Author: A.T.

In answer to my call for suggestions on sensible ways to invest in Japan, Neile Weissman wrote: “Try Tokio Marine & Fire Insurance ADRs — symbol TKIOY. TKIOY is an old line, well capitalized company that itself owns a diversified portfolio of Japanese stocks. Trading in the low 50s, it’s at a 25% discount to its underlying securities. Their website: http://www.tokiomarine.co.jp/index-e.html. Mutual funds that hold this security are deep value players like Sogen International and Third Avenue Value. One of Third Avenue’s past reports had an extensive write-up of TKIOY (visit www.mjwhitman.com).”

To balance Tokio Marine’s mostly blue-chip holdings, Neile suggests the Warburg Pincus Japan OTC fund. “The guy who had been running the better-performing Warburg Pincus Japan Growth also took over this one.”

Recently, I wondered what would happen to MSFT when it had to start paying real wages rather than rely so heavily on stock options to keep its people happy.

My musings elicited this interesting message from the ether:

“I am not a fan of Microsoft and I hate Bill Gates, partly because I do not have money like him and partly his philosophy about selling software does not match with mine. However, I am long his stock, because he is a savvy CEO and the world demands his products. I think his stock will do good in the long run. However, I do not agree with your projection of labor cost etc. Following are my reasons.

1. Just like when the US was a powerhouse in small scale industries in 70s and early 80s and now the whole industry is shifted to Asia and Latin America, software industry will follow it. It is a matter of when, not if. It could be 20 years, 50 years or whatever. Already you can see it. Microsoft has only 3 offices (R&D) in the world. 1. Redmond, WA; 2. Israel; and 3. Hydrabad (India) – will be operational by December 98. Microsoft does not believe in opening many offices and the fact that they have considered India as their only major offshore software development center is significant. Recent Bill Gates visit to India signifies his commitment.

2. Almost all software companies worth their salt have some of their operations offshore (somehow they like to use this word). One big reason is that U.S. universities are not churning out enough graduates to keep up with the growth worldwide.

3. American graduates cost more, demand more, and prefer to (or I should say forced to) move around. That creates a drag on product development.

4. India has state subsidized (almost 50-95% of education cost. I am a great beneficiary of this subsidy and always grateful to the government) and very good education system and relatively stable job environment. Graduates cost less than 5 to 20% of cost of US graduates and the number of universities and institutes are almost equal to US. The engineering and science graduates pool is almost 2 to 4 times of the size of US graduates. Naturally, demand and supply works here and wages are rising about 20% a year for last 10 years. Microsoft entry would ignite this competition.

5. Most companies offer restrictive (cannot sell before 5 year or 10 years) stock options to their overseas employees in US$. That alone is a significant attraction to most potential employees. How else they can get almost sure chance to become millionaire (in local currency, $1=Rs 40)? I know some of my friends, who did become millionaire by exercising stock options.

6. Internet, satellite telecom and government support do play a big role. The world is so close. When I was in India recently, I was able to read your page, trade stocks and be in touch with my office, just as I would staying in US. This was not possible even 3 years ago.

“Bottom line is, these technological advances will accelerate the migration of software jobs and will keep the production cost in check (in today’s dollars). Just think about it, your clothes, cars, shoes are much cheaper today (please include inflation in your calculation) than they were 50 years ago.

“However, I do worry about unexpected things which no one has control of it. Would next CEO will be as lucky or smart or savvy as Bill? How about something like Internet, which Bill miscalculated badly. Would next president of US or justice dept. go after Microsoft big time. I do not know and frankly nobody does…So keep investing in profitable growth companies…and pray for higher stock prices.”

A.T.: I pray for higher productivity, continued technological breakthroughs, good health, and auto insurance reform. I do not pray for higher stock prices. They’re already awfully high. Better to let earnings catch up for a while.

But his message is interesting. When I was growing up, India was a distant abstraction. One day soon, my late-night customer service query may be handled (at noon, India time) by a customer service rep in New Delhi. Small world, indeed.

Yesterday, I made a comment suggesting that libertarianism (the Ayn Rand school) goes too far. Today, I offer Jay’s comment on what happens when the pendulum swings too much in the other direction:

From Jay S.: “You recently wrote: In this country, given our resources, capital and technology, we’d need relatively few people just to feed, clothe and house us. A true observation, as far as it goes. Being as I live in a country that is 30-50% poorer materially than the US — Italy — I’ve noticed one other major factor in addition to resources, capital and technology that contributes to the wealth of the average American (and which is completely missing in most of the rest of the world): a political-social culture of productivity and personal responsibility.

“Here, between government regulation, stifling taxation, and a socialist mindset that causes the average person to regard a job as a fundamental human right which the government owes him regardless of his personal productivity, the output per person is far less than in the US. Throw in the wasted human labor, such as the army of guys who push the buttons in self-service elevators because they have jobs protected by powerful unions and everyone thinks it would be cruel to make them hunt for an actual job, and the end result is that everyone is poorer, even with abundant resources, capital, and technology.”

A.T.: A happy balance between unfettered libertarianism and stifling paternalism may be the best bet — and perhaps not so far from where America is today.

Many of the smartest people I know are libertarians. They basically want the government to get out of the way, both in the boardroom and in the bedroom, and leave it all to Ayn Rand.

I have never met a libertarian of average intelligence. They are always way smart, way capable. The kind of people who would for the most part succeed excellently in a libertarian world — or any other.

The one flaw in libertarianism, as best I can dope it out, is its silence on the matter of those who, for whatever reason, especially reasons beyond their reach, are born or rendered too weak or intellectually limited to hold their own. They need society’s protection/assistance/special care … and this sometimes requires the presence of government.

I asked one of you, Chris Selland, about this a while back, when we were e-discussing it, and he wisely replied:

"What do Libertarians say about those who can’t compete with Libertarians? They pretend they don’t exist. Which is why I can’t call myself a true Libertarian. I just believe, to pirate a phrase from Bill Weld, that the social safety net should be a trampoline, not a hammock."

In other words, Atlas just shrugged, but Bill Weld and Chris and others are willing to lend a hand.

Monday: The Trouble with Socialism

MERGER MANIA

From Toby Gottfried: “It seems that every week we hear about ‘the largest corporate merger ever.’ (Or, if need be, ‘the largest in industry X’ or ‘the nth largest.’) And each time the executives trumpet the efficiencies and wonderful prospects. Well, it seems to me that the logical conclusion of all this is to just merge everything into one company. We could call it ‘the company.’ Or ‘the government.’ Oh wait. They tried that in Russia. It didn’t work.”

APR vs APY

From T.S.: “I had to put in my two cents worth and remind everyone that you CANNOT earn an APR on a deposit account! APR – annual percentage rate – refers strictly to loans. Deposit accounts are stated as APY – annual percentage yield. Of course, no one intelligent enough to shop APY versus nominal rate will be foolish enough to put money in an account (with the possible exception of CDs) that is quoted as APY. (Hint: get a good mutual fund money market account instead!)

ATCALL

From Victor Smith: “Thank you for ATCALL. I have been a long time user of AT&T having been a stockholder in years gone past. After reading your commentary on Ameritrade I got a postcard from AT&T announcing HIGHER rates starting June 1. I’m not taking it any more! I called ATCALL at the 800-411-9696 and am now going to be switched to them within ten working days. My local phone company will charge me $5 for the switch but ATCALL will give me $5 credit so it cost nothing to switch plus I now will get 10 cents a minute anytime any day. This will be great because we’ve got six kids and grand kids and Nannie is a great talker!”

A.T.: And now you can get 9-cent-a-minute calling through a deal America Online has arranged. But if you use AOL, you certainly know about it – talk about “in your face” advertising.

“I want a world of warm puppies, butterflies and sunny days,” writes our friend Uvarov, “a world where the makers of wealth are not dishonest, rapacious rascals. I’ve read up on very rich men (and in the case of Estee Lauder, women) to see if there is one who was not a rat (even if a charming one) somewhere along the line. I haven’t found one. (Well, maybe Gene Autry…but I don’t know much about him.) Bill Gates’s early public image was that of a clumsy, endearing nerd who…well, it seems that Lawrence Ellison is right when he says, ‘Gates likes to think of himself as Edison, when actually he is Rockefeller.’ Gates stole the Stacker technology outright — to name one nasty thing he did — and only after Stacker took Microsoft to court, did Microsoft start paying them a royalty.

“Richard Branson was the other hope for a right wing Republican trying hard to believe in Mom and apple pie. Well, I just read a book on Branson and he 1) almost went to jail early on for breaking England’s import/export laws 2) sold boot-leg Jimi Hendrix records that he bought from a dealer…and when the dealer drove up in his truck to sell his records to Branson for 1 pound each, Branson showed up an hour late and, since he knew the dealer did not know what Branson looked like, asked the dealer, ‘Who are you and what are you doing here?’ The dealer said, ‘I was supposed to sell these records to a bloke for a pound each, but he hasn’t shown up.’ Branson said, ‘Well, bad luck, mate. How about I buy them off you for 50 pence each?’ And the dealer said, ‘Okay,’ and Branson sold them through Virgin mail order for the intended 3 pounds each. 3) When Branson started Student magazine, he had the magazines printed on cheap pulp paper…except for the copies he gave to advertisers. Their copies were expensively printed slick ones, and the advertisers were led to believe that all copies of Student were constructed thus…meaning they paid higher ad rates than they otherwise would have.

“I had four close friends in high school (we are all in our mid-thirties now). They were all fun to be with. One now runs an antique shop, and his worst crime against humanity was that he could be snooty now and again. My second friend now owns a small screen-printing business…that provides a nice income, but certainly nothing with which he can buy and sell congressmen. And his worst crime against humanity was that he would brag about being a better surfer than he actually was. The third friend is now an electrician, and his worst crime against humanity was that he asked a girl we both liked to the prom before I had a chance to. (Okay, so it was a crime against me, not humanity.)

“My fourth close friend…MADE IT ONTO THE FORBES 400 LIST !!!!!!!! He has since plunged off it like a sky-diver falling toward a field of iron-ore with an electric magnet strapped to his chest. But even though his company has since hit a reef, he is still worth many tens of millions. (And, annoying to old friends like me…his head has grown right along with his bank account.) This fellow’s worst crimes against humanity were: a) shoplifting music tapes from a record store by stuffing them in his pants; b) stealing car stereos and reselling them black-market style. He once stole a car stereo from a girl he knew and who lived two doors down from him…and when she got a car alarm after the theft, my friend (who wasn’t so close a friend at this point) laughed with his accomplice in front of me at the fact that the alarm was the most expensive one she could find. He also actually approached my prom-date-usurping friend and said, ‘Do you need some seat covers? Because I know a car that has some neat sheepskin seat covers, and I could steal them and then sell them to you.’ c) He stole a lot more stereos to sell to other students. d) When he wanted to get into a certain college after two years of junior college, his brother — who looks very like him and was very academic — took his S.A.T. tests for him…and my old friend got into the desired college. (I’ve since read of a student serving six months in prison for having someone else take his S.A.T.’s for him).

“Now, for my one friend who had/has a serious criminal streak running through him to be the one to end up richer than God…it’s one of those moral lessons about life one would rather not learn. And to try to find at least one HONEST fellow in the world who is stinking rich, and failing in the attempt… What is your take on the men who have built up wealth?… Is there such a thing as a morally upright filthy rich man? Can one get up to that level without being a rapacious manipulator? Will the nice guy always finish, at the best, second?”

A.T.: Uvarov, Uvarov! What kind of attitude is this! Surely you are being too gloomy. Michael Dell is no pauper, and is he a rapacious manipulator? Warren Buffett has played honest and fair all his life, I expect. And yet while I like to think there are numerous examples of nice guys finishing first, it is intriguing what you say. In my elementary school class, the one boy I remember as being “socially maladjusted” (my mother’s term, at the time) and who, if memory serves, was expelled for something having to do with a magnifying glass and kindling (though memory may indeed not serve — this was a long time ago) recently resurfaced in the pages of Business Week, worth $100 million. None of my high school classmates is, to my knowledge, stinking rich, but there was the boy expelled from my older brother’s class — again, just a bit too rough, raw and defiant — who became one of Mike Milken’s junk-bond-financed band of centi-millionaires.

So there may be more to what you say than any of us would like to think. But I still believe you’re being way too pessimistic. It must be that baleful, fatalistic Russian soul.

Charles and I went to see Bulworth at the Ziegfield Theater at 54th and Sixth in Manhattan, one of those great single-screen theaters with about a million seats. When we got to the line to buy tickets, we were surprised to see a seating chart dividing the theater into “zones.” We were politely asked where we wanted to sit and issued tickets with seat numbers just as if it were a football game or a Broadway show.

Well, it’s not a football game or a $75 ticket to a Broadway show; it’s a movie.

But, OK — it was required that we play along, so we did. We asked for an aisle up close, maybe the fourth, fifth or sixth row — center or side, didn’t matter. In we went and found our aisle seats in the 19th row. We waited for the movie to start, then moved up to two of the many empty aisle seats up front. No great harm done. The theater was only about half full, so we got to sit where we wanted.

But look how dumb this is. Today, the way it works is that 600 incredible computers are applied to the task of finding each person the seat that best suits his or her preferences. These computers are called brains. No ushers or attendants required, no arguments, no delays, and if you want to be sure to get the kind of seat you like, just come a little early.

Under this new, “improved” system:

• The wait to buy tickets will be longer, because each transaction becomes far more complex.
• To avoid holding everybody up, you’ll settle for a seat far less ideal than the one your eyes and brain could grab if you were actually looking at it, and those around it.
• Ushers will be required to help people find their seats, raising labor costs and ticket prices.
• There will be fights. People will sit where they’re not supposed to — some, because they’re pigs, most because “that’s an 8? It looks like a 3!” Or they’ll wait, as we did, until the lights go down, and then switch to an empty seat … but then the rightful owners, who came a little late, will arrive, which leads to a little whispering and “excuse me, sorry, excuse me, sorry” as people stand up and go in and out — and then, when you return to the seat you were assigned, it will turn out someone else took your seat when the lights went down — “excuse me, sorry, excuse me, sorry” — and why? What is accomplished by all this extra effort and regimentation? Nothing! It’s a movie! Leave us alone!

I’m all for the new small “luxury” theaters that are beginning to open up. Big plush seats, waiter service for drinks, “free” popcorn, a high ticket price. I have no problem servicing the affluent market, or the market that wants to splurge for a special occasion. Viva first class for them as wants to pay for it. But assigned seating at the regular movies? It is a ridiculous idea.

(And mark my words: It won’t last. Very few people will call the theater companies to praise it, and most won’t care too much either way, but many (like me) will hate it enough to drive the theater owners nuts.)

So we went to see Bulworth, which is a must-must-see (warning: raw language), and when we got to the line to buy tickets, there was a seating chart dividing the theater into "zones." We were politely asked where we wanted to sit and issued tickets with seat numbers just as if it were a football game or a Broadway show.

Terrible idea. I’m writing this in the hope it will not catch on. And I think it won’t, because it’s a terrible idea.

First let me say I’m no Luddite. "Hello, and welcome to MoviePhone!" may be annoying, but it’s a terrific idea. That’s the one where, if you like, you can call in advance — 777-FILM or 888-FILM in the cities I’ve used it — and purchase your ticket in advance.

It’s great for the customers, because many do want to be assured they’ll have a seat when they get to the movie. It’s great for the movie theaters, because it increases the proportion of occupied seats. Some people now go to a movie who wouldn’t before because they didn’t want to risk not getting a seat … or because they didn’t have a paper handy to see what was playing. On top of that, some small percentage of MoviePhone purchasers buy tickets over the phone but don’t show up. I’ve done that myself. Not that I am loose with $18 (the cost of two tickets), but it’s actually not a huge price to pay for the option of seeing the eight o’clock show of Bulworth if you can get out of work in time. So in a sense, MoviePhone increases a theater’s capacity from 100% to maybe 102% of its seats, without having to build any new seats.

Good for the theaters, a nice option for the customers — especially the older ones, or the ones who have to engage a baby-sitter, only to find the show’s sold out when they arrive.

Brilliant.

But assigned seats? A terrible idea — as I will argue tomorrow.

Every so often in this space I’ve suggested putting a small speculative bet on Russia. For example, a little over a year ago, May 2, 1997, I noted that the entire Russian stock market, though way up, still seemed to be valued at only about one third the value the market was placing on Coca-Cola. And up it went further, and further – an eightfold increase since 1994 – until the start of this year.

If any of you follow this market, I thought I would share the thoughts of a bright young American in Moscow who does this for a living:

Every day for the past two weeks, I’ve been telling our traders the market will continue to fall. And it has. A lot. Nearly every day. The Russian Stock Index dropped another 5% yesterday and another 4% this morning. It is now down 49% since January 1, and our account is down 47%.

I think we’re about to bottom out. The IMF left on Saturday, very quietly. My sources close to the IMF tell me that [International Monetary Fund chief] Camdessus is ready to support Russia with a multi-billion dollar bailout package if need be. There is an overwhelming sense that the IMF will step in very soon. Today, the Russian government is implementing austerity measures (albeit vague) which they claim will cut expenditures and boost revenues amounting to 50 billion rubles ($8 billion). Dubinin is fully dedicated to supporting the ruble from devaluation. He continued today by ordering all commercial banks to retain at least 20% of their portfolios in long-term government debt (OFZs). They must comply by July 1. Investors generally feel the Russian government has been doing “the right thing” to the proper degree (in contrast to Indonesia this winter), and that the IMF loves Russia.

We have not seen these levels in the RTS in 17 months. These are the days that Soros and Berezovsky and their cronies have been waiting for (indeed, in my opinion, have helped to orchestrate). If you have some extra cash to risk, now is probably as good a time as ever to average down. If I had more cash, I’d do it now.

A.T.: Does this mean you should buy 100 shares of TRF, the Templeton Russia Fund? Possibly not. It sells at a premium to net asset value, which is a handicap, and there are those pesky annual expense charges dragging you down. But better to buy it here at $26 or so than a year ago at $53. Russia is clearly risky. But it’s a good place to invest a little money you can genuinely afford to lose – and may.

Meanwhile, events move quickly. A couple of days after getting the preceding, which is to say Wednesday, he sent the following:

Wait! It’s not quite time. Today, T-bill yields jumped from 50% to 80% and higher. (The gov’t is virtually the only bidder.) This afternoon, the central bank raised interest rates from 50% to 150%. (They were raised from 30% to 50% just 10 days ago.) Ruble futures contracts for March 1999 are being traded at RR 8.7 to the dollar, a 41% premium over today’s rate of 6.16 [meaning that people are betting the ruble will be worth a lot less in the future]. Furthermore, political uncertainty about the year 2000 elections has not been fully factored into the market yet. While this may take place in a separate downward movement in the future, it probably makes sense to wait just a bit longer. The RTS Index is now down another 9% from yesterday’s close, down 54% since January 1.

While there are low prices now, and perhaps better opportunities soon, it also remains clear to me that no big money will return to Russia until the return of political stability, which will likely take place in the year 2000 or later. As before, any investments made now should be devoted for 3-5 years in order to achieve significant growth. Comparing today’s cheap, battered RTS to the pricey Dow, I’d give Russia another chance for significant long-term growth.

A.T.: So there you have it: lots of smart people, lots of big money, and … no one knows. I do know this, though: Russia itself will not disappear, and the country has awesome natural resources and an educated work force. It really may be worth more than Coca-Cola.