Author: A.T.

From George H: “I am all confused and I really need some good sound investment advice. A few nights ago, a friend of mine brought this man in a business suit named Tom over to my home to show me a hot new ground-floor business opportunity that could really make me rich. My friend told me that Tom was really pulling in BIG bucks and was a leader in this business. (I really want to believe him, except I kind of suspect this to be bull because I had to jump-start Tom’s 1977 Cordoba on his way out…three hours later…boy the wife was P.O.’ed.) Anyway, Tom set up this white board and began to draw circles on it. He told me that I only had to sign up 6 people and I would be a Garnet or Rhinestone or something. (No wait…I remember now…I would be a Diamond.) Tom said that if I really worked hard at this business and listened to lots of instructional tapes, I could retire on a six figure income in approximately two years. It all sounds pretty good to me. They showed me this book called ‘Profiles of Success,’ which has pictures of all of the people who are ‘Big’ in the business. Tom said that my wife and I could be in the very same book if we showed this business plan to others five nights a week. (My wife isn’t to [sic] keen on that part…but I’ll keep working on her) From what I understand, I don’t have to do any selling…just buy the things I need from my own business at wholesale prices and teach others to do the same. Anyway…I need your help desperately. What should I do? This guy has called me every night since he came over. He keeps talking about this ‘Function’ thing that I must go to. Only then will I be able to commit to the business and build a group…whatever that means. Worst of all, Tom told me that it would cost me $100K if I don’t attend the function. I tried to explain to Tom that I just got laid off, the wife and kids are sick, and most importantly, I don’t have the stinking $1,000 to go to this function in Seattle. (I live in Florida for crying out loud!) Then Tom starts making suggestions…like why don’t I sell my TV or sell my car. Then I will have enough to go. And, that I won’t regret it, nor will I miss my TV. I love my TV…

“So anyway Andrew, what should I do…Should I go for it? It costs about $300 to sign up, and an additional $25 a week for instructional tapes, where the Rhinestones [not to be confused with the Flintstones-A.T.] tell you how to build this business fast. I figure, the worst that can happen is we will get a little behind on the bills for this cash outlay…until my next unemployment check comes in. Also, with the money I will be making, I can get my dream car. I was getting sick of driving that beat-up old truck anyway.

“Should I go for it Andrew? I am undecided. Part of me wants to dive right in…yet a small inside voice is telling me to ‘Run like HELL!'”

A.T.: I did not make this up. And so far as I can tell, George didn’t make it up, either. Indeed, the same drama is played out thousands or tens of thousands of times every day – most often over the kitchen tables of the people least financially advantaged, most desperate for a miracle. All too often, the small voice telling you to run like hell just can’t yell loud enough to be heard over the voices telling you how good you’ll look in your new car with all that money pouring in.

And not all these schemes have such blatant warning labels as Tom’s 1977 Cordoba. (No one more enthusiastically advocates used cars than I, but Tom does not strike me as the type to shun conspicuous consumption if he could avoid it.)

I don’t know which specific pyramid scheme this is, but they are all chain letters, basically – and chain letters, as you know, and I’ll explain tomorrow, don’t work.

Yes, there is a place for the rare multi-level marketing organization that actually sells products – like Amway – where if you work really, really hard, you just might make good money (as would be true in many jobs). But the vast majority of these things, with their white boards and “levels” and $300 for the tapes, etc., are no more likely to solve your financial problems than the matchbook covers that offer the prospect of earning big bucks in your spare time.

Note that, at least from George’s not-short description, there was no mention of an actual product or service. There was no terrific food supplement that, sure enough, you have personally tried for six months that really does seem to give you more pep, so you are truly motivated to share your good health with others (and maybe make some good money doing it). There was no device that, left alone for three hours in your closet, cleans and organizes the closet all by itself. That’s a device I would rep for. (At the end of the three hours, the closet is tidy and the device has two refuse bags, one filled with dust to be emptied in the trash, the other filled with stuff for Goodwill, neatly tagged with your name and address for the receipt.)

And even with most of the multi-level marketing schemes that do sell products or services, such as the ones that sell genuinely good deals in phone service or satellite TV – real services – most of the people who sign on make only very modest commissions and drop out discouraged. It’s the circles and the levels and the garnets and the rhinestones that make them so alluring – and so much like chain letters.

Forget about it. Even if you were early enough into it and persuasive enough to sign up six who signed up six who … you’d have to live with the knowledge that the overwhelming majority of people at the bottom of the pyramid would lose their money. Better to become an Avon lady or something, where the money is modest but come by honorably.

T.Q. writes: “I frequently read about analysts who predict imminent market corrections or even a collapse. I’m not worried even though I’m a relatively new investor because I have an investing/trading strategy. However, I would like your thoughts on my strategy. I reason that since Internet trading gives me relatively instant trading capabilities at a low cost, I can now become somewhat of a trader instead of being limited to an investor due to time and cost constraints. Here’s the plan.

“I buy shares of xyz at $50; lots of them, and probably more than I can afford to, but I know exactly what I’m doing (I hope). I put in a sell stop at $47.5 (or $46) good-til-canceled. Then I sit back and relax, with full confidence that I’ve fully limited my risk to losses of 5% if I had the stop price at $47.5, or 8% if I put stop price at $46. If there’s a market correction, collapse, or sell-off, I’m protected. In fact, I’m sort of hoping for it due to the fact that if the bottom does fall out, I can take my principal, minus the 5% loss, and buy even more shares than I had originally if the price of xyz has dropped far enough in the aftermath. That way, when the market recovers, I’ll profit that much more.

“If the price of xyz goes up after I buy at $50, I leave everything alone. I expect to stay with xyz about a year, and of course I expect the stock to increase in that time. A win-win situation, right? Where is the flaw in my logic? It seems straightforward enough that it would work, and I wonder why everyone else isn’t doing the same thing if they are worried about a market “collapse.” Please enlighten a naive, small time investor, soon to be a “big” time investor (with respect to the fact that I’ll have more money in the stock market than I can really afford).

“Note that xyz is a heavily traded stock. I figure that in a huge down-turn, I can still sell xyz at the stop price because of my small volume; what is 40, 400, or even 4000 shares compared to daily traded volume of 20-30 millions shares traded? The two factors that I think make my strategy work are that I’ve put in a good-til-canceled order so that I do not have to monitor the market on an hourly or daily basis, and that xyz is a high volume traded stock.”

A.T.: I see three flaws in this oinkment, T.Q. (an oinkment being akin to an ointment, but with a little greedy piggishness mixed in):

First, you can get whipsawed. The stock dips down to 47-1/4, you get stopped out, it goes back up … you buy it back (or buy something else) … it dips a little and you get stopped out again. In a normal market, stocks don’t just march straight up. There will be bumps and corrections. If it was a good value at 50, why sell it at 47-1/2? Each little 5% or 8% hit adds up.

And where do you buy it back? You paid 50, you’re stopped out at 47-1/2 … presumably you won’t buy it back at 47-1/4, you’ll wait til it falls to, say, 43? To 39? Where is the bottom? But what if it doesn’t fall much – it just recovers from 46 or 47 and then gradually climbs to 180, but you never jumped back on! Because where would you have? At 47-1/4? No – that’s essentially where you sold it. When it hits 50 again? Maybe. But if it oscillates in the 47-51 range for a while, you’ll sure leave a lot of whipsaw dust on the floor of the exchange. Will you buy it back at 55? No … you’ll be too annoyed you sold at 47-1/2. Indeed, you might well never jump back on. So even though this stock quadruples, you’ve lost money – and developed a certain bitterness that knots the muscles in your neck.

Second, you can get creamed. True, stop-loss orders limit your risk. But the “full confidence” you speak of is illusory. In a bad situation, you could get a lot less than the stop-loss price you specified. Say the stock closed last night at 48 and xyz released some rotten news after the close. It opens for trading at 42. You’d get 42. So now you’re talking about a 16% loss, not 5% – which wouldn’t be so terrible, except you’re telling us that you’d be doing this with more money than you could ordinarily afford. If that meant you’d bought the stock on 50% margin – you borrowed half the money – then a 16% loss is really a 32% loss of your investment. And what if the company released really bad news, and trading in it were halted for an hour and it reopened not at 42 but at 35? Or 25?!

I’m not saying your strategy can’t work or never works, but it would have worked better the last 15 years, when stocks largely just kept going up, than it might the next 15, when we might — might — get back to a more traditional market where stocks go up and down while trending up.

And there is one more flaw in what you describe: your notion of holding xyz about a year. If you do have a gain, Uncle Sam will take 28% of it after a year (20% after 18 months). Live in California or New York? Uncle Pete or Uncle George will take a little slice, too. No, the way you were doing it before – long-term investing, and with no more than you can afford – is probably the better strategy. But you’re quite right about one thing: today’s negligible cyberspace commissions at least make this a significantly less-bad strategy than it used to be when each trade cost you $60 or $150 or $300 in commissions.

Good luck!

Here’s a quick, easy one. Want to see who your long-distance carrier is? Just pick up the phone and dial 700-555-4141. It’s free.

Ah, you say: you know who your carrier is. Well, probably you do. But sometimes your account gets scarfed up by someone else. This is an easy way to check.

Which makes me realize that — wow! — what about 700 numbers? Here’s the only one I’ve ever heard of, but there’s the potential for nearly 10 million more (700-000-0001, 700-000-0002, 700-000-0003 …). Will these be used for pet beepers? Your golden retriever off on a romp someplace and time to call him to dinner?

And what of the 600- and 500- and 400-numbers? And the 777-numbers (for gamblers?) and 666-numbers (devil-worshippers?) and 555-numbers (fictional TV characters?) … don’t tell me we don’t have a lot to look forward to. I’m not sure who decides all these things (though presumably she reports to Bill Gates), but it must be fun designing the future.

Yesterday I told you about going out to Chicago to praise booksellers. Today I want to tell you about going to Washington a week or two ago to attend the swearing in of my friend Fred Hochberg as the number two guy at the Small Business Administration.

Eighty percent of all the job growth in America (and since 1992, we’ve added 16 million new jobs) comes from small business, and the SBA is its advocate. Indeed, the head of the SBA, Aida Alvarez, holds a "cabinet-level" post. Not quite Secretary of Defense, but still. Phil Lader, now our ambassador to England, held the job before Ms. Alvarez, and Erskine Bowles, now the president’s chief of staff, held the job before Mr. Lader.

So the SBA is given considerable shrift (if that were the opposite of short shrift, which I deeply fear it is not) by the administration, and rightly so. Under its three recent administrators — Bowles, Lader and Alvarez — it has reinvented itself, finding ways to do more with considerably less. (Its budget, last I checked, had been voluntarily trimmed by about 40% since the Bush years.) It has learned largely to "get out of the way," reducing paperwork to a minimum, by guaranteeing enough of a bank’s loan to small business to encourage lending while leaving the bank sufficiently at risk (25%, in many cases, I think), so that the bank will not blindly make dumb loans.

(The SBA is not a place to go for financing if you have in mind to start a business. But once started, it has a corps of retired executives and others who can help with advice; it can help with additional financing; and it lobbies for small business on Capitol Hill. Interested? Click here.)

So there was Fred, whose appointment as Deputy Administrator had to be confirmed by the Senate, with his hand on a Bible held by his life-partner Tom Healy, being sworn in by Vice President Gore, with more than 100 well wishers, including two congresspersons and the chairman of the S.E.C. (another agency that’s been doing excellent work of late).

I was interested to hear that the oath of office Fred took was the same one the president takes: "I, state your name [Fred, I was relieved, repeated, "I, Fred Hochberg," where I think I, in the same frazzling circumstances, might well have repeated, "I, state your name"], do solemnly swear …"

Fred pledged to defend the Constitution from all enemies, foreign or domestic, so help him God (you never know when the SBA may come under attack), and then, the formality over, made a really eloquent speech. Tom and Fred’s family and all the rest of us were very proud, and more than a few of us were proud not just of Fred, but of America — a country that in a relatively few short years has gone from almost complete intolerance of its gay and lesbian citizens to a growing acceptance of their right to pursue happy, constructive, responsible lives.

Although he’ll be making a small fraction of what he earned in the private sector as president of Lillian Vernon, the mail order company (don’t miss their red-white-and-blue inner tube pool floats for Fourth of July, about $6 each and terrific), Fred is more than a little charged up about his new assignment. Not that he could do Lillian Vernon any good at the SBA. With 5 million customers, it long since disqualified itself from the ranks of small business. (For that story, see his mother’s recent autobiography, Lillian Vernon: An Eye for Winners.)

I had a chance to go out to Chicago for the booksellers convention recently and thank a lot of booksellers. Where would I be without them? But I wanted to say more than just that — every author says that — and so I did a little research before my talk. I discovered that, sure, we all know about bookish New York prosecutor Thomas E. Dewey, who nearly became president … and Dudley R. Dewey, whose Dewey Decimal System libraries all use. But how many of us remember their ancestor David Bowie Dewey, who recognized that the real money in libraries wasn’t in selling memberships or library cards but in all the fines for overdue books … and who hit on the idea of charging those fines up front and not requiring the books to be returned at all?

And thus was born the modern bookstore — the brains and soul of the retail world.

Think about it, I told my audience: every other store is devoted to your food, clothing, or shelter. Necessities. But what other store caters to your mind? To your soul?*

All hail the modern bookstore.

*Yeah, yeah — Blockbuster and Tower Records. I know. But I was addressing booksellers.

This is no time to be shy. I’m offering you a chance to visit yourself upon 41 million households. You’ll get calls from people you haven’t seen since high school! You could get modeling offers, movie deals, marriage proposals.

And how will all this happen?

I’m doing a story on credit cards for PARADE, the Sunday supplement that appears in newspapers throughout the country, and I need some real people (not to say average people: you are way above average) to bring it to life.

So would you do me a favor?

1. E-mail me your own credit card story … even if it’s bland. When did you get your first, how do you use them now, what’s your philosophy about them, how many do you have, did you ever have/overcome a problem with them … whatever. I’ll assume that if you e-mail me, I can use your name and where you’re from (so please let me know your full name and where you’re from) unless you indicate otherwise. It would help also to know your age and occupation.

• Note: I’m not just looking for unusual stories. I need some very run-of-the-mill, typical examples, too. So just because you don’t have 48 cards, or never started a $100 million business by borrowing to the max against your Visa card, doesn’t mean it wouldn’t be a great help to me to have you respond. (But if you do have 48 cards, I’ll naturally want to hear that, too.)

2. Let me know if you’d be willing to have PARADE use your photo with the story. They have good photographers. You’d look great.

Thanks for your help!

I’m writing this one a few days in advance, so for all I know the market’s been just jolly as you read this. But it doesn’t feel jolly today. Sure, the Dow’s down only 3% or 4%, but any number of smaller stocks are down 30% and 50% and more over the last few weeks. So for those few of you who may not own shares in Berkshire Hathaway or see Warren Buffett’s annual shareholders’ letter some other way (to my everlasting regret, I see them some other way — the press list) I thought that I would pull out a quote that seems apt … and could seem apter and apter if things don’t go well.

“[W]hen you read a headline that says, ‘Investors lose as market falls,'” advises Buffett, “edit it in your mind to ‘Disinvestors lose as market falls — but investors gain.’ Though writers often forget this truism, there is a buyer for every seller and what hurts one necessarily helps the other. (As they say in golf matches: ‘Every putt makes someone happy.’)”

Especially if you’re young and adding to your investments each year rather than drawing upon them — investing rather than disinvesting — then a falling market is a wonderful thing.

Of course, this presupposes the notion you are trying to buy companies that you actually believe will make a lot of money (profits) over the years to come, rather than merely buying stocks you hope will go up.

If you’re not young and in or entering your disinvesting years, then market declines are bad news. And we may not have seen the last of this one.

From Aaron L.: “The short version of the question is: Is it possible to inflate the price of a stock by placing limit buy orders at a price above the stock’s market price? The long version: There is a fairly thinly traded stock I watch (average trading volume: 2,500 shares a day). Its price fluctuates only slightly from time to time. Let’s say I buy 5,000 shares. Then let’s say I offer to buy some more (100) at a higher price. I do this several times (perhaps from different accounts) to try to make the appearance of general interest in the stock at the higher price and eventually have the appearance of interest turn into actual interest in trading at that level, so it becomes a so-called “base” price level for the stock. Then I sell my shares and make a killing. This seems an obvious sort of gambit, especially on a stock where the trading volume is small, so there must be a reason this would generally fail. Any thoughts on the subject?”

A.T.: Yeah, I have two main thoughts:

• There are SEC regulations against deliberate manipulation. If caught, you could be in hot water. Realistically, you would not get caught; but that’s partly because …

• It wouldn’t work. Normally, what you propose is called “painting the tape,” where a lot of little trades are done (though not necessarily above the current price range), to suggest, by the unusual activity, that “something must be up.” If nothing else, it’s a form of advertising — everyone watching the ticker sees this symbol they don’t recognize going by over and over, so curious investors around the world may take a look to see what the darn thing is. But a few 100-share trades are hardly going to arouse a lot of interest.

Consider: If the stock trades 2,500 shares a day, buying 100 shares here or there won’t move the price. And what if you really get into this and made 50 little trades of 100 and 200 shares each, accumulating 7,500 more shares, say, and edging the price up 3/8 in the process? Guess what: when you went to sell what are now your 12,500 shares (or whatever), you’d likely knock the price back down by even more than you edged it up.

Yes, there are ways to manipulate the market — some of the folks on various Internet sites passing on rumors may actually be starting those rumors in hopes of hyping the holdings they itch to sell.

But homework and patience will ultimately serve you far better as an investor than trying to find a legal scheme for beating the system that no one ever thought of before — or an illegal one you won’t be caught at.

But you knew that.

1. After 500 years of 3% inflation, $100,000 will be worth 4 cents.

2. “The guy who invented playing cards was brilliant. But the guy who invented chips was a genius.” – Ricky Jay (himself a genius)

3. Spending tens of thousands of dollars on a person’s last few months of life is compassionate – but spending. Spending tens of thousands of dollars to improve a person’s first few years of life is also compassionate – but investing.

4. “A man who says he is willing to meet you half way is usually a poor judge of distance.” – Anonymous

5. “This fishing tackle manufacturer I knew had all these flashy green and purple lures. I asked, ‘Do fish take these?'” “‘Charlie,’ he said, ‘I don’t sell these lures to fish.'” – Berkshire Hathaway’s Charles T. Munger, as quoted in Fortune

6. THE LIMITS OF EXPERTISE: “Years ago my father was told the refrigerator was broken beyond repair. After the repairman left, my father kicked it, it started, and worked fine for eight years.” – my friend Mary O’Neil

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.”