Author: A.T.

Turns out, you can win a lot more from Video Poker than $2 an hour (see last week’s discussion). But before returning to that tomorrow — and the issue of investing vs. gambling generally — let me slip this one in:

“When I was ordained,” writes a friend, “I was given $3,000 which I put into a savings account. Having it there keeps me from having to pay service charges on my Chase checking account. I don’t write many checks. Possibly three per month. Do you suggest a better place for my pittance?”

Well, if the monthly service charge you save is $10, which is probably about what it is, then you are “earning” $120 a year on $3,000 — 4%, tax free, which isn’t bad. If you could do twice as well (which you could not without taking at least some risk), that’s still only $2.30 a week more, and I guess there’s a limit to how much time and effort you should put in trying to find a way to get an extra $2.30 a week.

You might check with Chase to see if you can move your $3,000 into a money-market checking account that pays interest and would still serve to waive the checking service charge. Those accounts limit you to writing three checks a month. But for you, that might not be a problem. You’d be earning around 2% in taxable interest — wheeeee! (a second pittance!) — at the same time as you continued to “earn” 4% tax-free in saved fees.

If I were you, I’d just sit tight. You won’t get rich, but you’re not allowed to anyway.

Tomorrow: Back to the Vices.

[Note for those of you getting daily delivery via Q-Page . . . I posted this column late, which is why you may have been e-mailed Friday’s again. But soon Q-Page will get smarter about that, or I will have to become more punctual.]

For your weekend delectation, I’ve turned on Chapter 12. (You already have Chapters 1, 2, 3, 4, 5, 6, 7, 8, 9, 10 and 11.) You think you’re a health nut. Get a load of Charles Revson.

But now back to on-line gambling. (See the discussion from yesterday and the day before.) If you’re looking for some reasons to keep your money in the stock market at today’s high levels, read on.

From Thad Fenton: “Your column today really hits the mark. The convergence of on-line trading and dot-com stock frenzy provides all the ingredients for a bubble run-up and crash. I can’t help but believe that this is history repeating itself in America — the Roaring ’20s and now Bull Market ’90’s. While in the ’20s everyone was living off the margin, it seems today everyone is living off their (often unexercised) tech stock options.

“Your analogy to gambling is apt. Will those who played the game and made money have the discipline to take their money off the table while they’re ahead of the ‘house,’ or will they stay in the game only to have the croupier suddenly rake away their chips? As you, I fear that greed has overcome reason in the market even for the “everyman,” and when the bubble bursts everyone will point their fingers at someone else and demand new regulation or file face-saving lawsuits, and few will look in the mirror for the real party responsible for the market mayhem.

“It’s hard to keep a cache of cash in these markets, but I’m confident that I’ll soon have a chance to buy back in at seemingly rock-bottom prices and then ride the market back over the long haul. Guess that’s why an asset allocation strategy does so well over the long term — the discipline of the allocation forces you to take some chips off the table when you’re winning, and leaves some chips to throw in when you know that the marble will have to land on black after a long streak of landing on reds only. But asset allocation isn’t sexy, doesn’t make one look particularly brilliant or prescient, and doesn’t generate prodigious short term fees for money managers, so I guess the popular press and talking heads won’t tout the theory and practice as they should RIGHT NOW. What a shame.”

Nicely put.

The other side of this, though, is the case against market timing. Basically, because almost no one can successfully call the direction of the market — a great many smart people have been skeptical of the US market for the last several thousand Dow Jones points — there is a case to be made for remaining fully invested forever, even in tax-sheltered accounts that allow you to take some chips off the table without tax penalty.

I buy that never-time-the-market line a lot less at 10,500 on the Dow (let alone the S&P 500, which has appreciated even faster) than I did a few years ago at, say, 5,000.

Still, there is a strong argument to be made for this. Also for the case that things ARE different this time (arguably the five most dangerous words in investing). Human nature never changes, so in that sense it’s hard to imagine there will never be another panic, another bear market, another prolonged period when the average person truly loathes the stock market and knows it is a terrible place for your money. But you can argue that we are in the midst of a long-term ramp up in positive factors that really do justify today’s prices, or close to them, and allow for much higher ones ahead. (Again, I’m too old to buy this argument fully — Gillette at 44 times earnings? — but I can make it.) You have the astonishing productivity-enhancing leaps in technology combined with the greatly reduced drain of military expenditures (military spending as a percentage of gross global product has to be near an all time low) and the trend toward far more efficient, productive market economies in places like China and Russia (yes, even in its current miserable state) and Eastern Europe. This is very big stuff. Add to it good relations amongst central bankers and a growing appreciation of the need for sound policies, and you could make the case that we are getting a bit smarter in the art of collective economy, as a species, even if human nature itself isn’t changing.

So there’s a rosy picture to be painted for sure, and, in any event, even in the U.S. market there are interesting values and special situations here and there.

So you can make the case for someone’s remaining fully invested in the stock market with that portion of his or her money that is truly “long-term,” whether I buy it fully at these valuations or not.

What you can’t make the case for, other than as you might make the case for other self-destructive behavior (“Newport — Alive With Pleasure!”), is the on-line casino. Active trading on the Internet, as practiced by most of the folks practicing it, is just gambling. Many players will ultimately lose money; and the vast majority, even if they make some, will make far less, after tax, than they would have with a prudent long-term buy-and-hold strategy.

Yesterday, I likened on-line trading to gambling. As usual, your responses were much more interesting than my column.

YOU CAN GAMBLE AND WIN

From Dan Hachigian: “Bet you didn’t know that there’s a game in Vegas that can be beat! (Now you’re waiting for me to also claim perpetual motion exists) I speak not of counting cards at blackjack, which the casinos have made next to impossible (and lures suckers in a vain attempt to try). I am talking about (some) video poker machines (primarily located off the strip), which offer up to around a 1.5% advantage over the house. Consider that 5 cards are dealt and for each card you make a decision about whether to keep or dispose of the dealt card. Therefore there are 32 different hands that can be potentially selected by a player. One of these hands has the highest expected statistical return. If you always pick this hand, a quarter machine will yield on average more than 6 dollars per hour of play (over the very very long run).

“Of course the average player gives the house more than a 10% advantage based on non-optimal play. It is, however, amazing that profitable machines do exist (and are easy to find). The only catch is that you have to learn to play very close to perfectly. Fortunately there is software to teach you to do just that (available for free, see www.vid-poker.com/vptutor.html). In reality, playing at the level where you get a 1.5% advantage over the house is fairly difficult, but achieving a .5% advantage is very doable. Really!”

If perfect play yields a 1.5% edge and $6 an hour, then the more easily achievable 0.5% advantage he posits is worth $2 an hour. So it would seem there is a second catch, with which I’m sure Dan would agree: this isn’t gambling — you know the outcome in advance, and there is no chance to win big — this is work. Well below minimum wage and with significant unreimbursed commuting costs, to boot.

Still, it makes the point that if you are really logical, you wind up winning at the expense of most day-traders — oops, I meant video-poker players — who stare at the screen and place their bets based on intuition and sorcery.

More on-line trading casino notes (and another chapter of Fire and Ice) tomorrow.

“We already know what a big winner the government is when it comes to the lottery,” writes Graig Ponthier. “If someone wins $30 million, the government gets almost half. That’s almost $15 million to the government and they didn’t even buy a ticket.”

But Graig was writing in with a further observation — something he noticed at the checkout line at one of the largest grocery chains in Texas.

“In Texas,” he explains, “you have to be 18 to buy tobacco. This grocery store had all its tobacco items locked up in a glass cabinet. If you want to buy tobacco, the checker has to get the key from the Manager and unlock it to get your product.

“Well, it is also a law in Texas that you have to be 18 to play the lottery. The difference is that these ‘scratch-off’ lottery tickets are conveniently located in vending machines for any patron to purchase, right next to the Soda machines and even a baseball card vending machine. There is no age verification system built in to the machine. Anyway, I thought this was interesting, only the government could get away with that!!!”

We are becoming a nation of addicted gamblers, and lottery vending machines between the Pepsi and the baseball cards can’t be helping.

Neither can the huge expansion of legalized gambling. Remember when Las Vegas was the only game in town? Or should I say the only town in gaming? OK, and Tahoe. But when Atlantic City got casinos, it was a huge deal. Now everybody’s got them. Or we seem headed that way.

But today’s explosion in gambling has nothing to do with casino. Or race tracks or ballgames, for that matter. Even with a bookie you used to have to make a phone call, and then physically, face-to-face, settle up. (Well, I’ve never actually placed a bet with a bookie. Maybe some of them pay off with checks?) Until recently, you couldn’t actually place a slot machine in your den. Or, well, maybe you could (I had a Black Knight pinball machine for a long time — “THE . . . BLACK . . . KNIGHT . . . WILL . . . PLAY . . . YOU”) and I actually still do have a 1937 nickel one-armed bandit. But what kind of gambling is that? It’s your own nickels! Maybe, if you’re lucky, you get a couple of your dumbest children to play the slot machine with their spare change on the way home from school. Or even the occasional dinner guest. A nickel here, three nickels there. But this is not gambling.

No, effort-free in-home gambling arrived just a short while ago, and it is called, needless to say, Online Trading.

Click . . .

Click . . .

Click . . .

With a one-armed bandit you need to be able to reach your entire arm up a foot or two, grasp the handle firmly with your fist, and yank. With Ameritrade or E-Trade or any of the others it is just the slightest indentation of your index finger. Click . . . click . . . click.

Most of us haven’t gotten addicted to this and probably won’t — even with the much clamored-for advent of night-time trading. But an alarming number of people have and will.

Investing is a terrific habit everyone should acquire. We would all be better off, individually and as a group, if everyone did. Speculating also serves a useful economic function, but is best left to a relative few — sophisticated, disciplined players who understand the odds and can afford the risk. (The odds, because of the tax system and the transaction costs, are generally against you.) What an awful lot of people have developed a taste for is neither investing nor sophisticated speculation but gambling. This should be no surprise. We are a nation of gamblers. Indeed, a species of gamblers. The difference is that now the betting window is right there at our fingertips. The wait until “post time,” what with the seeming inevitability of “24/7” trading, will soon shrink to nothing.

We will survive this, of course. But it may not be pretty.

Susan Kazmaier: “I am writing regarding a problem I had fairly recently with Ameritrade. I sold shares of TSATA on April 22nd, the day this stock was downgraded from the Nasdaq to the OTC bulletin board (although I wasn’t aware it was happening that day). I sold the shares over the internet trading system, and the order screen displayed 2 7/32 as the bid, ask. This happened to be the previous day’s close, but I thought that was a coincidence. It turns out that it wasn’t a coincidence, the internet wasn’t showing me the correct price, which was actually 1 3/8! (Fortunately, still more than I paid for it — but I would not have sold it at this price.) I have corresponded with Ameritrade, and one of their lawyers basically told me that my account is a self-managed account and quoted me the ‘Data Not Guaranteed’ terms and conditions. Ameritrade has not explained why I was not shown the correct price, nor why I was even able to trade an OTC BB stock over the internet. Their normal policy is that bulletin board stocks can only be traded through a representative. This experience has been disturbing, and I am almost certain to transfer my account out of Ameritrade. It also speaks of the risks of trading over the internet.”

Sorry you had this problem, Susan. I also use Ameritrade … but I take very seriously all their little warnings about “delays” and such. And I almost always use “limit” orders — I would with any broker — which prevent this sort of thing from happening.

Unless I’m missing something here, I don’t think you have a claim. Still, it’s a bummer — and perhaps yet one more reason not to try to outperform the pros, almost all of whom can’t outperform the averages over the long run, either. (Though it’s fun.)

Coincidentally, I have dabbled in TSATA, as well. The story, if I remember it right, is that John Malone paid $8, and John Malone is not the kind of guy to lose money. I bought some at $1.75 and then more at 75 cents. Then something happened and the stock suddenly jumped to nearly $5 (where I sold the shares I’d paid $1.75 for) and fell back almost immediately into the $2+ range, where it is today. So I’m very nicely ahead of the game with TSATA, and hoping for more.

This may sound like easy money, but bear in mind that when you trade in and out this way, your partner Uncle Sam takes a big chunk of any profit. And bear in mind, too, that it doesn’t always work. (To say the least.) To take just one fairly recent example: Ron Perelman, also not the kind of guy to lose money, had both money and ego tied up in Marvel Comics — and it crumbled to dust.

If I get lucky, my wonderful TSATA profit may one day equal my Marvelous loss.

So, yes, I have my vices, too.

The time you would have spent reading this column today? Click here and save some money instead.

Recently, I called “that new car smell” the most expensive fragrance in the world. Thanks to Stephen Gilbert for pointing Susan Sprechter’s excellent letter, posted on “the car guys‘” excellent web site. (You know the car guys? Tom and Ray? One more reason to listen to National Public Radio — or visit its excellent web site. On NPR, excellence abounds.)

To wit:

“This week a friend showed us her new Malibu, and as I smelled that seductive ‘new car’ aroma I felt myself strangely compelled to go out and purchase a brand-new automobile, too. Later in the week I was putting up a recently purchased plastic shower curtain and noticed that it had exactly the same satisfying odor as a new car with a three-year warranty. May I suggest that people save themselves from a very expensive form of chemical dependency by carrying a little piece of new shower curtain in their pockets? Just one sniff at the first urge to visit a dealership, and the fit passes. You are once again cool, calm and breathing normally.”

The alternative, I should think, would be to fit your car seats periodically with shower-curtain seat covers. Is Rayco still in business? When I was five, my dad had the Rayco Seatcover advertising account and put me in one of their commercials, jumping up and down on the seatcovers, presumably to demonstrate their protective qualities. (I was five, what did I know?) Thus began and ended my acting career.

I believe you can also buy that aroma in a spray can as well. I don’t know the official name of the scent, but I call it eau de saved money.

THE $64,000 QUESTION

“Regarding your recent column, the expression, in a less munificent version — ‘that’s the $64 question’ — predates the television quiz show. In the 1940s a radio quiz show ‘Take It or Leave It’ had a $64 question that worked its way into the language and meant that later the title of the TV quiz show would have some resonance. I remember watching the television show the night it premiered. When I told my parents about it, they were quite certain I was confused — NO ONE could possibly give away the almost unimaginable sum $64,000.” — Tom Williams

A precursor to “Take It or Leave It to Beaver,” no doubt.

EXPENSIVE WATCHES

“I would not buy an expensive one for myself, but my wife purchased a stainless and gold Rolex Submariner for me about 10 years ago for about $2,300. (I’m not so fussy about my principles that I returned it.)Today, despite gold’s fall, the same watch retails for $6,000 and mine would probably bring $4,000 if I were to sell it. I realize that’s only 5.6% or so annualized, but it’s tax free so far and some of my shallower friends are impressed.” — Bill D.

SPDR EXPIRATIONS

“Which is better, a Standard & Poor’s 500 index fund or ‘spiders’ — SPDRs — and how come my brokerage statement shows an expiration date for my SPDRs?” — John Ebert

As between the two, it’s basically six of one, half a dozen of the other — go with whichever is more convenient if you’ve decided to go for an S&P 500 surrogate.

But an expiration date on SPDRs? This was a new one to me, so I steered John to the toll-free phone line for the American Stock Exchange, where they are traded — 1-800-THE-AMEX — and asked him to find out the answer himself and let me know. A little Q-and-A judo, as it were. John dutifully reported back that, according to THE-AMEX, state laws, except for Alaska, do not allow perpetual trusts. So the SPDR trust is set up for the maximum time allowed, which translates to an expiration date of 2118.

That will be a very long-term gain indeed.

MALIBU HARDBALL

This was the story last week about the real estate dispute. “My father told the same story set in NYC. He insisted that the second encroacher was required to tear down his or her building. My father would believe anything about lawyers.” — Erik Sten

“The irony here is that the disputed 1/2-inch between the two houses could qualify as a studio apartment in Manhattan and would probably rent for about $1400 per month in the West Village.” — Nick Corman

THAT NEW CAR SMELL

“Is it ok to buy one new car per lifetime? I have always bought used ones, and had only paid a total of $5,500 for all the used cars I ever had, until this year, at age 47, I bought my first brand new one. Over a lifetime, doesn’t that represent a major savings and make it ok? Yours, guiltriddenly” — Nicole Ferentz

It’s okay, Nicole! It’s okay!

“Here’s another way to save money — buy a NEW car. The last two cars I purchased were the previous year’s model — still new and on the lot — after the new models had shown up. They were discounted about 33% off the sticker price, about the same as a one year old used car. Mine still had the full factory warranty, no miles AND that new car smell.” — Mike Elwood

Touché.

The world is divided into two kinds of people: those who file their taxes by April 15 and those who file for the automatic extension to August 15.

Count me in that latter camp.

You still have to pay by April 15, you just don’t have to finish the return until August 15. So, like many, I send in “more than it could possibly be” along with my Form 4868 Automatic Extension to File on April 15th each year . . . but go light on my first quarter’s estimated tax, which is also due April 15. Then, when I finally figure out how much too much I sent in with Form 4868, I apply that to the following year’s tax.

Meanwhile, whether you file April 15 or August 15 (August 16 this year, as the 15th is a Sunday), the world is divided into two kinds of people: those who have to make quarterly estimated tax payments and those who don’t.

Estimated tax payments are for those who have significant income other than wages (on which tax is withheld automatically). Say you’re self-employed or you get lots of interest income or you realize a big capital gain — sorry, Bud, you have to send in estimated tax payments by April 15, June 15, September 15 and January 15. It’s fine if you overpay in any quarter, but if you underpay, there will be interest and penalties.

And the same for most states.

The world, I might add, is divided into two further kinds of people: critics, who (with the exception of Janet Maslin) did not like the Star Wars prequel and audiences, who did.

But I digress.

Oh, wait — and here’s the good news. Taxes are down! At least for families with kids. According to my friend Jane Bryant Quinn’s Newsweek column a couple of months back, a family of four earning the median wage ($55,000) will pay 7.5% of it in 1999 federal income tax — the lowest level in more than 30 years. A family that earns twice the median is expected to pay tax, on average, of 14% — the lowest level in 27 years. And a family of four earning half the median would pay nothing but, rather, get 1% from the IRS, thanks to the earned-income credit.

What’s more, as Jane so aptly concluded: “Freedom from taxes isn’t paradise. It’s Cambodia. … It’s any country that cannot afford the social and physical infrastructure on which prosperity is built.”