Author: A.T.

Perhaps the saddest-but-true Wall Street maxim is to buy "when there’s blood in the streets." Under this rule, the drop in the U.S. crime rate, especially in New York, could be seen as an ominous sign. Not enough blood. More to the point, the scary goings-on in Indonesia suggest it could be time for large, sophisticated investors to begin thinking about how to place a small bet in that country.

"Stay away!" was the knee-jerk response from a very smart f/x trader I know. (F/x is short for foreign exchange, which means that on a moment’s notice, he may sell a billion ringgits or arbitrage the yen against the baht. Ah, finally words I know that my spell checker does not.) "You don’t want to be anywhere near that region — not Indonesia, not Malaysia, not the Philippines, not Singapore, not Hong Kong. …"

Which could mean he’s right, or which could prove the point: When everyone’s terrified and the end has surely arrived — when there’s blood in the streets — it’s time to consider taking a gamble.

Had you observed the blood in the streets of St. Petersburg in October 1917, you would have done very poorly following this folk wisdom.

Had you taken it a little less literally and invested in U.S. stocks after the crash of 1987, or when OPEC in 1973 had thrown the economy into a tailspin, you would have done Okay.

A friend who runs a company based in New Jersey and Malaysia thinks the bottom has more or less been reached. His company’s most important customers are disk-drive makers. Of these, Seagate has been the biggest. Well, at the beginning of the year, given the turmoil in Asia, the bad news came: Seagate wouldn’t be ordering anything from my friend’s little company for a year. They planned to resume ordering in 1999. Now that’s a pretty hefty setback for a little company — what do you do? Lay off all the Malaysians for a year? No, he found other things for them to do and just carried the plant for a while and, guess what? A few weeks ago, Seagate called to place a $3 million order. And IBM has been going gangbusters with its manufacturing in this region. So my friend won’t have to lay off any Malaysians, and at least his little corner of the Asian economy may have seen the worst.

Of course, this is hardly a macroeconomic view. One anecdote from one guy with one plant in one country in Asia. (His favorite country in the region from an investment perspective: the Philippines.) But even with a macroeconomic view, no one knows for sure what will happen.

But I’m looking into how to place a small bet on the Philippines.

Tomorrow: a few related words on closed-end country funds.

Yesterday I told you what my full-service broker says he first learned when he came to Wall Street. “I can’t use that,” I protested. “It’s too ethnic.” (I used it anyway.)

An hour passed.

My phone rings.

I am screening my calls, so he gets the machine.

It is obvious he has now put some thought into this.

“Buy when you most feel like selling,” he tells my machine (no need to identify himself or anything — we’ve been doing this for 25 years), “sell when you most feel like buying.”

This is not a prescription for happiness. You’re always either terrified … maybe this time the world, or at least your stock, really will end … or heartsick … over ditching a stock you’ve come to love, over watching it rise some more after you sell it, and over paying the tax on your gain. (It is from just this experience that comes the expression “eat your heart out.”)

Nor is this a guarantee of success.

But the fact is, the market in effect pays you for your distress.

Sometimes.

“Perhaps you could explain to me something that sounds like a mystery to me (I am sure there are many more) but which may not be at all. I have owned a few Sony Corp shares (SNE) for the last couple of months. Yesterday, Friday 05/08, I receive a newswire saying that Sony hit record consolidated sales, pretax profits, and net profits, listing a plethora of highest-of-all-time double-digit etc. etc. What is the result of all this? I’ll tell you … During a strong day on NYSE like yesterday, the stock fell 0.62%. I was quite stunned! Should I be so? Is this normal?” – Fabrizio Manopulo

The first thing they used to teach new hires on Wall Street was “buy on the rumor, sell on the news.” (“The first thing I remember hearing,” says my full-service broker, “is buy on Rosh Hashanah, sell on Yom Kippur” — reason enough to pay $245 for a trade you could do for $8 here, don’t you think?) The point is: Since everyone wants to get a jump on everyone else, the time to buy something is when you think there will be good news, and the time to sell it is when the news is announced and folks new to the market, who assume good news is good news, rush in to buy the stock.

It doesn’t always work this way, especially if the good news is even better than expected, but that’s basically the key, at least to short-term price movements. It’s not how good or bad the news is that counts but how that news compares with how good or bad people expected it to be.

Of course, if you are buying SNE to hold for the next 20 years, because it’s a great company and you believe in its future, then how the market reacts to any given quarter won’t make much difference. (And I’m not sure they even celebrate Yom Kippur in Japan.)

“I’m starting to see a trend in the products and services mentioned in your column. They all have the same initials. ATCall, Auto-by-Tel, AmeriTrade, Andy Tobias. Have you noticed this? Do you own all of these companies?” – Joe Robinson

I had the same thought about Mobil when it acquired Marcor and Montgomery Ward a billion years ago (or I imagined they did, for a story about conglomeration I wrote in 1976) — that maybe their strategy was to stick to the “M’s” — until out of the blue they went and acquired Belgium. (“Why not? The Belgians are a practical people …”). And I milked the IBM AT for all it was worth, if any of you can remember back to 1984 or so, when it was first introduced. But no, as of yet I don’t even own AT&T, and my plans to acquire it must remain secret until I’ve saved up $125 billion.

INCREASING YOUR DEDUCTIBLE

“Your recent column on deductibles reminded me of what I found researching the cost of an individual health insurance policy last fall. In the most extreme case, to go from a $500 annual deductible to a $200 deductible, the monthly premium went from $115 per month to $194. The possibility of saving $300 in expenses increased the annual premiums by $948 or by 316%. Other policies had increases of 176%, 200% and 232% to go from a $500 deductible to $200.” – Erik Sten

A.T.: Moral? Check your current insurer (for health or auto or homeowners) and find out how much you could save going to a higher deductible. Often, it’s worth it.

“Another reason not to file a claim if the amount is slightly more than the deductible: I recently had to replace a broken windshield. The first thing they asked was whether I had insurance or not. The cost for replacement if they billed the insurance company – $850. If I paid out of my own pocket – $200.” – T.K.

A.T.: Depressing, no? And even where it’s not fraudulent, there’s a point to be made. My convertible roof was just slashed (again). To get a new roof is $1,500. To get a waterproof patch is $50. Because it’s a beat-up old car by now anyway, it would be dumb to go for anything but the patch. Yet by buying ‘comprehensive’ insurance (which I don’t), I am in effect paying a premium that not only covers the insurer’s overhead and profit, but also covers all the people who DO go the $1,500 route. (Well, it’s insured, so why not?) Yet another reason to self-insure, when you can afford to, and make your own economic choices.

* * *

MORE TELEMARKETING TALES

From Uvarov: “A friend of mine said he told a telemarketer, ‘My favorite show ends in 10 minutes. Hold on and we’ll talk.’ The caller said, ‘FOR TEN MINUTES!!!’ He got rid of the telemarketer.

“I was a telemarketer in high school. The first call I made, inviting the woman and her husband to a dinner, she said, ‘If you don’t know, my husband is dead, and you shouldn’t be calling.’ Ouch.”

APRs

“I just read your column on APR’s and I wanted to make a couple comments. If one is talking about savings accounts or CD’s, then the method of compounding might be the main thing that affects the APR, although as computers have taken over the banking industry I don’t know if anyone still compounds quarterly, or even monthly. But in my experience, when one is talking about home loans, the APR is mainly affected by the points and/or fees on the loan. There exist no-point, no-fee loans where the APR is the same as the nominal rate, but the APR for the other loans takes into account these points or fees.” – Greg Buliavac

A.T.: When I think APRs, I think savings accounts. But you’re right. Thanks, Greg.

* * *

DUMB LUCK

“Speaking of dumb luck (as in forgetting about GTC Limit orders), the following has happened to me twice: I went into the trade screen of my online broker and instructed them to trade 100 shares of a stock I was holding so that I could realize a tidy profit. Upon checking the status of the trade later I realized that I hadn’t indicated the trade was a sell, and therefore the default of ‘BUY’ was executed. Instead of selling 100 shares, I now owned 200 shares. Fortunately both times the stock has risen, so that when I remedied my mistake I actually made a few hundred extra. Whew! Counting my blessings in NC. (Don’t use my name in column please, too embarrassing. ;-)” – A.T.: For a few hundred extra, I agreed not to use his name.

FINDING GREAT CD RATES

“The two best money market and CD rate scanning services I’ve found so far are www.bankcd.com and www.bankrate.com. I’m now earning .4% more with an FDIC insured bank I found through www.bankcd.com (5.85% compared to 5.39%, $25,000 minimum deposit and a limit of 3 checks a month) than I was with my … [broker’s – a broker other than the one that sponsors this comment] alleged premium money market mutual fund ‘the best in the country.'” – Bill Nagler

Adds Alan Light: “Another useful site is www.banx.com/wsj/savcd/savebox.htm. Which, unlike bankcd.com, is completely free.”

* * *

FINDING OUT-OF-PRINT BOOKS

“If you are looking for a really great book search engine, try www.mxbf.com. It will catalogue results from Advanced Book Exchange, Powell’s, Bibliofind, Amazon, Interloc, and Bibliocity … all in one swell foop! You can ask it to give you 10 books per site, 25 books per site, or more … and specify price ranges.” – Rick Geyerman

A.T.: A swell foop indeed. And as if that weren’t testimony enough:

“Amazon just got back to me about your book, Getting By On $100,000 a Year and Other Sad Tales, and after a full month, they offered it to me for $80. Now, I like some of your work, but not at $80. I declined, then found MX Bookfinder (www.mxbf.com). In 30 seconds, they found 4 bookstores with 8 copies priced $10 – $20 plus shipping. They aren’t quite as easy to use as amazon (I have to snail-mail a check to the dealer), but much faster and cheaper overall. MX Bookfinder allows you to put in requests for books they cannot immediately locate, so I put in the out-of-print anesthesia text that Amazon has not yet been able to locate. You have a point about Amazon’s cutthroat competition and the likelihood of an after-tax profit of $250 million.” – Charlie McDannald

So I get a lot of brokerage statements at the beginning of each month. There’s the one on which the commissions are all about $8. There’s the one on which the commissions are all about $48. There’s the one I don’t use much — a discounter but not a deep discounter — where the commissions are typically about $120.

All these statements are easy to read and review.

And then there are the ones I get from my full-service broker, at which the commissions are typically $150 or $250 for trades I could do just as well for $8, but I am Godfather to my broker’s kids. And for more than a year now, these statements — to save paper? to drive us nuts? — have been printed as follows: Page 1 comes first, then page 2, upside down on the back of page 1, then page 3 like page 1, then page 4 on the back of page 3 and upside down. And so on. The pages have holes punched in them at the top, though I can never recall being sent a full-service, $200-a-trade binder, and I guess the idea is to flip through the pages not from right to left, as one would flip through a book, but as you would page through a wall calendar — paging up rather than to the left.

But let me tell you: It’s incredibly annoying.

And don’t I feel better for getting this off my chest?

If only Seinfeld weren’t going off the air, he could do virtually an entire episode on this all-important theme.

From Jim Strickland: “I’m confused about the stock market. The most simplistic explanation I’ve ever heard for what the stock market is, is that it is a way for you to own parts of companies. [A.T.: A perfectly good explanation.]

“In the old days, before 1987, hardly anyone invested in the market or cared about it much, so there was always this finite, slowly growing, amount of money being invested. This was perhaps the reason stock prices also rose ‘slowly,’ 10% a year or so. [A.T.: Stock prices tended to rise 6% or 7%, plus there was a thing called dividends that added another 3% or 4%, for a total of 9% or 10%.]

“But since 1987 a number of things have changed.

1. The baby boomers are saving like crazy. [A.T.: No, but we should be.]

2. 401 K plans are hot because NO ONE trusts a company to give you a pension till your 100. [A.T.: And because where an employer puts up 25 or 50 cents for each dollar you save, NOT to save is like spurning FREE MONEY.]

3. The tax code has been tightened up so there aren’t many loopholes for people to put their money in, so it goes to the market.

4. The whole world trusts the U.S. economy more than any other, even their own, so that money is coming over.

5. Inflation is way down so bonds aren’t very fun anymore. [A.T.: Low inflation isn’t what makes bonds no fun. Real interest rates – the rate you get after inflation – are higher than they were when inflation was high. But bond interest is heavily taxed, and how can they compete for fun with stocks that go up 25% a year? They will be much more fun in a year stocks go down 25%.]

“So if you look at all of the above points, there is TONS more money coming into the market, trying to buy the same amount of shares, companies, etc. I know that’s not exactly true but for arguments sake it’s true enough. So all the money in the world chasing the same amount of stocks will of course drive the prices higher constantly, no matter what else happens. This is what I believe is happening to stock prices.

“It seems to me that one of two things can happen. Either …

1. This is the way things are going to be from now on and it’s ok, don’t worry about it. Or …

2. This is like what happened to Japan and the stocks are going to fall like crazy sometime, half the ‘wealth’ of individuals is going to ‘go away’ and we’re all in for a really lousy time.

“Are there any other ways to use investment money besides putting it into stocks and carving the same pie into smaller pieces?”

A.T.: I think you’re not a bit confused, Jim [my annoying bracketed comments notwithstanding].

As high as our market has gotten, its overvaluation (if I’m right that it’s overvalued) is nothing like Japan at its peak, and I’m hoping it won’t be. But you’re right: If people just keep bidding up prices irrespective of value, prices will keep going up irrespective of value – but not forever.

Other places for money? You bet. I’m not recommending these, just listing them:

1. Paying down debt. Want to suck a trillion dollars in demand out of the stock market? It’s as simple as people deciding to take profits and use them to pay down their mortgages. (Even just paying off car loans would suck a little liquidity out of the market, and an investor who does that earns 10% risk-free, tax-free if his Buick came with a 10% loan.)

2. Real estate. Suck out some more demand buying a retirement condo or bidding up the price of land. If you had a $30 million profit in some high-tech stock, what would you care whether you paid $1 million or $5 million for your Caribbean island? For your view of the Tetons?

3. Bonds and cash. The Japanese have invested a ton of their own money in U.S. Treasury securities. At some point, American investors might decide to bid up their prices and buy them back. Or just to put more money into safe bank accounts.

4. Overseas. Lots of markets are high, but some are not. Some people may decide to switch a bit of their assets from the U.S. to Asia or others areas.

5. New investments. One of the great things about this low-interest, liquid investment environment is that it leads to financing tremendous innovation. We’re building a new economy, here and abroad – so one place the new dollars can flow isn’t into existing shares of existing companies, but into new shares of new companies. There’s a limit to how much can be wisely invested, but a growing world economy will definitely absorb investment funds. What will it cost to bring the rest of the world up to US/European standards of living – and to do it in planet-friendly ways? There is a tremendous need for capital, if only the economies of the world can figure out how to organize it all with reasonable good sense.

So, yes, there are places those trillions of baby boom dollars could go other than the high-multiple U.S. stocks.

(One other place: the doggy stocks that, even in this market, are too small or dull or unappreciated to have gotten swept up with the rest. Forget the dogs of the Dow. You should see the dogs of my Keogh.)

Sure it’s a monopoly. But is Microsoft a pyramid scheme, too?

From Jonathan: “What do you think about the article that appeared on the cover of the Financial Times recently that claimed that if the value stock option granted to employees were accounted for as an expense, then some high-flyers, like Microsoft, would have shown a net loss in 1996? Is Microsoft some kind of big pyramid scheme where the company maintains itself by paying its talented engineers in stock options (thereby diluting all the other shareholders)? The scheme works as long as the share price goes up, but as soon as people think it’s leveling off, the price could collapse.

“Full disclosure: in 1990 I was offered the option to acquire 2,300 shares (pre-splits) of Microsoft at the then present price. This was part of a job offer. I refused, because I was suspicious. When I interviewed at Microsoft with about six people during one day, they each pointed out that as a Microsoft employee, you get FREE soft drinks on the job — all the Cokes that you want. There was a big spray-painted banner hanging in the lobby, ‘Ship or Die.’ And there were no women working there, except for the recruiters, who were all exceptionally cute. Lastly, a young Microsoft engineer, responsible for the Macintosh version of Excel, took me to dinner at the only fancy Jewish restaurant in Seattle. I am Jewish, as anyone can tell from my last name, but I never said anything about it. Everything seemed so perfectly orchestrated. The hairs stood up on the back of my neck, and I bolted.”
A.T.: What do I think? The first thing I think, not surprisingly, is that this decision cost Jonathan $48 billion or something. Poor guy! It ranks right up there with my never having bought Berkshire Hathaway.

What I further think is that there’s definitely something to this. On the one hand, Microsoft is no pyramid scheme: It sells products the world clearly demands. (In a pyramid scheme, the big money isn’t made selling products but rather in selling the “right” to sell those products, and getting eight or ten people under you to sell eight or ten people under them the right to sell eight or ten people under them … like a chain letter.) Yet at some point, the cost of labor at MSFT is likely to rise, and the more exciting entrepreneurial opportunities will be at smaller firms. Today’s 18-hour-a-day men and women will take their $15 million and open pottery shops by the sea. Tomorrow’s talent will be harder to acquire and motivate. They may have to be paid with actual money rather than the prospect of stock options that climb to the moon. Paying with more competitive salaries will cause a drag on earnings which will cause a drag on the stock which will make stock-option compensation all the less a substitute for competitive wages. And some folks may decide it’s enough to work 12 hours a day, and others may decide they should take their talents to smaller enterprises or start their own.

But none of this may happen for quite a while, because Microsoft is such a powerhouse company, with lots of potential still to grow.

And this is true of lots of today’s high-tech companies.

And it’s not just employees who are being paid with the prospect of future stock price gains — it’s investors. Forget dividends. Forget big salaries. So long as the stock keeps rising, investors and employees will be happy.

And basically, it’s great: People in the high-tech world are working like crazy (and making fantastic technological progress), both because of the excitement of what they’re doing and because of those stock options … investors are shoveling in all the needed capital and demanding not a dime in return. The cost of labor and capital are both low.

Someday, employees and investors will want cash. That could well lead to a vicious cycle that disappoints a lot of employees and shareholders. But in the meantime, we’re remaking the world.