowing me to point readers this way.

Now the owners of Ameritrade are trying something new — Freetrade.

As you will see if you click over to the site, it is not for everyone.

But in reading through its introductory sections, you will see, I think, an admirable candor. And you may get a little better sense of how brokers make money.

Will Freetrade.com succeed? I’m not sure. I, for one, won’t sign up any time soon, because, among other things:

(a) For the kind of trading I do, the extra $8 a trade I now pay makes almost no difference. My trades tend to be relatively large and infrequent. Who cares, on a $25,000 trade, whether the commission is $0 or $8 or $13? (It does make me gulp when my full service broker charges $200 on the same trade — that’s real money.)

(b) I like to be able to indulge in vices that Freetrade.com does not yet offer — only very occasionally, when I am at my most self-destructive — like trading non-listed securities, shorting stocks and trading options.

(c) In case there are any bugs in this new system, I’m too old to be a guinea pig.

But it’s intriguing, because, among other things:

(a) I like doing everything by e-mail.

(b) I would love to see my account updated in “real time,” the instant I make a trade. And it would be fun to watch the progress of a trade from the moment I place the order, as if I were tracking a FedEx package.

For those of you who plan to build your own Personal Funds — and with relatively small positions where even an $8 commission on the way in and again on the way out mounts up — Freetrade.com could be a useful tool.

Anyway, the nice folks at Ameritrade wanted to find a way to get the word out to a relative few people, and so thought of me.

“Are you crazy?” I asked them. “After my columns on mining, I have only four readers left. Why don’t you call the Wall Street Journal? Why don’t you call Money?”

“Because we’re just feeling our way with this,” they said, “and don’t want to make too big a splash.”

Well, they have come to the right place.

Things seem to have settled down — or settled up. But on Saturday I got this expressive missive from someone who wrote, simply, “I want my mommy!” I don’t know, but he sounded like a guy of about 40.

Tomorrow, if all goes according to plan, you will be the first people in the world to have the opportunity to link to a new Internet broker that offers free trading. It is definitely not for everyone, and I will be neither endorsing nor recommending it. But it is interesting to contemplate: a brokerage firm with no people, no telephones, no paper.

OK, a few people. But none you can talk to. Yet, unlike traditional brokerages, this one will be always available, with “real-time updating,” meaning you can always see the status of your account (not last night’s status, the real status) . . . and watch the progress of your trades as they are being made, much as you can track a FedEx package, only faster.

A virtual broker, virtually free.

The last thing I think people should do, even with zero commissions, is trade a lot. (Anyone ever hear of taxes? Spreads? Addiction?) But offered the chance to be the first to give people a look at it, I couldn’t resist. It’s interesting. Kind of like being offered a first look at some state-of-the-art casino. You don’t have to book a room and gamble all night to be fascinated.

Anyway: come back tomorrow and be the first on your block to take a look.