Author: A.T.

Some of you may recall “my” story about the frozen chickens. The Brits had borrowed a cannon the Federal Aviation Administration uses to shoot chickens at airplanes. They wanted to test a new train windshield to see if it could withstand the impact. Their first test-fire caused so much damage, they called the FAA to see if they had conducted the test properly. “Use a thawed chicken,” suggested the FAA.

Well. There is considerable thawed chicken expertise among readers of this column, to say the least. I’ve been saving it up for months now, and today’s your lucky day.

Thomas Nazarek wrote: “I heard the same story about 5 years ago, although it was the FAA checking the ability of an aircraft engine to withstand the force of a bird strike. Either the FAA has learned from its past mistakes and failed to pass along the information, the Brits have not heard the joke, or this is one of those ‘shaggy dog’ stories which will never die, only go into hibernation and re-emerge every couple of years with slightly different details.”

Bill Merkel wrote: “As someone who used to fire (thawed) pheasants into Pratt & Whitney aircraft engines, I’ve heard this story a thousand times, in many mutations. Pretty unbelievable. In recent years, they’ve switched from actual carcasses to jelly birds that can be made to simulate the size, weight, density and temperature of a live bird without having to euthanize any real birds. Just thought you’d like some more details.”

Indeed!

A month or so after the thawed chicken story made its (tired old) debut in this space, I followed up with the story of the aircraft carrier warning an approaching vessel to make way — “We are an aircraft carrier,” they radioed disbelievingly to the idiots who were refusing to budge; “We are a lighthouse,” came the reply — and got more mail. In a way, the two are related.

Mike Brady wrote: “I got a kick out of your story (OK, it was really Brooks Hilliard’s story) about the game of ‘chicken’ between the aircraft carrier and the lighthouse. It’s definitely a fun one to tell. Unfortunately, it’s not very plausible. You see, there are several ways for a ship to tell what’s around it. The two main ways are visual (at night there are navigational lights) and by radar. From the way the story is told, it sounds as if it was at night and the Enterprise got a visual on the lighthouse’s light. But a lighthouse’s light is different from that of any ship. It is white, and it flashes at a certain interval — usually a few seconds. A ship, on the other hand, has a green light on one side, a red light on the other side, and a steady white light only visible from the rear. So, even if the Enterprise mistook the flashing white light for a steady white light, they would have thought they were overtaking another vessel — a situation in which the other vessel clearly has the right of way. Of course, all of this presumes that they had lost track on their charts of where they were and where the land was. Two different groups are responsible for charting the track, and they each update the chart at least every five minutes. The Officer of the Deck is always apprised of where the nearest land is (and a good one will always check for himself). It’s not likely that everyone involved would lose their place AND agree on where they thought they were. Before, during, and since my years as an officer aboard a Navy destroyer I have heard many unlikely sea stories that turn out to be true. This could be one of them, but in this particular case I would have to say it is most unlikely, but quite entertaining.”

A reader then chimed in from France: “I missed the frozen chicken story the first time around and just caught it on the rebound from the lighthouse story. My sense of humor is as good as anyone’s, I suppose, but all this story reveals is that the locomotive’s windshield was badly designed, not to mention the engineer’s chair (there is no comment on the design of the engineer). Obviously frozen objects (ice falling from overpasses) or their equivalent (rocks thrown by smiling children) are more likely to strike the windshield of a train than that of a plane. This merely confirms what we already know to be true about British trains. Except for that, I enjoy your column. Yours sincerely, Lee Leserman, Centre d’Immunologie de Marseille-Luminy, Marseille, France”

I figured it was time I display some frozen chicken expertise (even though I have none), so I replied, privately, that, to take the other side of the argument, “I should imagine that the number of flying birds per square mile at any time is a lot higher than the number of airborne solid objects.” Right? How often are their bricks or icicles flying through the air? Then again, solid airborne objects don’t have much instinct for self-preservation, nor maneuverability, so it may be a wash.

Fortunately, Kevin Mukhar had the final word: “The chicken cannon story and the lighthouse story are, in my opinion, good stories, but fiction nonetheless. They are stories that come from a genre called Urban Legends. More on that later.

“If you have the time, go to http://www.urbanlegends.com/search/search.html#afu and do a search on “Lighthouse” and display the result as threads. That search will give you a long Dejanews list of e-mail regarding the lighthouse story from the newsgroup alt.folklore.urban. In case you don’t have time here is a short excerpt:

[QUOTED MATERIAL] Subject: Re: Ship vs. lighthouse From: LJ Shoots Date: 1996/05/03

In Steven R. Covey’s The 7 Habits of Highly Effective People, published in 1989, p. 33, this story is presented, but told in the first person. To wit: “…as told by Frank Koch in Proceedings, the magazine of the Naval Institute. [END QUOTE]

“I checked my copy of the book, and indeed the story is on page 33. In another post someone makes the claim that the story may have appeared in Reader’s Digest as long as 20 years ago.

“Doing a search on ‘chicken cannon’ results in a similar list. In this case, not as conclusive, but I think the general consensus of alt.folklore.urban is that while there really is a chicken cannon used to test the effect of birdstrikes on aircraft, no one has ever borrowed it and used a frozen chicken in their test.

“So what is an urban legend? It’s a story that passes from person to person, as in ‘I heard this from a friend, or a friend of a friend.’ It’s a story that appears mysteriously and spreads spontaneously; it often contains elements of humor or horror. Finally, while often false, they are stories that may have a basis in truth. For example, do you remember Craig Shergold? He’s the British boy who was dying of cancer and wanted to get into the record books as receiving the most postcards. True story. Except Craig has been cured, yet the legend of the dying boy who wants to make the record for most postcards/business cards refuses to die.

“Have you heard about the new airport x-ray laptop scam (hordes of thieves stealing laptop computers from airport x-ray machines)? While it’s true that thieves steal laptops, the story that there’s an epidemic of thefts from airport x-ray machines is probably false.

“Another grand-daddy: the $250 cookie recipe. It used to be Mrs. Fields some years ago, now it’s Nieman-Marcus. Person tastes cookie at Nieman-Marcus, asks for recipe, is told there will be a two-fifty charge for recipe, turns out that it’s $250 not $2.50, gets revenge by spreading recipe over Internet. Another false story that’s been in circulation for (probably) decades.

“Some other recent stories circulating the Internet: South African Floor Polisher Massacre — A spate of mysterious deaths caused by South African cleaning lady. The Biscuit Bullet — Woman in car is hit by bursting biscuit tube; the woman thinks she has been shot in head and brains are leaking out. Dead Diver Found In A Tree — A plane dropping water on a forest fire in CA (or France) accidentally scoops up scuba diver and drops diver to death.

“As you can tell, I have some interest in these stories, as do many others. They all congregate on a newsgroup called alt.folklore.urban. Their web site is http://www.urbanlegends.com. One of the founding fathers of this field of study is a man named Jan Harold Brunvand who has written a number of books about urban legends, such as: The Vanishing Hitchhiker, The Choking Doberman, The Mexican Pet Curses! and Broiled Again! [A quick check of www.amazon.com shows that several of these are readily available.]

“If you enjoy these kind of stories, and you might, since you’ve now passed on two of them, you might enjoy Brunvand’s books.”

You mean that poor Scuba diver wasn’t scooped up and dumped with a thousands of gallons of water to put out the Malibu brush fires?

Thank you one and all. As usual, your comments are far more interesting than mine.

Remember that annoying little Texan — I forget his name — who said that if we passed NAFTA there would be a "giant sucking sound" as jobs whooshed south to Mexico? I forget his name, but I remember he kept popping in and out of the 1992 presidential race, and I remember that phrase — the giant sucking sound.

Can you hear it? The unemployment rate has dropped below 5% for the first time in decades, at the same time as inflation is low — kept down in part by the price competition of free trade.

His name slips my mind — he was short, I remember — but he had this know-it-all attitude that just reeked of contempt for our elected representatives. (Not that he was entirely wrong there.) If we elected him, the message went, the government and the deficit would shrink (they have), the economy would start to grow again (it did), and Fortune would be running stories like the one in its June 9 issue: "These ARE the Good Old Days" — the economy has never been stronger.

Not to offend those of you who voted for him, but — what was his name? — I think we have managed to bumble along OK without him.

I’m writing this three or four days ahead, with the Dow at 7,782. By the time you read this, it could be 8,000 or 9,000 — or maybe there will be another one of those cute little scares, where it drops almost 10% before bouncing back twice as far.

So how high can it go? If the market is at the “right” level today, then it could just keep going up 7% or so a year (with another 2% or 3% paid out in dividends), more or less in line with its historical growth. Or perhaps it can do even a little better if there’s been some fundamental oomph in our prosperity equation. (Such oomph might be attributed to, say, the lessened drain on our prosperity from lower defense spending, or a technology-driven speedup in productivity, or freer trade.)

At 7% a year, the market doubles every decade. The Dow would hit 10,000 on Thursday, March 1, 2001.

At a 9% growth rate (plus more from dividends, remember), it would double every 8 years, hitting 10,000 sooner still: Friday, May 12, 2000.

Or it could just keep up its pace of the first half of 1997 — the roaring ’90s redux — and reach 10,000 this coming February.

But what if the market isn’t sensibly priced today? In hindsight, it could turn out it is way too low — that a reasonable man, looking back years from now, would be slapping himself silly for not taking advantage of the screaming bargain represented by the Dow Jones industrials at 7,782 in June of 1997. Or it could appear to have been priced way too high or just about right. Only time will tell.

But shouldn’t all this be based on some logic? Yes. The market’s future price depends on two things, basically. One is supply and demand. As long as more people are buying stock than selling, the market will keep going up, regardless of where it “should” sell.

(Of course, on any given day, just as many shares are sold as bought. But you know what I mean. If there’s more pressure to buy than sell, the market “clears” by hiking prices, bringing buyers and sellers into balance. But if the pressure continues, so do the price climbs.)

If people continue to dump their retirement money into the market — even if they begin to do it knowing they’re playing a sort of musical chairs, but expecting to get out with their profits before the music stops — prices will just go higher and higher. The market could continue to rise at 20% or 30% or 40% a year for several more years. And that could be just the start of the bull market if, by then, every newly-prosperous Chinese person bought just 100 shares of some U.S. stock. Imagine. That would add demand for 100 billion shares of stock, driving prices higher still. (Isn’t 2007 the Year of the Pig? I can hardly wait.)

But at some point people will focus on the second reason to buy stocks: their share of the underlying companies’ profits. Isn’t that the fundamental reason to own a business — to make money? You can take it out in salary if it’s a small business you run yourself, or in dividends if you’re just a shareholder. But the point is to make money. Ultimately, that’s what makes a business valuable. And ultimately, it’s cash that pays the rent and gasses up the car.

If you have $1 million at retirement, you could get $10,000 a year in cash investing it in a portfolio of stocks yielding an average of 1% a year in dividends (Microsoft, Coke and Intel don’t pay even that much), or you could get $70,000 a year investing it in, say, U.S. Treasury bonds (or in any number of other investments, including utility stocks and real estate investment trusts).

Of course, as long as stocks are going up 20% a year, you’d be better off keeping all your money there and selling a few shares periodically to replenish your checking account. And as long as lots of people feel that way, and thus keep putting their money into stocks, no matter what (since “stocks always outperform other investments over the long run”), stocks will keep going up 20% a year. Maybe 40% a year.

Until they don’t. But hold on — many of you, and almost all the potential Chinese investors, are nowhere near retirement. So for them, dividends are unimportant. All money should go into stocks, at whatever price they sell, because over the long run everyone knows stocks always outperform other investments.

As suggested a couple of weeks ago, “everyone knows” and “always” are the kinds of expressions that have been known to — forgive my French — piss off Mr. Market. Mr. Market takes some pleasure in not being seen as easy. He likes to tease, but he also likes to torment. Faced with so many people falling in love with him, he plays hard-to-get-rich.

Over the long run, superstition and psychology are not what move the market; numbers do. And in the U.S., one thing likely to keep the market from going to and/or staying at too crazy a high or low level is the corps of trained professionals who understand these numbers. That is, whatever lunatic or irresponsible things you or I might do on a tip from a friend, most of the really big money is managed by professionals who have to at least be able to make some rational case — based on the numbers — before they buy more shares of whatever stock. That doesn’t mean they’ll be right or that their underlying assumptions of sales growth, profit margins, inflation and the rest will be right. There’s huge room here for error, huge room for getting carried away with consensus thinking that turns out to be all wet. But still, they do try to act logically most of the time.

So what is logical?

Is it logical to pay $2.5 billion for a company with no profits? Yes, if you expect it to have big profits soon, or very big profits in a while, or gigantic profits 10 or 20 years from now. That’s the story with a lot of the high tech companies, which are obviously the hardest to evaluate — and more apt to get caught up in a frenzy of irrational exuberance than, say, a 50-year-old cement company earning $2 a share.

Is it logical to pay $70-plus a share for Coca-Cola, or about 46 times its last year’s earnings? Yes, if you expect its earnings to zoom, as Coke sales skyrocket in the developing, much-of-it-until-recently-communist world. No, if you think its profits will grow at “only” 15% a year — a growth rate many large companies only dream of. What about Coke, or about the world, has changed in the last three years, during which time its stock has tripled? Were people morons for selling their shares at $23 three years ago? Are they morons for paying $71 today? Or does the truth lie someplace in between? Coke’s excellent management hasn’t changed. No new Berlin Walls have fallen. (Well, Albania’s — but could that be it?) My guess is that Coke stock didn’t adequately reflect its prospects at $23 in 1994 and that it over-exuberantly reflects them today. This is no reason necessarily to sell and pay the taxes. (I’ve sold KO in my tax-deferred account; can’t bear to in my taxable account.) But my guess is that the stock is a bit “ahead of itself.” And that this may be true of much of the rest of the market.

That doesn’t mean it won’t continue to zoom, at least for a while. If you have a life-strategy of steady periodic investments in the market, in up markets and in down, don’t ever quit. It is a great life-strategy to have. But if you just got into the market in the last year or two, because it’s so easy to make money, I’d be getting nervous. What’s that? You say you’ve got a brilliant broker who’s done really well for you? It’s an old line but it’s true: everyone’s a genius in a bull market. Has he really done better than a monkey throwing darts? Oh — you’re planning to take some profits but are waiting till they cut the capital gains tax? You and quite a few others. Unless there are an equal number of people waiting to buy until they pass the tax break, it will be interesting to see whether, in the short-term at least, such a tax break doesn’t tip the balance from buying pressure to selling pressure.

One way or another, we will get to 10,000 on the Dow. And I am definitely not smart enough to know whether we’ll get to 5,000 first.

“You recently wrote: ‘There are some things everyone knows, so no one explains them, and you somehow know you’d look stupid asking, so you never find out.’ How true! For someone who’s never bought stock before, there’s really nowhere I can go to find out how the whole thing works. Say I open up an account at a brokerage firm. There’s a minimum amount of say, $5,000. Does that money have to stay there all the time, like a minimum in a bank account?”

[No. It’s more like a casino that requires you to show $5,000 at the door, but won’t kick you out as long as you have anything left to bet.]

“What if I only want to buy $2,000 worth of stock?”

[That’s fine. You’ll have a $3,000 cash balance — hopefully with a broker that pays some modest money-market rate on cash balances or sweeps your cash into a money-market fund.]

“Then you call in to buy 200 shares of Widget Co. at $10 each. They take a commission of $50. OK. So what happens? What do they do with the $2,950 you have left in your ‘account’?”

[See above. Only I would point out that $50 is 2.5% of $2,000, and another 2.5% if you ever go to sell, which doesn’t sound like much but — in percentage terms, anyway — is a huge handicap. I know you were just using $50 as an example, but especially with such a small stake, you should try to find a broker that charges a very low minimum commission. One day, when you’re making $40,000 trades, it won’t much matter whether you’re paying $15 or $50 or $150 to do it (though at $150, it does begin to mount up — why throw money out the window?).]

“Do they mail you 200 certificates that look like high school diplomas stamped with ‘Widget Co.’ on it?”

[Well, if they sent you any certificate it would be one, not 200 — one for the whole shebang, with the numeral 200 stamped on it. (When you want to pay someone $200, do you send 200 checks?) And yes, they used to send certificates if you insisted — it may still be possible to get them — but the only time I see stock certificates these days is at “scripophily” auctions. “Scrip” is a word like “voucher” that means “sort-of-money,” and “ophily” you know is Greek for “likes to collect,” which is why stamp collecting is philatophily, or would be if I got to decide these things. I have some wonderful old certificates with mermaids outspreading their arms, and all manner of pioneering scenes to conjure up railroads and steamboats. But no: you will not get a certificate, you will get a “confirm” — a computerized report confirming the details of your transaction. It will arrive in the mail a couple of days after the trade. There is not a hint of artistry to it. And don’t worry about losing it. It has no actual value. I don’t even save them anymore. You will also get a monthly statement, like your bank statement, showing every asset this broker is holding for you, your transactions for the month, your cash balance, any money you may owe the broker. (Brokers love to lend to you “on margin,” letting you buy more than $5,000 worth of stock, in this example, and charging you interest. For them it is a risk-free loan, because they are sitting on your collateral — the stock — and will “sell you out” if the stock falls far enough to jeopardize the security of the loan.) You should keep the monthly statement, just as you would your bank statement. Your shares will be held “in street name,” meaning the name of the Wall Street brokerage house, even if it is located in San Francisco or Omaha. Widget Co. will not know you own it unless you give the broker permission to disclose your name (or perhaps it’s the other way around — they will know unless you tell the broker not to disclose your name — but the point is you get to specify this when you set up the account), and your broker will forward to you Widget quarterly and annual reports, along with “proxy statements” asking you to vote your shares for the directors Widget recommends. Buy shares in several companies, and pretty soon you will need a larger mailbox. Should your broker go broke, meanwhile, you will be protected by the $500,000 of government-backed SIPC insurance meant to allay this fear plus, typically, $9.5 million more, privately bought. But of course the risk in all this is not that your broker will go broke, though that can happen (at which point your securities and cash will ultimately be made available to you, but you could suffer great inconvenience and possible additional losses as the prices dropped in the meantime), but rather that YOU will go broke buying the wrong stocks or getting the bug to play the “options” market or, God forbid, the commodities or futures markets. Of course, brokers are expected to “know their customers” and shouldn’t permit you to make some of the more insanely speculative bets without at least having you sign something saying that you understand the risks.]

“Or do they keep some kind of records for them and for you? I know I have money in the bank because they send me a statement every month, but what does owning stock look like?”

[It looks like Paris on a beautiful spring day, with young lovers smiling at you warmly on every corner — when your stock is up. Duluth in December when your stock is going down.]

[Incidentally, especially when you get a bit more money, you may decide to have your broker, in effect, be your bank. Most offer checking accounts and debit cards linked to your brokerage account, and this can be quite convenient.]

“What if you decide to switch brokerage firms?”

[You probably won’t. Not that you shouldn’t or that it’s hard — you just fill out a form the new firm gives you, and it takes care of sucking your assets out of the old account. But the inertia is just too great. If you’re with a full-service firm — a human you’ve gotten to know — it will make you feel yucky to fire her, so you won’t. If you’re with a discounter, you still won’t. For example, I don’t have an account at Ceres, even though it would save me money. I have had an account at Ceres’ older brother, Accutrade, owned by the same parent firm, since long before either Ceres or this web site was established. At Accutrade, the minimum commission is $48 [editor’s note: minimum commission on equities is $28 + 2 cents per share] instead of $18 — and my friends will tell you I am not exactly loose with a dollar. But you know what? Forms to fill out . . . new account numbers to memorize . . . I guess I ought to get around to it someday. If I traded actively, as some of you do, the difference would really mount up. But I’m a buy-and-hold kind of guy, by-and-large.]

“This is by no means all the questions I will have, just those that I can think of right now. Can you do a New-Investor 101? I feel silly asking, because it feels like if I have to ask, I have no business buying stock.”

[Ahem. Well, you said it, not me. Actually, nothing is more American than learning about the capital markets and building your own portfolio. It can also be fun. The prudent thing for someone like you to do is almost surely to make periodic investments in one or two no-load, low-expense mutual funds instead. It’s easy, and you’re likely to do better than if you did this yourself. But who said all this had to be logical?]

“Please leave my entire name and e-mail address out of your column if you decide to write about this. Please, decide to write about it!! Thanks. — XXXXXXXXX”

[OK, Ann_Honomuss@aol.com — oops! — I will.]

Summer’s in the air; time to write up the “house rules.” How else to share a summer place with 8 or 12 or 16 friends — let alone strangers — and survive? (Rule #1: “We don’t care that you only ate one yogurt all weekend; we split the food bill equally.”) Or if you don’t share, read on: rules are still needed. You have — or are — guests.

It doesn’t even matter so much what the rules are, so long as you have them. That way, there’s a common understanding and the lawyers in the house — there are lawyers in every summer house, even if they’re bond traders during the week — will have some basis on which to negotiate.

Also crucial: have the phone company install two lines (or no phone lines, but not, under any circumstances, just one line), and pay extra for the type of account that blocks outgoing long-distance calls not made with a credit card.

I no longer take a share. After years of doing so and watching the rent rise each year, I said to my friends, “Why don’t we just buy the house?” My friends agreed whole-heartedly, with one small twist. “You buy the house,” they said. “We’ll visit.” And they have been true to their word.

Which is fine, because, number one, they’re great friends; and number two, I get the good bedroom. Fair’s fair. But over the years I have learned a few lessons. Most important, I have learned that a good host lets his guests know what’s expected of them (and then, for the most part, stays out of their way). A really good host, I suppose, might expect nothing of his guests — might wait on them hand and foot all weekend and then clean their sheets. But my guests are friends, not visiting dignitaries.

The obvious thing to do would be to have a maid come each Monday. But that would mean watching the dishes and towels pile ever higher throughout the weekend, sleeping with it all Sunday night, and then sharing the house one day a week with the maid. Not for me.

So a system has evolved. For one thing, there is a “conversation piece” subtly attached to the living room wall to get guests thinking about their responsibilities. It’s one of those black felt-boards with white stick-in letters, neon having been hard to come by on short notice, and it says, at the top: “No Maid.” It also says “No Smoking” and it used to say “No Abrasive Cleansers” (someone found my box of stick-in letters and changed that to “No Abrasive Guests”), and it always says “Welcome” with the first names of all the guests, as if it were the Holiday Inn welcoming an out-of-state bowling team. But the main thing it says is: “Best Guest ’96: C.E.K.”

“Who’s C.E.K.?” people invariably ask, a little defensive, their competitive juices beginning to flow. “What’d he do?” “Mopped the kitchen floor,” I lie, inviting them with my eyes to take the bait. Amazingly, some do.

In fact, I had to stop telling the truth about what C.E.K. did, and resume rotating the initials every couple of weeks, because I found that when I was truthful (what C.E.K. actually did was arrive one weekend with copper tubing, fixtures, and a soldering iron and install a dual-nozzle outdoor shower), everyone realized they could never top that, and so lost all interest in trying.

Each summer, I toy with distributing to each guest something a tad more explicit. Welcome! [it would say]. The following are a few things you should know to make your weekend thoroughly enjoyable [for me]:

1. There’s no maid. Your room was made up for you by ______________, the previous guest.

2. Several guests have not been able to find the washer-drier. It is located in the laundry room. Note also that, though many try, it is actually not possible to wash and dry sheets and then remake a bed all within ten minutes of the last ferry.

3. It’s OK to take out the garbage — and to do so before it gets too full to tie. Taking out the garbage requires actually lifting the plastic garbage bag … [detailed instructions follow].

4. The red recycling container is for . . . recycling.

5. The dishwasher is located beneath the counter, to the right of the sink. Contrary to what most people have apparently been taught, it is not a good idea to fill the bottom rack with a single giant pot. Furthermore, when the dishwasher is full of clean dishes, that does not mean it can’t be used, just that you have to empty it first.

6. The little gates to the roof deck blow off their hinges if not latched. Yes, it’s not windy now, but it may get windy later, so please latch them. Or just leave the $200 it costs to get them fixed each time.

7. We are temporarily without a deck attendant. Therefore, it is OK to put the furniture back yourself after turning everything on end for a water volleyball game.

8. You are on the Fire Island side of Great South Bay. Thus, in reading the ferry schedule to determine your departure — all good things must come to an end — it is necessary to look at the right-hand column.

9. “Weekend” is a measure of time (from the English: weekend) generally thought not to include “weekdays,” another common measure of time.

I would never actually have printed up such a handout — better just to shell out the $200 each time the little gate blows off than risk losing a friend. But I can’t say it hasn’t occurred to me from time to time as I’ve been making up the beds.

(OK, OK, all right. Accuracy compels me to acknowledge that things have changed a little since I first wrote, but never had the nerve to publish, that. My better half has run roughshod over my need for privacy and engaged the world’s most expensive maid. But I still expect you to latch the gate and empty the dishwasher when you come.)

Writes Alan from Iowa:

“I hate to admit it but I am relatively new to the stock market, and I am confused (but it seems so are all the experts who disagree with each other). My parents knew nothing about the stock market. My dad worked hard but invested nothing in the market because he didn’t understand it and was afraid of it. He put his money in the bank and some rental property (which caused him no end of grief — renters always called to have that leaky faucet or broken screen door fixed “right away” at 6 AM on a Sunday morning). So when I sold my publishing business back in 1983 I put all the funds into CDs. (“All” being around $750,000.) At first it was great, but then rates dropped and of course I missed a great time to be in the stock market. (I saw it rising but put off diving in because we all know the line you’re standing in moves slower than the one next to you UNTIL you switch lines. <g>)

“Then around 1991 I started reading two great books – Making The Most of Your Money, by Jane Bryant Quinn, and yours. I took the plunge, put 5%, then 10%, now roughly 40% of my “nest egg” into the market and have been rewarded really well. I read and memorized and obeyed the “don’t time the market” mantra and “invest for the long haul” (which I am; I won’t need to draw out that money to live on for 10, 15 years, maybe more) but now I’m told not to invest blindly but to “keep my eyes open” — but to what? The financial experts all say different things and, even more agonizingly, they all seem to make sense when I read them.

“I have my IRA money 100% in stocks now. The amount has doubled in the last 3 1/2 years, from $80,000 when I took it out of the insurance company to around $165,000 now (thank heavens I put half of it into Vanguard Index 500). A part of me thinks I should be happy with this phenomenal luck and take it back out, put it into 6 or 7% at the bank and let it ride for the next few years. Another part of me still can’t shake the “don’t time the market” saying I’ve tried so diligently to obey since “getting smart.” (With that “as soon as I do the line will start moving” thing in my mind again.)

“What would YOU do in my place? How would YOU stretch a $750,000 nest egg to live on for the rest of your life, if you were ‘only’ 43 and could live on $30,000 a year comfortably by buying smart, etc. as your book taught me to do?”

How about splitting your non-IRA money into thirds?

• a third in the Vanguard Prime Reserves Money Market Fund, into which you’d put your dividends from the other two funds, and out of which you’d spend your $30,000 a year;

• a third in the Vanguard Total Stock Market Index Fund, which might over the long run throw off 2% or 3% in dividends and 6% or 7% in growth to help keep pace with inflation;

• a third in the Vanguard Total International Index Fund, ditto.

Based on how you say you invested the $750,000 you got from selling your company in 1983, and the frugal way you live, you likely have upwards of $1 million now. Plus that $165,000 in your IRA.

With reasonable luck, you should have more than enough to withdraw the $30,000 a year you need — in today’s dollars — for the rest of your life.

I suggest Vanguard because the annual expenses it nicks you for are about the lowest around. In the investment race, that gives your horse the lightest jockey. I suggest a third in the money market, because that would give you enough to weather a long storm. I suggest splitting the rest between U.S. and international stocks, because that takes a good deal of the risk from the equation.

As for your IRA, I think it could make sense to take some tax-free profits and sit on the sidelines for a while, as you suggest, even though this will get me into terrible trouble with the “don’t time the market” people (of whom I am usually one). In the next recession (there will be one, although only economist David Bostian seems to be predicting it any time soon), interest rates could drop a bit further (good if you’ve put some of your IRA into safe intermediate-term bonds) at the same time as corporate profits and, with them, stock prices could decline. If we never have a recession, or stock prices never decline, good — you’ll be doing very well with your two Vanguard equity funds, and with the portion of your IRA you kept in stocks (and/or switched into international stocks).

It’s important to note that there’s no single right answer here. You should do what feels comfortable. One of the great luxuries of having a nest egg, and of living frugally, is not to have to worry too much about these things.

It’s also worth pointing out that you obviously have the talent to earn some more money now, if you choose to do so. Once you’re 70 or 80, still with the prospect of another 20 or 30 years ahead of you, your options will narrow. I know you’re not twiddling your toes in the lake [Iowa has no lakes, and I know from separate e-mails that this man’s hard at work pro bono]. But you still should consider earning a few additional dollars while you’re still young to increase your flexibility when you’re older. [OK, Iowa probably does have lakes, just as Kansas probably has hills someplace. But not many.] No rush, but keep your eyes open to the right opportunity. Do I sound like a fortune cookie? [Minnesota — now there is a land o’ lakes.]

One of my favorite New Yorker cartoons pictures a fearsome looking secretary sitting at a desk — don’t mess with this old battle-ax — and one executive rounding the corner, confiding to a visitor: “Miss Kessler is our poison pill here at Tolan, Merle & Fender.”

If you’re not sure what a poison pill is, read on.

From Debra Lavoy: “I own a bunch of stock in a company which made this announcement. Can you tell me what it means? Thanks.”

The announcement (which you should feel free to skim):

XXXX today declared a dividend distribution of one Preferred Share Purchase Right on each outstanding share of its common stock. Each Right will entitle shareholders to buy one one-thousandth of a share of newly created Series A Junior Participating Preferred Stock of the Company at an exercise price of $125.00. The Rights will be exercisable if a person or group hereafter becomes the beneficial owner of 15% or more of the Common Stock of the Company or announces a tender or exchange offer for 15% or more of the Common Stock.

The Board of Directors will be entitled to redeem the Rights at one cent per Right at any time before any such person hereafter becomes the beneficial owner of 15% or more of the outstanding Common Stock.

The Rights are not being distributed in response to any specific effort to acquire the Company. The Rights are designed to assure that all shareholders of the Company receive fair and equal treatment in the event of any proposed takeover of the Company and to guard against two-tier or partial tender offers, open market accumulations and other tactics designed to gain control of the Company without paying all shareholders a fair price.

If a person hereafter becomes the beneficial owner of 15% or more of the outstanding Common Stock of the Company, each Right will entitle its holder to purchase, at the Right’s exercise price, a number of shares of Common Stock having a market value of twice the Right’s exercise price. Rights held by the 15% holder will become void and will not be so exercisable.

If the Company is acquired in a merger or other business combination transaction after a person becomes the beneficial owner of 15% or more of the Company’s Common Stock, each Right will entitle its holder to purchase, at the Right’s then-current exercise price, a number of the acquiring company’s common shares having at that time of twice the Right’s exercise price.

The dividend distribution will be payable to shareholders of record on June 3, 1997. The Rights will expire in ten years. The Rights distribution is not taxable to shareholders.

So what does this mean? The short answer is that it’s a “poison pill,” designed to make it impractical for someone to pay you a bunch of money for your shares — much as they might want to, and much as you’d like to take it — if the company management doesn’t want to be taken over. It’s called a poison pill because if the acquirer did swallow your company, the mechanism described in the pill would be activated and make it a most unattractive meal.

A longer and more balanced answer, courtesy of a friend who is much better at this stuff than me, is that “poison pills force an acquirer to go through the Board of Directors in order to make the acquisition, instead of making a 51% acquisition of the Company, and perhaps giving the remaining 49% (usually the small investors) some junk paper to complete the acquisition once they’ve attained control. The pill forces the offer through the Board, so they can decide whether all shareholders will be treated fairly. The form of the pill has been determined by the case law surrounding the Time Warner and other deals in Delaware. [Once upon a time, Time Warner was offered $200 a share, if memory serves, when the stock was more like 80. Shareholders were dying to get their hands on that $200, but the directors, in their wisdom, “protected” them from this. You might think directors shouldn’t be allowed to act this way, but when you are incorporated in Delaware, as a great many public companies are, directors can do almost anything. The lawsuits over that particular incident helped lawyers refine the language of the poison pill.] It theoretically enables the Board to consider the full value of the Company over a ten-year period, and force an acquirer to pay up for that value.

“The truth is, these pills can have two effects. In the case of a Time Warner, they are used to entrench incompetent and venal management. In the case of a new, high-tech company, they can be effective in preventing a Milkenesque takeover by a bogus shell company. The trouble is, the investor cannot tell which it is in the case of her Company (if the lawyers have done their jobs correctly). In the case of heavily talent-driven enterprises, where the talent could leave in an instant, these pills are generally redundant. No one would attempt a hostile takeover of Netscape a year ago and throw out Barksdale and Andreesen. Today, with the product line more established, they might consider it (I doubt it, but it gives you a feeling for the range of consideration). In the case of a Time Warner, or a GM, you can easily see that the players in the executive suite have a lot less to do with the Company’s success. In these cases, the pills are designed to keep the G-IVs [$25 million private jets] flying.

“Without knowing the Company adopting the pill, its insider shareholdings and its business model and stage of development, it is hard to judge whether the pill is one designed to keep Beluga on the plates in the corporate dining room or one designed to protect minority shareholders in an attempted 51% takeover by an underfinanced and inferior entity. Clever, eh? Some of this concern is legitimate, fueled by the junk-led takeover attempts of the 80’s. Cash offers were made to 51% of the shareholders (generally institutions who knew where there certificates were, and tendered on time), and then some Chinese paper with an investment banking opinion was given to the remaining shareholders, once the new group had control. The remaining shareholders were generally small investors, who didn’t read The Wall Street Journal, or have a Bloomberg. This gave Management a great excuse to execute pills to protect themselves, while appearing to protect small shareholders. In some cases it is true, in some not. It is just hard to prove.

“The complicated preferred [described in this poison pill] is just a way of justifying a valuation of the target’s value in ten years time. The valuation needs to be re-set each year, and generally is, by the Board. No shareholder vote is required. Many of the big state pension funds, like Calpers, oppose these pills.”

*

OH NO, MR. CHO!

So I pass by Mr. Cho’s Sushi-To-Go last night, thinking I might tell him about his mention in yesterday’s comment, and to my horror see a “For Rent” sign in his window. Say it ain’t so, Mr. Cho! It was only the day before that I had trotted out of his place with 18 of the most delicious eel, tuna and salmon sushi, with no hint of disaster looming. But, yes, it seems that from all that fish slicing and rice twisting, this lovely sweet man has developed severe carpal tunnel syndrome and has to close up shop. I am bereft. And of course I feel a little silly recommending a place on the very day its “going out of business” sign appears. But maybe if enough of us stop by with good wishes, he will get well soon and come back. I hope so, Mr. Cho.

Tomorrow: It’s a Bird, It’s a Plane — It’s Lunch!

Gee, it’s great to be alive. You’re thinking that’s because the market is 7500 on the Dow, give or take, and — like the odometer that finally turns all its little dials to 00000.0 when you go those last 170 yards beyond 99,999.9 . . . delicious . . . the market is going to 0,000 just as the calendar is going to ,000 — it’s all coming together, in other words, neat and well organized, like the strands of a complicated plot.

But no, this is not what has me excited, although it certainly is fun to see one’s net worth inching up almost every day. Likewise, I’m happy to see the crime rate, welfare rolls and unemployment rates coming down, the AIDS virus yielding to science, the days getting longer and longer (if it keeps up this way through Thanksgiving, we’ll have nothing but sunlight), cigarette advertising under attack, decimal stock-market pricing on its way (it will shave transaction costs) — all that.

But the immediate cause of my good cheer is my root canal. I have wonderful news. It turns out — in the hands of a really good endodontist, anyway — root canals are just no big deal. All my life I have dreaded the possibility that one day I might need one. But having managed to avoid it until last week, I lucked out. I skipped the century or so when it was a procedure just this side of agony. Technology saved me, and just in time.

Seriously: this is one fewer thing for you to worry about. If you ever need one, take the time to find someone who specializes in root canals and then figure it will be only a little less convenient and comfortable than going for a haircut.

Tomorrow I’ll get back to money. But aren’t you relieved? Soon, I’ve read, they may be zapping tooth decay without need of drilling. Ah, brave new world. It’s stuff like this that makes you think the market’s not so overpriced after all. (And talk like that that makes you think it is.)

There is no connection here to sushi, but I had to find a way to get you to read a comment about root canals. (But if you happen to be on the Upper West Side of Manhattan, stop in for some sushi to go from Mr. Cho — the little hole in the wall on Columbus between 72nd and 73rd. "Hello, Mr. Cho," I say whenever I’m in town. He bows, I bow. He makes very good sushi, and if you live in the neighborhood, he delivers.)

Tomorrow: Poison Pills

Paul F. writes: “I have been extremely successful using a strategy of selling covered calls with IOM (Iomega). I bought at 32, doing a buy-write [buy the stock and simultaneously sell a call against it] and dropping my basis down to $29.50 a share. I continued to write covered calls as the stock continued to drop. My goal had always been to make 20% profit on the stock. My last covered calls were written when the stock perked up to 17, and that dropped my basis down from $14 a share to $12 (all commissions figured in). Now that IOM is up to $18 a share range, I might get called out. But, who cares? My basis is $12 and I would get $17.5 a share. That’s more than the 20% I originally wanted. If I don’t get called, I will wait until it perks up to 18.5-20 and write the $20 calls, lowering my basis again, and increasing my guaranteed profit margin if I get called!”

Do you see what he’s doing? He buys a stock and at the same time sells someone a call on it at a higher price. So if it goes way up and it’s “called away,” he misses out on the bonanza, but still has a nice profit.

In this case, when he first bought the stock at 32, his effective cost was only $29.50, because he was paid 2.5 points ($250 on each 100 shares) to sell (or “write”) the calls.

He probably wrote the 35 calls, giving someone else the right to buy his stock any time in the next few months for 35.

If the stock shot up to 60, he would have gotten only 35 for it — missing the extra 25 points. But he would still have done nicely: selling for 35 stock he’d bought for an effective cost of 29.50. Not a bad profit for a few months — 18.6% before commissions and taxes.

Of course, in this example the fellow buying the call for $2.50 would have done a lot better, exercising his right to buy at $35 a stock he could have simultaneously sold for $60, and realizing a $25 profit less the $2.50 he paid for the calls, commissions and taxes. With 10 calls, say, representing 1,000 shares of stock, that would be about $22,000 profit on a $2,500 speculation in just a few months.

But how often do stocks run up from 32 to 60 in a few months, and what are the chances you will catch them just before they do?

Options trading is a “zero-sum game” — for each winner there is a loser — less commissions and taxes. In stocks, everyone can theoretically be a winner, as the economy purrs along, throwing off dividends and perhaps even growing. In options, on average, everyone loses: it’s a less-than-zero-sum game because of the commissions and taxes.

Of course, as Paul describes, Iomega did not shoot up from 32 to 60 right after he bought it. Instead, over time, it staggered down, down, down. And every so often, when one set of calls expired worthless (pity the poor guy who did pay $2,500 for the ten 35 calls, hoping the stock would shoot up), he’d write another set, for another premium, at a lower price.

In his mind, his “basis” on the stock he had originally purchased at 32 is now down to 12. (I guess he’s been doing this for quite a while now.) But that’s not how it works for tax purposes. As Paul probably knows, each premium he receives for selling a call is taxable as ordinary income. His tax basis of $32 a share on the stock itself remains unchanged. So unless he’s doing this in a tax-sheltered account, one thing about this strategy is that it assures that much or all of any profit you make will be fully taxed. Between federal and state income taxes, that can be a big handicap.

(Someone who can compound $10,000 in a stock at 20% a year, untaxed until he sells 20 years later, turns that $10,000 into $383,000. Figure he’s in the 40% tax bracket, and that’s $230,000 after tax. The same person earning the same astonishing 20% but paying tax on it each year will have $96,000.)

And there are the commissions along the way, for buying the stock and then selling each successive crop of calls.

Still, there’s no question this strategy can work out OK — it has for Paul.

But what if the Iomega he had bought at 32 dropped to 16 within just a few months. Then he would have paid $32,000 for 1,000 shares (say), received $2,500 to write those first calls . . . and now what? He’s lost (in this example) nearly $14,000. He can write more calls, but before doing so he should recognize that doing so is really a separate decision. He may think of it as part of one long strategy, but each move is a separate gamble. Say, in this hypothetical, he had written IOM 20 calls when the stock was 16, getting $1,500 for doing so — but then the stock dropped to 8. Ugh! (He’d have lost nearly $6,000 more.) Or the stock shot to 30. Ugh! (It would have been called away from him at 20 — how much better he’d have fared if he hadn’t written that second call.)

You can construct endless scenarios, and for conservative types who nonetheless enjoy “action” and “the game,” writing calls can be a relatively sensible way to play. Kind of like going to Las Vegas and betting red or black at roulette, with small stakes. You can stay at the table a LONG time without losing much. If you’re lucky, you may even win, even though the house (commissions and taxes) makes that less and less likely the longer you play.

You may even have a special knack or insight that allows you to do better than the averages would predict. You may be a fairly consistent winner in this zero-sum game if you can identify stocks that will not fall too sharply. You’ll be getting premiums, you’ll be getting dividends (although dividend-paying stocks tend to be far less volatile than the Iomegas of this world, and thus to provide far lower premiums when you write the calls), and you may also get price appreciation as the stock gradually inches up over the years — or even if it shoots up and gets called away from you.

In other words, most of the time, you’ll make money. Once in a while, you’ll get really hosed. Good luck, Paul. You may just have the knack.

Personally, I only write calls when I have a stock I don’t want to sell (because of taxes), but which I think has really gotten ahead of itself. I haven’t done it much, and with only mixed success.