Author: A.T.

From Bob, on my concerns over the world’s “population problem” — which I think may be a problem:

“Consider this: We are 6 billion humans. There are 300 billion birds on the planet. They seem to do all right. Perhaps the birds are smarter than we are? Regards, Bob”

Perhaps. Or maybe they just drive smaller cars.

If you’ve not yet read my book, you may be unfamiliar with the history of the universe. Here it is, in a nutshell, which I hereby grant myself permission to excerpt (apologies to those of you who have already read it):

The universe exploded into existence 15 billion years ago, or so they say. I find this hard to believe, in part for all the obvious reasons (could Bill Gates really have three dollars for every year since the beginning of the universe?), not to mention the logical headaches (where did it come from?), but I am one of the millions of readers who stopped understanding Stephen Hawking’s A Brief History of Time midway through Chapter 4, so let’s just assume it’s true.

For the first 10 billion years, nothing happened.

Then — they say — the Earth was formed. That was about 5 billion years ago, give or take.

Now, to put this in a scale we can more or less comprehend, imagine that one century equals an inch. A hundred years, an inch. On that scale, the Earth was formed 789 miles ago. Milwaukee, if you live in New York. Denver, if you live in L.A. New Orleans, if you live in Chicago.

And every hundred years since the Earth was formed, you moved one inch closer to today.

I know this sounds like the story of the bird that lives on the cliff above the beach. (Every hundred years, it flies down from its perch and eats one grain of sand from the beach. When the bird … [pause for effect] … has eaten all the sand on the beach … [pause and then intone solemnly] … one second of eternity shall have elapsed.) I love that story.

The difference is, this story is real, as best we know. One century, one inch, 789 miles, give or take, since the Earth began.

The first four billion and some years nothing happened. Oceans, mountains, DNA maybe — don’t hold me to exact dates. But it was really, really slow. One inch a century. That brought you to around Scranton or Death Valley or Indianapolis.

Oh, sure, life was evolving, but it would be another 800 million years or so before you got your dinosaurs, and 140 million years more until they disappeared — which brings us, 60 million years ago, just 9 miles or so from today.

And in the 59.9 million years after that, bringing us up to 100,000 years ago, and 83 feet from where you’re sitting, still nothing much happened. Early man had evolved, and I don’t know, maybe he had invented primitive language, maybe fire, maybe the wheel.

Finally, inching along, century by century, about half a foot away, we came up with printing, and a few inches later, steam.

But my point is this: In the last inch and a half — the last 150 years — we have invented everything. Electricity, automobiles, radios, television, computers, faxes, airplanes, lasers, microwaves, Velcro — everything. And it’s only accelerating. As with any unimaginably complex jigsaw puzzle, the first pieces take forever to piece together. But as more pieces fit, the faster and faster it takes shape. We are mapping the human genome. (Decades ago, don’t forget, with by-now ancient technology, humans walked on the moon.) We are cloning living beings and freezing others, with the prospect, one day, of bringing them back to life.

None of this makes any sense whatever to me as a layman, except in one very obvious overall way; namely, that we are either at the beginning or the end of the human species, for all practical purposes. In the next inch or so, we will either screw it all up, a la nuclear winter or the release of some plague to end all plagues, or else we will launch ourselves into the dawn of an entirely new era (and even one day get enough human consciousnesses off this physical globe so that, should some comet hale-bopp into us one day, all will not be lost).

This huge, long journey that began with the formation of our planet 789 miles ago, proceeding century-long inch … after inch … now has reached what really appears to be the climax.

So?

So what we do matters.

There are dozens of persuasive political and economic philosophies, and I certainly don’t pretend to know for sure which is best. But I know this: Whatever your politics or ideology — or even your religion — waste is bad. Waste impoverishes us all.

Thus, without being slavish or ridiculous about it, a good starting point for anyone in stewarding his or her money, it seems to me, is to try to spend, invest, and donate wisely. At worst, it will do no good (I think it will do lots of good). But where’s the harm?

Just a few words here to note that waste is not all of a single kind or severity. For example, if I get a parking ticket, I’ve learned not to let it bother me. So long as I wasn’t blocking traffic or creating a hazard, what difference does it make? Instead of feeding a quarter in the meter, I send the city $35. The money doesn’t disappear, and given what I already pay in taxes, another $35 is so trivial as not to be worth a second thought. No appreciable resources have been wasted, no appreciable human effort misdirected. (Yes, there’s the meter maid, but it’s unrealistic to think that a change in my behavior will obviate the need for them — more likely they’ll soon invent some sort of "wand" that can be quickly passed over the meter and your license plate, automatically printing and mailing you a ticket, and perhaps debiting your checking account.)

But compare that with the time my car was parked 18 inches too close to a fire hydrant (but I swear there was still plenty of room — honest!). Instead of a ticket, my car was towed, and damaged in the process. The $125 ticket and $75 in towing fees weren’t the waste. It was damaging a perfectly good car that was a waste … and all the time (and a bit of fuel) involved in towing the car and then my having to go and retrieve it, and the paperwork, and … it wasn’t the stuff of an NBC special report. But this is what I mean by waste.

Leaving a tool outside to rust is a waste.

Burning fuel into the air to power a Sea-Doo is a waste — but it’s so damn much fun, it’s one of those trade-offs that’s not so simple. Part of the trick may be to build the "externalities" — the awful racket Sea-Doos make, the pollution they cause, the cost of disposing of them when they’re eventually junked and wash up on some seashore — into the price of driving them.

Long brisk walks are less wasteful than unused treadmills and Exercycles. (If you use yours, that’s different. But most of the exercise equipment I’ve bought over the years sits unpedalled.)

Spending money on a fancy dinner isn’t a waste, in the sense that you’re simply transferring most of it to other people — you’re satisfying each other’s needs. (In this country, given our resources, capital and technology, we’d need relatively few people just to feed, clothe and house us. The rest of the jobs, so long as we enjoy or profit from the products and services they create, are valuable too. Man does not live by bread alone.)

Digging for gold is a waste. After all, gold’s value lies largely in its scarcity. (We have more than enough already for our industrial and decorative needs.) Digging more only makes it less scarce.

Building casinos may add some measure of happiness to the lives of those who enjoy gambling, but would seem to be a lot less productive then building a factory or a school or a research lab.

And so on. You get the idea. And your judgment in assessing wastefulness is just as valid as mine — and we may differ. But it’s an assessment we six billion earthly denizens should perhaps routinely make. To me, spending $5 billion a year in the U.S. to promote the leading cause of preventable death is a waste — which accounts for my hectoring over the years on the tobacco issue. Bulldozing a clubhouse and filling in a perfectly fine pool, only to one day rebuild it, is a waste — which accounts for some of my misery [described earlier in the book] regarding Miami real estate. And you already know past all patience what I think about that other obsession of mine [also described earlier in the book]. With luck, one day there will be a postscript. In America, anything is possible.

From D.P.: “Are you SURE that margin interest is really deductible if the loan is used for personal purposes, such as buying a car? My reading of IRS Pub. 550 ‘Investment Income and Expenses,’ pages 29-30 (available on line), makes this seem a dubious proposition. Although it may defy conventional wisdom, I have found that I CAN deduct credit card interest if the proceeds are used for investment purposes.

“I know, I know, WHY would I use credit cards for investment? Simple, to take advantage of all those low interest rate teasers that stuff my mailbox. At 3.9% or 4.9% it is the cheapest money around and it helps me buy my lots in the Southern Colorado mountains. The downside is keeping on top of the fiendishly tricky card companies and their devious rules, as well as the blizzard of payments that have to be made exactly on time. It wouldn’t be worth the trouble if it weren’t so much fun to fleece the card companies. I call it the ‘card game.’ (It is, of course, essential to have a sturdy backup plan for when the card rollovers dry up.)

“Please don’t use my name if you should use any of this. I don’t care to have the IRS audit me even though everything is on the up and up.”

Response From Andy:

Well. Leaving aside the wisdom of your “card game” and the murky psychological significance of the pleasure you take in fleecing anyone, even a poor, struggling credit card company, you do raise a good point. The IRS regulations on deductible investment interest are very complex and I believe do remain based on the purpose for which you are borrowing.

But as a practical matter, deducting margin interest is very unlikely to arouse the IRS (assuming you meet the other tests, mainly reporting at least as much investment income to deduct the interest against). If you want to be incredibly (and, in my entirely unofficial, unguaranteed, don’t-hold-me-liable opinion, unnecessarily) good about this, I suppose you could use your margin power to buy shares in a money-market or bond fund that allows you to write checks against it. Then some time later, should you need to buy a yacht, write a check. Or of course you can sell some shares, use the proceeds to buy the yacht, then buy them back minutes later on margin. But as I say, I just don’t think this is something you need worry about, either practically or morally. (And as I say again, this is just my entirely unofficial, unguaranteed, don’t-hold-me-liable opinion.)

By contrast, I think the credit card thing, even though you might ultimately prevail, could actually cause you a hassle if you are audited. Unless, that is, you can actually buy stocks by charging them to your Visa card. That might be an easier case to make. (And think of all the frequent flier miles, if it’s the right kind of Visa card!)

Note: In a recent column I said one problem with writing options is that the premiums you are paid to write them — to sell a put or a call — are all taxed as ordinary income. This is true unless the options you write are exercised, in which case the premium is added to or subtracted from the cost of the shares in figuring your capital gain.

Tomorrow: A Brief History of the Universe

Picked up the phone to call Amsterdam just now and — well, sure, I can afford AT&T, but I figured they might keep me on hold a while, so maybe I should use 800-211-9696. That’s the number I use whenever I’m traveling or at a pay phone.

(The company is ATCALL. It charges 16 cents a minute for such calls. To learn more: 800-411-9696. There may be others even cheaper, but this one is pretty darn cheap. And in hotels, it saves a fortune — a single 75-cent charge from the hotel to make the 800-call, which then allows you to return all your calls, one after another, without ever having to hang up and pay the hotel another dime. You just hit the pound key a few times after each call before making the next one.)

For regular calls, I’ve just stuck with AT&T, albeit one of their cheaper plans. I know if I worked at it at all, I could save a little dough. But like a lot of us, I’m lazy, I have a fond place in my heart for AT&T (I do!), and last time I checked the difference — giving full effect to the value of the frequent-flier miles I get for each call — it didn’t seem entirely stupid just to stay put with AT&T.

And it still doesn’t — domestically. One of the joys of having scrimped and saved for decades is that I don’t have to worry about a nickel here and a dime there — except on your behalf. (On your behalf: shop around! You can almost surely get a better rate than you’re getting with AT&T!)

Still, I was curious. ATCALL charges 34 cents a minute for my calling-card call to Amsterdam. I called AT&T and inquired what I’d be paying from my home phone for the same call. (It was during the day.) Answer: $1.38 a minute.

Well, you’d have to be dead not to care about the difference between 34 cents and $1.38, especially facing what could be a 20-minute call.

So let me take this opportunity to tell you what you already know: It’s always wise to do a little comparison shopping on your phone rates every now and then. (And, for that matter, your auto insurance rates and life insurance rates.)

From William Frietsch: “Buying used cars is a religion of mine. I’ve bought two or three year old used cars since I was 16 years old (I’m now 62). The money I’ve saved versus buying new cars I’ve invested in the stock market with very good results. One of my rules is never to buy from a dealer, always buy from an individual. You can tell a lot about how the car was cared for by the way the person maintains his home and yard. In addition, you can buy the car cheaper. Typically, you can buy it for the midpoint between wholesale and retail since the individual can’t get retail since he doesn’t have financing capability, warranty etc. But if he trades it in he will only get wholesale so an astute buyer can pick it up for somewhere in the middle.”

Ah, used cars. As you’re probably sick of hearing me say by now: forget Calvin Klein or Chanel – that new car smell is by far the most expensive fragrance in the world.

Consider that a new $20,000 car is probably worth just $15,000, if that, a few weeks after you drive it off the lot. So in that sense, if you’re someone who buys a new car every couple of years, the new-car smell costs you $2,500 extra a year.

Well, $2,500 a year of after-tax money is not a small thing over a lifetime. Obviously, somebody has to buy new cars or eventually there wouldn’t be any used ones (though Cuba sure has held out a long time); and obviously, the greater the demand for used cars, the higher their prices become relative to new ones, so the less you save by buying them.

Still, a 24-year-old who saves $2,500 a year on his auto expenses all the way through age 74, and invests that savings to return 7% after tax, will come out $1 million ahead. Who couldn’t use an extra million in her golden years?

From Thorsten Kril, recently arrived from Germany: “What is your verdict on EE-Series Saving Bonds? You have only a short paragraph about it in The Only Investment Guide You’ll Ever Need, basically saying they were bad once and not too bad now.

“Here is my situation: In my taxable account I only hold stocks for the long term, adding to the positions every month. Mostly industry leaders, and once in a while some small caps. I avoid Mutual funds and bonds because of the tax mess. Buying funds/bonds every month for dollar-cost averaging and reinvesting the distributions would require a full-time job to figure the taxes once I sell something. Also, I’m comfortable to pick the stocks myself.

“To balance the risk, I have allocated 40% of my 401k and Roth to Bond and Money Market Funds. But I’m 30 and have 30 more years to retirement, so I would rather have a bit more of my 401k and less of my brokerage account in stocks. And since I already maxed out the 401k/Roth contributions, I need another place for my Retirement money. (And you just counseled against annuities.)

“So, the solution that appeared to me is the EE-Series Bond. I can buy them every month and not pay taxes for years. Since every bond matures after 30 years, I could sell the bonds I bought this year when I’m 60, then sell the bonds from next year when I’m 61 and so on. I’d have a steady income beside the volatile stock holdings. It would last until I’m 90.

“So, what do you think? Did I miss anything? It sounds to me like a perfect retirement saving plan.”

Well. You’re obviously doing great – no wonder Germany’s savings rate is so much higher than our own. But you raise a lot of interesting issues, the net of which is: I’d skip the savings bonds.

But let’s start at the beginning:

Savings bonds still make sense for the small saver. For a completely safe investment, the yield is good – set by law at 90% of the yield on 5-year Treasury securities. And the tax advantages make it better still. Like all Treasury securities, they are free of state and local income taxes. On top of that, the EE-Series savings bond interest is free of federal tax, if you choose to defer it, until you cash in the bonds. Certainly this is better than a certificate of deposit at the bank.

But for retirement money you don’t need for 30 years? Even the worst 30 years in stock market history (the beginning of 1929 to the beginning of 1959) would have grown your money much faster, after tax, than savings bonds. And if you think the U.S. market is high today and are looking to diversify, why not buy a little Russia and Thailand this year, something else next year? You have your 401(k), Roth IRA and Social Security to fall back on. Surely you can take the risk that Russia and Thailand (and who knows what else next year) will not all disappear in the decades to come.

Or even just buy some more of today’s robustly priced blue chips. Is there much chance the Hewlett-Packards and Ford Motors and FedExes of the world won’t ultimately be able to grow faster than a savings bond? (I’m not recommending these specifically.)

Says my friend and sage Less Antman: “Nothing makes me sadder than the conservatism of a man of 60 being practiced by a man of 30, so that he’ll need to show the aggressiveness of a man of 30 when he’s a man of 60.”

You should keep ample cash for emergencies . . . to be able to comfortably increase insurance deductibles to the maximum . . . to take advantage of special opportunities to purchase in bulk or at a big discount . . . to send monetary gifts to undeserving and unreliable friends with large upcoming tax bills . . . and to fund for short-term personal goals. But of the rest? “Keep safe money safe,” Less likes to say, “but keep growth money growing.”

(As for the difficulty of dealing with mutual funds: not so. Every large fund family and discount broker keeps average-cost information on mutual fund holdings and provides it on sales. It takes just a few minutes at tax time to copy the sales and cost information to Schedule D from the information sheet mailed by most funds along with the Form 1099.)

Aren’t we getting just a LITTLE tired of these calls? They get you at dinner mostly, or when you’re on the phone with somebody really important, like Dolly Parton or Valéry Giscard d’Estaing, or maybe Elvis – yes, finally Elvis calls and is about to tell you exactly where he is, for real – and the phone rings and it’s some telemarketer for a magazine or MCI or a cold caller from one of the brokerage firms (“I don’t have anything right now, but if some time from now an attractive investment opportunity crossed my desk, would you like me to let you know?”) – and you couldn’t tell in advance who it was, because you have Call-Waiting and, yes, Caller-ID, but not the newfangled phones with Call-Waiting Caller ID, which display the caller who’s waiting – so you put Elvis on hold (because you have Hold) – and by the time you’ve depressed the Flash button to switch back, Elvis is gone and you’re . . . just . . . so . . . angry.

Well, I’ve come up with a solution. It’s not practical and it won’t work, but I offer it anyway.

Instead of politely waiting for some break in the script to interject a firm, “I’m really glad you called – I know you have a tough job – but let me save us both some time, because I’m definitely not interested, by hanging up [CLICK]” . . . how about this: See how long you can keep the caller on the phone. Make him/her hang up on you. Ask a lot of questions. Tell some nice stories. Ask some more questions. Keep your eye on the clock and each time try to break your personal record. Ten minutes? Twenty? An hour? Just don’t commit. “Oh, I don’t know. I’m pretty close to the limit on my credit card. Gosh, where would I be without those credit cards? I was once this close to starving to death, because of the layoffs, you know?, and then I remembered I could get a cash advance on my Visa, so I went down to the . . .” and just keep going until finally the telemarketer has no choice but to hang up on you.

Don’t think of this as a waste of your valuable time. Think of it as a game, like any other game that you spend hours of your valuable time playing. If the whole world did this, every telemarketer would go broke in a week. No more dinner-time interruptions.

OK, OK. The people who call are, for the most part, just kids trying their best to make a buck. They don’t run these businesses or write the scripts. It’s one thing not to bite at the pitch, another to try to punish some stranger for doing his or her job.

Still, most of these calls really are an intrusion. Better to make the offers on TV, in print ads, or through the mail. At least with junk mail you can make all but instant determinations from the outside of the envelope as to whether you have any interest. And the mailman doesn’t interrupt you in the middle of dinner or beep you in the middle of a conversation with Elvis.

What to say to the complete stranger who calls hoping you’ll entrust some goodly portion of your life savings to him? Leo Cullum had a great idea in his recent New Yorker cartoon. He drew an obviously-not-wealthy man watching TV, legs crossed comfortably, beer in hand, on the phone. “Oh, I’m really sorry,” he has the man saying. “I just placed three million with some broker who called five minutes ago.“

From Shirley W.: “An acquaintance who recently won a $27,000 minor lawsuit, but for whom this was a windfall, asked how to make some money with it. Being rather conservative, I told him to do what he wanted but that I would put two-thirds in a balanced fund and the rest in a 1-year CD. He said he could never make money that way, so promptly drove to Las Vegas and gambled away every last dime and then some. Oh, the humanity!”

From the lawsuit lottery to Las Vegas. Beware the will to lose.

Thanks, Shirley.

From L.B.: “I would like to get rich quick. I have a little spare money to gamble. I heard that margin trading can make a mountain of dough out of my little molehill of cash. Any experience in this?”

Yes. My experience is that you will lose your money.

The leverage you get with borrowed money does increase potential returns. (Buying out-of-the-money puts and calls increases it still further.) The more leverage you reach for, the greater the pot of gold you have an outside chance of winning – but the more outside that chance becomes. Sooner or later, you will in all likelihood lose it all, because even gamblers who do win rarely quit while they’re ahead.

“At the ripe old age of 36, netting mid 40’s in income, household assets listing about 10 grand, liquid about 25 grand, only started my IRA last year, I feel like I’m going to be working a long time. I would like some advice on putting my money to work for me. I am on a newly developed saving/investment plan of my own, to save or invest $1000 a month. I do not object to medium to high risk. At this time I have no investment vehicles working for me. Do you have any suggestions on what would be a solid way to add some spark to my plan????? I would like to retire at 45.” -Andrew

It’s great that you’re saving $1,000 a month but a little scary that you have your eye on retirement in nine years. At that time, if you’ve been able to grow your money at 8% after tax and inflation along the way – a very aggressive assumption – you’d have $158,000 to last you the rest of your life, which if you’re an average unmarried nonsmoker who wears his seatbelts will be about another 34 years.

This suggests several things. Ideally, you would find a job that makes you want to work a lot longer. Easier said than done, I know. Or is there a possibility of your marrying an heiress?

As to finding a solid way to add spark to your plan, I’m not sure solid and spark go together – they suggest that you’re looking for a good safe risk. But yes, for long-term investing, stocks have always outperformed more predictable investments. The problem is that everyone seems finally to have adopted that wisdom. Everyone and his shoeshine boy are now in stocks. This has driven stock prices well out of the bargain basement, at least in the U.S., leaving old fogies like me to worry whether this is a good time for young fogies like you to jump in.

But the answer again is yes. If you’re going to stick to your $1,000-a-month discipline through thick and thin, then ANY time is a good time to start investing in the stock market. And to add a solid spark, you might toss into your mix shares of whatever closed-end country funds seem most beaten down but likely to recover. (Just avoid closed-end funds selling at any significant premium to their net asset value.)

But I feel awkward just tossing that out – it seems to me you should get a more solid overview of how all this works, and of how sparks can lead to fires that burn the house down. May I suggest you go to the library or bookstore and grab Burton Malkiel’s A Random Walk Down Wall Street or even my own modestly titled paperback, The Only Investment Guide You’ll Ever Need.