Author: A.T.

Conflict of Interest: When you’re earning 5% interest in a money market account and paying 18% interest on a credit card.

User’s Manual: No one knows. No one has ever read one. (Not to be confused with the well-thumbed usurer’s manuals on the shelf of every pawn shop and check cashing store in America.)

Bond Yields: Moments in the market when bonds let other bonds go first.

Face Value: The extra price you pay for a bond with an attractive certificate.

Indentures: Only old folks buy bonds, so they need indentures.

Millionaire: Someone with a net worth of $5 million or more.

Tomorrow: What to Say to Someone With $5 Million

INVESTING 102

“I found your Investing 101 article interesting. My questions is: Once I have bought a stock, how do I place an automatic sell at a certain price?”
Regards, K4Group

It’s called a LIMIT order (if the stock’s now $30 and you want to get at least $40 for it) or a STOP-LOSS order (if it’s $30 and you want to sell if it ever trades at $20). In the first example, you instruct your broker to “sell at $40 or better,” either “for the day,” if you’re crazy enough to think it might actually jump to 40 by the close of trading that day, or “good-til-canceled,” if you just want to put the order in and forget about it. Long after you forgot all about this, your phone might ring with word that “you sold 200 WHATEVER at 40.” (And two days later you might then read in the paper that someone had announced an offer to acquire WHATEVER at $56, which could explain why it had been inching up to 40 on swirling rumors. Oops.) In the second example, you instruct your broker to “place a stop-loss at $20.” The instant it trades there, he then places an order to sell your shares — “at the market” — which might mean that you get $20, but quite possibly a bit less. (If a stock has been falling and you put in a sell order, you’re certainly not going to push the stock up.) If you own a lot of stock in a thinly traded issue, this makes little sense, because your sell order — 5,000 shares in a little over-the-counter stock that’s falling and often trades only 2,000 shares all day — could be executed at “distress” prices, with the market makers taking advantage of you.

PEROT — PEROT! — THAT’S HIS NAME!

I dissed what’s-his-name a little recently (not yet having heard that giant sucking sound he had predicted with such certainty), and several of you made some good points in return.

Jim Strickland: “I didn’t vote for Ross Perot but I did agree with a lot he said. I believe someone like him airing the ‘common man’ concerns helps prod the established politicians. I think Clinton has acted as Republican as he has because of people like Perot and Gingrich.”

This is undoubtedly true. But bear in mind that long before Perot or Gingrich surfaced, then Governor Clinton was co-founding and helping to lead the Democratic Leadership Council (DLC), a group of progressive democrats who were already criticized by the left-wing of the party as being too “Republican.” Indeed, it may be the discipline of the bond market, and Clinton’s appreciation of the need to appease it if the economy and jobs were ever to get growing again, that prodded him more than Perot or Gingrich.

Ronnie Pickus: “Since 1992, we have all come to realize the disaster that might have been if ‘what was his name?’ had actually been elected. To his credit, however, he should be remembered as a catalyst for changing SOME of the ‘politics as usual’ that preceded the 1992 elections. Since that time, some politicians have (hopefully) realized that there exists a LARGE body of disenfranchised people who, if they were to actually vote, might actually elect someone like what’s his name. After that, there would be real changes. (Nothing would get done, of course, with all the vetoes, filibusters, etc., but there would be changes — which might be fun to watch if it didn’t have the serious implications that it does.) Well, there’s always the year 2000.”

Tomorrow: Important Definitions

I recently wondered whether Coke could be worth 46 times trailing earnings. My guess was, and is, that the stock is “ahead of itself.” But to emphasize how much it is only a guess, consider this:

Coke is divided into about 2.5 billion shares, each selling for about $70. Call it $175 billion and change for the whole thing.

Is it not possible that 20 years from now, with 7.5 billion people on the planet, Coke will be able to earn an average profit of 3 cents a day from each one? Surely in “developed markets” people average more than one Coke-owned beverage per day, in one form or another (Coke, Sprite, Minute Maid, etc. — even Fruitopia is theirs, no?). And surely 3 cents — a number I picked out of the air because it’s small and because multiplied by 365 days it rounds nicely to $10 — is not an impossible net profit to make per quaff.

So what would that mean? It would mean profits of $75 billion a year, which at even 20 times earnings (say) — down sharply from its current high multiple — would yield a market cap of $1.5 trillion. For Coke’s market cap to grow from $175 billion today to $1.5 trillion over 20 years would be for the stock to grow at 11.3% a year. Not bad. And if Coke could earn a dime per capita, and get there within 15 years (a lot can happen in 15 years; it was just about 15 years ago that IBM brought out its first PC), then at 20 times earnings you’ve got a market cap of nearly $5 trillion and a growth in the stock from today’s prices of 25% a year.

So maybe Coke’s a bargain. Who knows?

Not me.

Meanwhile, in answer to someone’s question about finding historical stock quotes, I suggested www.quote.com. And that’s fine, but do you know what I just noticed? If you sign on to AOL (which I’ve not found as impossible most of the time as it’s cracked up to be), and if you choose Personal Finance and then Quotes and then Historical Quotes, you can get quite a range of back prices — charted by week or month, or “custom,” where you can set a date range of just a few days, one of which will be the specific one you’re after.

I didn’t check to see how far back the prices go, but I did check some of my harder-to-find symbols — foreign stocks and stuff like that, and was pleasantly surprised to see that they do come up on AOL’s free Quotes service, although only for current prices, not historical prices.

If you’re an AOL subscriber, or your daughter is, check it out.

Recently I answered a question about the value of the home-mortgage tax deduction. Basically, I said that while you should absolutely take it into account in calculating the true cost of home ownership (along with lots of other costs, like repairs and repairs and repairs), there is nothing magic about the mortgage deduction. You’re not a sap for not having one — because you can only get one if you borrow a lot of money. Sometimes that’s smart; sometimes it’s not.

It’s quite true that if you’re now paying $1,000 a month rent and could own a place for the same $1,000 — after figuring in all likely costs — then you should probably grab the house (and the mortgage deduction that helps to make the after-tax cost of homeownership just $1,000 a month). But only if you expect to occupy it for quite some time, because selling it a year or two from now, apart from being a huge hassle and source of potential anxiety, can easily eat up the first 10% of any appreciation you might be sitting on.

How long you’ll live there is just one of the imponderables that makes the decision to buy or not buy more art than science. You can calculate to the penny the “cost” in lost interest of withdrawing $20,000 from your savings account for the downpayment. But what if you were taking that $20,000 out of the stock market instead? You can compare the after-tax cost of owning the home with your rent today — but what would your rent be in five years? And how do you value the ability to complain to someone else when there’s a problem rather than having to fix it yourself?

Anyhow, what got me thinking about all this was a message from one of you: “If your correspondent wants to get a truer picture of his contemplated tax situation when buying a home, he should also deduct the standard (no hassle, no records) deduction he enjoys from any tax reduction he might enjoy after buying a home.”

This is a good point, especially for someone who may have a tax-deduction envy. To take an extreme (but not entirely unlikely) example, say you have no tax-deductible items today. You give nothing to charity, pay no state or local income tax, and so on. Yet you yearn for that tax-deductible mortgage. Well hold on, pardner! Right now you’re getting about a $4,000 standard deduction if you’re single, better than $6,500 if you file jointly — so the first $4,000 or $6,500 in mortgage interest and property taxes would be “wasted” as a deduction. That much you’re getting to deduct anyway. Say you file jointly, property taxes would be $2,000 and mortgage interest would be $6,000. You have $8,000 in tax deductions you didn’t have before. But you could have taken the $6,500 standard anyway, so all this really gets you is $1,500 more in deductions. In your bracket, maybe that saves you $400 in taxes. Something, to be sure, but not reason enough to buy a house.

So I repeat: there are lots of good reasons to buy your own home, and the tax deduction certainly helps you to afford it. But don’t feel you’re a sap for not taking advantage of it. Especially to those of modest means, it may be even less than meets the eye. Think of it this way. Right now, you get a $6,500 tax deduction without having to shell out $100,000 for a house.

We all know it’s a sin to park in handicapped spots, even though almost no handicapped people ever do either. If a disabled person comes to Home Depot to walk the miles of aisles and lug out several hundred pounds in purchases — my kind of in-bulk shopper — we certainly want to reserve a space near the door. What’s more, it makes sense to have enough handicapped parking spaces so that one is almost always empty, because the whole point is to have easy parking available for the disabled.

Fine. Home Depot may not be a place they make great sense, but I’m certainly in favor of the principle generally.

That said, there is another sort of handicapped "parking spot," to put it delicately, where the logic is a bit different. The ones for men — and I assume the ones for women — are wonderfully spacious. At airports, this gives you room for your carry-on bags and sometimes even your own private sink. Even if you have no carry-on bags, the extra space gives you a general feeling of freedom — of not being locked into a tiny cell.

Now, in case you’re horrified, let me wait no longer to present my thesis. Namely: It’s OK to use those handicapped facilities. At least 99% of the time there is not a handicapped person anywhere in sight, so whom are you hurting? And that 1% of the time when there is a wheelchair waiting in line, at worst you will keep the handicapped person waiting a minute or two. This is no great imposition, nor one most handicapped people would resent having to deal with on rare occasion just as the rest of us do.

So go ahead: give yourself a first-class upgrade. It’s no more selfish or thoughtless, as best I can figure, than using the handicapped ramps next to the stairs.

(Good taste requires that you roll your eyes in disbelief at the subject and thesis of this column. Fine. Jeer all you want. I would do the same thing. But secretly — in case you hadn’t already come to the same conclusion long ago yourself — I hope you will feel newly privileged.)

Tomorrow: How Much Is That Home Mortgage Deduction Really Worth?

One of you asks: "What’s the best site for historical prices?"

Good question. The best I’ve seen — don’t be shy about letting me know of even better — is http://www.quote.com. They have daily data going back to 1988 for individual stocks. I just registered for their trial period (for free), and I’m not yet sure what services of theirs will be free forever and what will require payment in the future. But I was able to get historical quotes for a specific date (adjusted for stock splits, importantly), for individual stocks for free. Just go to the QUOTES section, then the RESEARCH pull-down menu, then HISTORICAL.

This can be extremely useful when trying to establish the basis for stock you’ve inherited (the stock’s price on the date of death) or received as a gift (its price the day your rich uncle bought it, because if he’s living, his basis is supposed to transfer to you). It also appears that you can get the entire database back to 1988 for a single stock in comma-delimited form (great for statistical analysis) including open, high, low, close, volume for an absolute pittance ($1.95 for a single file). If you’re only looking for a file of daily data going back about a year or so, then http://www.i-soft.com provides it for free.

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.]