Author: A.T.

“I rolled money over from a profit sharing plan in a company I left into an IRA. At the time I knew little about investing and signed up with a gentleman who said he would manage it for 2% a year, and said that it should return 10% a year, based on his model forecasts. He gets the 2% every year, but the performance of the funds has been lackluster, which worries me because the market was doing the best it had ever done. I am 27 and plan to keep it in an IRA until I am 65. Would I be better off rolling the money into a self managed index mutual fund like Vanguard, and just forgetting about it?”

Yes! Two percent is a terrible handicap — like betting on a horse with a 400-pound jockey.

“This is no friend-of-a-friend story, this one happened to me! I received a wedding present from a friend, (let’s call him Mr. Perkins). It was a glass platter shaped like a fish. Inside the box was a card reading: ‘To: Mr. and Mrs. Perkins, From: Mr. and Mrs. Matthews.’ Apparently, my wife and I liked the platter more than the Perkins family did. We hung it up as a wall decoration. I resisted the temptation to hang the card next to it.” –Scott Flanagan

Well, see? That was just my point! The Perkinses were right to regift it to you! You like trout-shaped platters! They just should have paid closer heed to Regifting Principle #2.

From Simeon: "In June of 1983, my parents purchased $15,000 worth of Seagate, 750 shares at 19 5/8. They sold those shares at 6 1/4, losing $10,360 in the deal. In August of 1989 they received information about a class action lawsuit, but the letter said that nothing needed to be sent in at that time. Nothing else was ever heard from the lawyers, and it was assumed that the case was lost. My mother was watching the news one evening in 1995 and she heard about the class action lawsuit — and that it had been successful. She was very upset and called the law firm responsible for the suit. They sent her a claim form, but said they did not have her on record of being a claimant. She would be considered a "late applicant." We had never heard anything from them informing us before that we needed to send them anything! In August of 1995 we sent in the claim form, with proof of purchase. From there the case has been a dead end.

"Any help or advice would be greatly appreciated. If you help us in recovering any money, not only will you make two anti-smoking activists/professors very happy (they have your book on the shelf), but we’ll also send you 10% of it.

"P.S. Why am I, a 20-year-old college senior, pursuing this case for my parents? Because I think it is terrible what happened to them. They got burned as novices in the stock market by this company which didn’t disclose their financials honestly, and now they will never touch the market again. Hasn’t stopped me, though."

Sorry I can’t be of help — if the law firm that handled the class action isn’t helping, I can’t either. But at the risk of making you REALLY mad, and without knowing all the facts, I’d suggest that this may not be quite the case of good and evil it seems.

Investing in any small high-tech stock, as Seagate was back then, is risky. Had your folks held on, they would have made a big profit. The fact that they bought at a high price on the promise of a bright future — but then lost money when they sold at the bottom because there was a scary disappointment along the way — is not necessarily someone else’s fault. SEA’s future, as it turns out, WAS very bright — your folks were right to buy into its long-term promise.

The question, clearly: Did SEA purposely mislead people about that quarter’s results (or whatever). I have no idea. But I do know how hard it is to foretell the future of anything, let alone the profits of a then small disk drive company in a wildly evolving, zooming, competitive market. So maybe they were just carried away with their optimism — which did ultimately prove more than justified — rather than trying to bilk your folks out of money that should have been safe and sound in a speculative growth stock. Safe and sound and speculative growth stock are just not phrases that properly belong together.

The last thing to say, incidentally, is that — to my knowledge (which may be wrong) — SEA never lost such a suit; they settled one. The difference being that, in the real world, maddening as it is, innocent parties really do wind up settling suits frequently. (Of course, guilty-as-sin parties do, too.) If you can settle a $100 million suit for less than the legal costs to win it — and at the same time protect your shareholders from the outside chance of a crazy verdict (juries are not immune to being misled on occasion) and protect your management from having to divert attention from selling more/better disk drives, the logical thing to do, sadly, is settle.

It sets a very bad precedent, of course. And it offends our sense of justice. We want to know for sure whether the party was guilty or innocent — and have him pay through the nose if guilty and be fully reimbursed for the lawsuit if innocent. But in the real world, it just doesn’t work this way. (Nor is guilt or innocence in a matter like this always clear-cut. Where does optimism end and fraud begin?)

I really don’t know whether SEA purposely misled your folks. But if you’ve researched the company, you can see it was not exactly some total scam — it’s today grown to be, I think, the largest disk drive manufacturer in the world, or something like that.

(And how come you’re only offering 10%? The lawyers who sue SEA, et al, normally take a heck of a lot bigger slice than that! Which is one reason that, along with lots of good suits that should be brought, there seem to be even more that shouldn’t be, but are to extort a settlement.)

(And one last thing. If this is the settlement I think it may be — sorry I haven’t had time to check for sure — I believe the lawyers settled for something like 9 cents on the dollar, which would mean $900 for your parents, less a third to the lawyers. It amounted to maybe $3 million to the lawyers, but $600 to folks like your parents. So, if it’s any consolation, it’s not as if by missing a notice of the suit your folks left $10,000 on the table.)

I know this is a controversial topic. As usual, all comments welcome.

From J.C.: “Does offshore banking provide the financial privacy and competitive return it’s represented as doing? I am not interested in anything illegal or banking with drug lords, just like to have more privacy in my financial dealings without sacrificing returns. What are the advantages and disadvantages of taking my money abroad?”

I’m no expert in this, but the first disadvantage is that you have to check a box on your tax form saying you have foreign accounts. So there goes the privacy, or at least some of it. Second, you don’t have the FDIC standing behind your deposits. Third, there is not likely to be a meaningfully better return from a German or Swiss or Bahamian bank than from a U.S. bank unless you’re taking more risk. Fourth, the transaction costs for doing this, and the effort, may overshadow any advantages.

That said, some people do want their assets abroad, sometimes outright, sometimes in trusts, to escape creditors or lawsuits or whatever. But the idea’s never grabbed me.

See also: Offshore Funds.

Thanks to Dave Davis for these facts about America’s money (from a book called The History of Money):

• It’s printed on presses made by Germans and Italians.

• The average life span of a bill varies from eighteen months for the one-dollar note to an ancient nine years for a one-hundred-dollar note. A bill can be folded four thousand times before it tears.

• Nearly half the bills printed in a day are one-dollar notes, and 95 percent of the bills are used to replace worn-out bills. [Which, even if accurate and up to date, doesn’t necessarily mean our money supply is growing at 5% a year because . . . ]

• Coin and paper account for only 8 percent of all the dollars in the world. The rest are merely numbers in a ledger or tiny blips on a computer chip.

The “money supply” used to be an easy concept back in the days when money was money. But how much money is there in circulation today? Just by whimsically taking out a cash advance on your credit card this afternoon (hey, don’t: the interest rate is ridiculous), YOU create money and balloon the money supply.

Actually, with more and more transactions going plastic or electronic, one might expect the supply of physical money in the U.S. to shrink a little each year. Especially if we could get you to turn in those pennies (don’t give me “what pennies” — you know what pennies). But in fact, a good chunk of the money we print, especially those great new Ben Franklin $100 bills, isn’t printed for the U.S. anyway. It winds up serving as the de facto currency in many countries around the world. This is a good deal for us, because it’s kind of like . . . well, printing money. We don’t just give the Russians, or whomever, this money. They have to buy it from us by exchanging something worth $100 for each one. With dollars more or less as good as gold in places like Russia, our printing $100 bills is kind of like our being able to turn paper into gold. Ah, alchemy.

It’s not fair, exactly, but the rich get — or in this case, the richest nation gets — richer.

Just don’t try printing any on your own.

It used to be that sex and politics were the two hottest topics. Then, for many years, just sex. Now, clearly, credit cards and frequent flier miles are what get the bells ringing. Three responses worth sharing:

Martin Dauber: “Discover Card rebates up to 1% of purchases in cash at the end of the year. So the miles for your 20,000-miles-per-year reader must be worth more than the $50 annual fee plus the $175 or so that Discover gives back. On the other hand, VISA and MASTERCARD Gold cards offer certain product insurance. If this insurance has any value, this needs to be factored in. Our solution: Discover for most purchases. Gold card when we think we may need the extra protection from Mastercard’s Gold Protection. No miles!”

[If you occasionally have to fly without much advance notice, or without a Saturday night stay-over, miles can easily be worth anywhere from two cents to a nickel or more — i.e., 2% to 5% versus the Discover 1%. But if you’re invariably able to snag $279 round-trips, or can only travel during busy or “black-out” periods when the free tickets are unavailable, they’d be worth little more than a penny to you, so Discover would be just as good. — A.T.]

Jonathan Hochman: “Because of my business, I do a lot of traveling, spend a good amount on credit cards, and make plenty of international phone calls. My strategy is to convert these miles into US Savings Bonds. I know of one long distance company (AT&T) and one credit card company (Diners) that offer this type of reward. The conversion rate is between 1.25 and 2 cents per mile (I assume savings bonds are worth 50% of face value). This strategy may seem less effective than taking free airplane tickets, possibly worth up to 5 cents per mile. However, when I need airplane tickets, I can usually get a low price by shopping around, planning ahead, or else by using miles accumulated on actual flights. Free US Savings Bonds are free money. Who knows, I might even hold them for a while and earn tax deferred interest. A ‘free’ airplane ticket is a temptation to waste money on food, entertainment, rental cars, and hotels.”

Dorothy Mallonee: “Your column today was fine, as far as it went. But you ignore one of the simplest and best frequent flier programs around. Southwest Airlines’ Rapid Rewards program is based on trip segments, not miles. Every time a member flies one-way, she receives credit for one trip segment; a round-trip earns two trip segments. When the member accumulates 16 trip segments (flies 8 round-trips), Southwest sends her a free ticket good for a round-trip anywhere Southwest flies. I normally fly on business between Los Angeles and northern California (Oakland or Sacramento), but I often use my free tickets to fly from Los Angeles to Baltimore (to visit DC) and hope soon to fly from Los Angeles to Providence (to visit Boston or NY).”

[Oh, sure, Dorothy. Just wait til you see what a cab from Providence to New York costs!]

“Free tickets may be used by the member or given away; I often give them to friends or family members as gifts, and have given them to organizations to raffle off to raise money. I have seen advertisements for companies that will buy the free tickets for around $320, although I have never sold one and don’t know Southwest’s official policy on selling them. I once overheard a fellow passenger on a Southwest flight tell his companion that when he accumulates several free Southwest tickets, his travel agent will exchange them for tickets to Europe.

“Now for the part of the program relevant to today’s column: Southwest now has an affinity credit card tied to Rapid Rewards. The fee is $29 per year (waived the first year), and the member receives one trip segment for every $1000 she charges.”

[Aha! A free ticket thus costs just 16,000 dollar-credits, versus American’s 25,000, say. Of course, with American, you don’t have to take a cab from Providence.]

“Southwest also has other affinity arrangements with MCI (trip segments if you use their long distance or cellular service) and Hertz and Alamo (one trip segment each time you rent a car).”

[That works out to be a lot better than the 500 miles you typically get from the other carriers’ frequent flier programs for renting a car.]

“Between my flights, credit card purchases and car rentals, I now qualify for the Companion Pass, the ‘premium program’ which allows me to take the person of my choice free with me whenever I fly on Southwest, even if I am using a free ticket! Southwest’s routes now cover most of the continental US, and they are adding several cities per year. I know the Rapid Rewards program does not have the cachet of the programs of some of the international carriers, but it’s simple and gets you free trips fast. The major restriction is that the member must collect 16 trip segments within a year.

“I will admit that travel on Southwest is something of an acquired taste. You have to get used to the ‘airplane as bus’ concept, and long trips (e.g., LA to Baltimore) normally involve a couple of stops. And Southwest usually uses the ‘second’ airport (Midway in Chicago; Oakland in the Bay Area); that is often a blessing in disguise since the second airports usually have cheaper parking, and are often easier to get to and from. But Southwest has the best on-time record, and it’s actually kind of a hoot once you get used to it. I’ve flown United on my business routes a couple of times, and I’ll trade the Southwest peanuts and pleasantness for the surly United employees any day of the week!”

From Dana Nibby: "If index funds beat 85% of all other mutual funds, and there are 7000 mutual funds, this means 1050 funds (15%) beat or match index funds. What’s the time horizon for the 85% figure? And . . . of the 1050 funds which beat or match the index, are these largely the aggressive growth funds?"

When the market is going up, it’s the aggressive growth funds that tend to do better than average. When it’s going down, it’s the conservative funds that do.

Most funds, over time, do about average. It’s VERY hard consistently to do better. But then you have to subtract the sales loads many funds charge and annual expenses. Index funds have no loads and charge tiny expenses and so have a huge advantage. (In the investment derby, I’m fond of saying, the fund with the lowest expenses is the horse with the lightest jockey.)

As an individual stock picker, this is also your advantage in paying no annual expenses and seeking a broker that charges very slight commissions. (Counter-balancing this advantage is the amount of time and worry stock-picking can take, and the fact that you are pitting your part-time skills against some highly skilled, impressively equipped, full-time competitors.)

The longer the time horizon, the better the index funds will do. Why? Because of the 15% (or 25% — whatever) of actively managed funds that do manage to beat the market by enough to more than overcome their expense handicap in any given year, study after study shows that few do so consistently; i.e., the ones in the 15% this year may do poorly next year.

(Index funds also subject you to less tax, because they tend to buy and hold. In a taxable account, that gives them yet another strong edge over actively-managed funds.)

So if you take the mutual fund route, you should not feel dumb betting on a couple of index funds rather than trying to find tomorrow’s outperformers.

Monday: The Money or the Miles – Part II

“It seems germs need help,” writes Gabriel Rotello in his new book, Sexual Ecology, which examines the spread of the AIDS epidemic and draws the not very startling — but important — conclusion that wild promiscuity, be it gay or straight, provides precisely the help HIV needs to spread. (One reason marriage is so important to a healthy society is that it discourages promiscuity.)

But I knew that.

What I hadn’t known about was Egypt.

I do remember as a boy reading headlines about the Aswan High Dam, and all the controversy over building it or not building it, and whether the Soviets or we should provide the aid. This was shortly before Rachel Carson’s Silent Spring, which launched the world’s environmental consciousness in 1962. And so here I am decades later reading about this dam, and what actually happened with respect to, of all things, the snails.

I don’t think the snails had even been considered back when plans for the Aswan High Dam were under way. Yet today, reports Rotello, 58% of rural Egyptians are afflicted with schistosomiasis, a “nasty debilitating parasitic disease” which produces “weakness, weight loss, lassitude, and decreased resistance to other diseases.”

Why? The snails. And hence the dam.

“The immediate cause of schistosomiasis is a parasite called a schistosome, whose immediate hosts are snails that thrive in slow-moving streams and stagnant ponds. Each infected snail can produce thousands of male and female sporocysts that swim out into the water, free to infect any humans they come into contact with. Once those sporocysts infect their unfortunate human hosts, they migrate to the heart, lungs, and liver, where they mate and reproduce.”

For thousands of years the snails were kept in check because the Nile moved swiftly and because when it flooded each year, it deposited silt — and snails — on the land. As the water seeped into the ground and the puddles dried, the snails died. “So there was schistosomiasis throughout the ages in Egypt,” writes Rotello — they can tell that from mummies and hieroglyphs — “but apparently not very much. Indeed, it’s doubtful that Egypt could have sustained its millennial glory if a majority of its people had been stricken with such a debilitating disease.”

And then they built the dam, “the greatest engineering project in North Africa since the pyramids.” The annual floods were replaced with “thousands of miles of stagnant irrigation ditches, canals and holding ponds, covering the length and breadth of the country.” The snail population exploded and, as I say, 58% of rural Egyptians, who routinely wade in the irrigation projects as part of their work, are now debilitated.

All things considered, was the dam worth it? Conceivably, depending on how you weigh various factors and how soon, if ever, you believe a cure for schistosomiasis will be found. But to those of us who scoff at the notion that economic and population growth really could come back to haunt us — that the ozone layer really may be disappearing or the globe warming — these snails, and the 58% of rural Egyptians with parasites reproducing in their hearts, lungs and livers, are a cautionary tale.

10. You’ll laugh until you cry.

9. What better gift for “the man or woman who has everything” than a book called MY VAST FORTUNE?

8. What better for the man or woman who wants everything?

7. You can go to www.amazon.com and get half your Christmas shopping out of the way right now — it hasn’t even hit most stores yet and they’re taking orders at 30% off. Your donees will be thinking they got $23-plus-tax gifts, but they will have cost you only $16.10. A lot cheaper than a juicer. Even cheaper than a cheesecake. You can also get all hardcovers at 30% off at Barnes & Noble, but because they have (wonderful) stores everywhere, they have to add sales tax.

6. Yes, there will be a small charge for shipping, but think of the time you’ll save, and the wear and tear on your car, by not having to leave the house to shop. Did you know you are 198 times as likely to be injured while driving to the store to Christmas shop as to be stricken with carpal tunnel syndrome while browsing at an on-line bookstore?

5. You can write funny inscriptions on the flyleaf.

4. You can give it to your ultra-liberal friends to get them to be less knee-jerk.

3. You can give it to your ultra-conservative friends to get them to be less jerk.

2. You can read some of the same stuff you’ve read before. (Warning: Some of the words in this book have been previously read.)

And the number one reason to buy multiple copies of my new book . . .

1. No batteries required!

A friend of faithful reader Brooks Hilliard claims this happened to a friend of hers:

She had a wedding to go to, and needed a wedding gift. Aha, thought she, I have that monogrammed silver tray from my wedding that I never use. I’ll just take it to a silversmith and have him remove my monogram and put hers on it. Voilà, one cheap wedding present.

So she took it to the silversmith and asked him to remove her monogram and put the new one on. The silversmith took a look at the tray, shook his head, and said, “Lady, you can only do this so many times!”

True or not, it’s a great story. Herewith are my Principles of Gift Recycling:

1. Hey, waste not want not. If someone gave you a sweater you hate, the world is not better off feeding it to the moths. If it’s too much trouble to exchange for one you like, wrap it back up and pass it on.

2. If the donor is not present when you open it, open it very carefully, and just far enough to see if you’ll want to keep it. You may not even have to break the seal. Rewrapping becomes much easier. Just be sure there’s no possibility of a card or inscription or engraving concealed inside.

3. Make a note not to regift it to the donor or anyone the donor knows or might meet (cf: that Seinfeld episode).

4. It is the thought that counts. You are pleased by the thought Don and Dana Donor wanted to give you something — in that sense, the gift was entirely successful! What’s more, you own it. Don and Dana want you to get the most possible enjoyment out of it — which in this case happens to be the enjoyment of saving the $60 you were planning to spend on Ron and Rhoda Recipients, plus the enjoyment of not having to go out and shop or wrap, plus the enjoyment of knowing you are living light on the land, plus the enjoyment of getting that thing out of the house.

5. Cover tears in the wrapping (caused by clumsy unwrapping) with extra stick-on bows. A box of stick-on bows is a good investment. Better still to stock your own box with recycled stick-on bows from previous gifts.

6. It’s an old story but completely true: there are only one or two fruitcakes produced each year. They just get recycled.

7. Do not recycle perishable food gifts — or else recycle them very fast. The great thing about fruitcakes, of course, is that they have a shelf life of a thousand years — and a half-life about equal to uranium.

8. OK, let me say a kind word about fruitcakes. They can actually be pretty good. Some people do like them, which is why a few new ones do have to be made each year. But here’s another great recyclable: champagne. Most of the people who get it don’t really like it — we recycle it. And those two-foot Galliano bottles. Any really great-looking novelty liquor bottle is meant to be taken from the box, marveled at, replaced in the box, and recycled. (When was the last time you actually were asked to mix a Harvey Wallbanger?)

9. Gift recycling is one of the few areas in which it is generally OK to lie. If someone gives you a copy of a book you already own, there’s no need to say, “Oh, gee, I already have it.” Say, instead, “Oh, I’m dying to read that!” or, perhaps better, “Oh, I can’t believe it! I love that book — and then someone borrowed it and never returned it. I’m so glad to have it again! I keep meaning to buy it again and I always forget. Thanks so much!” Then wrap it back up, or add it to the pile of books you’re planning to give to the library.

• (Note. There is a world of difference between a lie and a white lie, and it is this: A lie is told for selfish reasons. A white lie is told primarily to spare the feelings or buoy the spirits of someone else. “You look great!” is a white lie. “I’ve never even heard of Bruno Magli shoes” is a lie lie.)

10. No, scratch #9. Bad example. Never recycle books. Books are the one exception. They should be bought and kept forever. Never lend a book to a friend. Never let your spouse read your copy — make him/her buy his/her own. Do NOT support the public library. And I want you to know that my saying this has nothing to do with the fact that I write books and get a royalty from each one sold, but nothing from each one read. (Well, great satisfaction, but no cash.) Have I mentioned lately I have a new book coming out?

Tomorrow: Top 10 Reasons to Buy (Multiple Copies of) My New Book