Author: A.T.

When New York magazine was swallowed up by Rupert Murdoch in early 1977, I joined a bunch of other writers, retrieved my few thousand dollars in pension money, and left. Knowing that the money would have to find a home under the shelter of an IRA or else be subject to taxation, I stuck it into Mutual Shares, a fund run by Max Heine and his young protégé Michael Price.

I was reminded of this recently when I got my latest statement. According to Morningstar, Price has compounded the value of that fund at the rate of 19.6% for the last 21 years. A dollar invested 21 years ago under the shelter of an IRA is now, therefore, nearly $43. My little stake (which had had the benefit of only 20 years’ compounding, not 21) is now a six-figure stake.

They say that “past performance is no guarantee of future results,” and I know this to be true for two reasons. (Fuzzy reasons, but valid I’m quite sure.) In the first place, the last 21 years in the stock market have been extraordinary. It can’t keep up like this. Second, if Mutual Shares did continue to compound at that rate, then 21 years from now, when I’d be forced to begin withdrawing from it, each dollar originally invested in my IRA would have grown to $1,839.

Lovely, no? But barring major inflation — which would at first knock stock prices on their bottoms but ultimately drive them higher to reflect inflated values — it just doesn’t make sense that this would happen.

One could parse all this in much finer detail (noting, for example, that Price recently sold out to the Franklin Group of funds, so that, for newcomers, Mutual Shares is now a “load” fund, and its not likely to enjoy Price’s management for anything like another 21 years). But instead I’d just like to point out two very general and somewhat contradictory “themes.”

First, one really should not expect nearly as much from the market in the next decade as in the last. Second, starting early with an IRA — or any form of saving — really does make sense. Twenty years will pass, and then forty, and if you’ve been socking away your $2,000 a year in an IRA ($4,000 now for you and a nonworking spouse), you will be SO happy you did.

Kids: are you listening?

It took 10,000 human generations for the world’s population to reach its first billion. World population now grows by an additional billion every twelve years.

There’s room, of course. If you can fit 2 million people onto the island of Manhattan, you need only pave and layer 500 such areas every dozen years to fit the extra billion.

But, at least for the foreseeable future, should the goal of our species be “quantity of life” or “quality of life”? Would a species a 20 billion mostly miserable beings be more successful than a species of six billion mostly happy, peaceful, healthy ones?

In some respects, the earth’s carrying capacity is for all practical purposes limitless. We certainly have enough silicon. But in others, given current political technology, we seem already to be over the limit. And regardless of political technology — the ability to distribute jobs and wealth equitably, without bloodshed — what do you do if people would like to visit Yosemite or the Pyramids or have a nice little home at the seashore?

Each additional billion people make the lines that much longer, the likelihood of being able to ski — or even see — virgin powder that much lower.

If this resonates with you, you might wish to become a member of Zero Population Growth, or even to mark November 13 on your calendar, the night of ZPG’s (expensive) 30th Anniversary dinner in New York. ZPG works with educators and legislators to try to raise people’s consciousness on this issue. Heck: if you’re going to teach high school kids exponents, you may as well use population as your example. Compounding can be as dramatic with people as with money.

“At this moment in time, in which no-load global mutual fund would you put your IRA?” — Susan R.

The one with the best 10-year record is the Scudder Global fund. And it has done so with significantly less volatility than the average fund. Riskier, but perhaps more rewarding: Scudder Global Discovery, which buys small cap growth stocks and has actually beaten Scudder Global over the past 1, 3, and 5 years (it doesn’t have a 10-year history).

Another interesting one — I have my friend Less Antman to thank for the research on all this, along with my Morningstar disk — is the Tweedy, Browne Global Value fund. It follows a Benjamin Graham approach. (Indeed, he was a Tweedy, Browne client for years.) This fund buys the cheapest stocks in the world as measured by earnings, book value, and cash flow. Or at least that’s the general idea. As a result, it’s one of the safer stock mutual funds in existence. It’s only been around three years, but Tweedy, Browne is over 75 years old and in its third generation of family members. In their private client accounts, they’ve matched the performance of Michael Price over his entire investing life (since 1975); namely, returning around 20% per annum with about half the downside risk of the market averages. The fund has more than $1 billion under management (and, like most funds that invest abroad, a rather high expense ratio — 1.6%).

As you know, a “global fund” is different from an “international fund” in that it can include U.S. stocks as well as foreign. (We are, after all, part of the world.) If it’s strictly non-U.S. holdings you’re interested in, consider American Century’s Twentieth Century International Discovery, which invests in small non-U.S. stocks. It has a $10,000 minimum, even for IRAs (and a steep 2% expense ratio); but its bigger brother, International Growth, invests in larger non-U.S. stocks and has a $1,000 minimum for IRAs (and, again, a steep expense ratio — 1.77%).

Other excellent global funds include: Janus Worldwide (best 5-year record) and T. Rowe Price Global Stock fund (run by the same managers as T. Rowe Price International Stock fund, recent winner of Mutual Fund Magazine’s Ironman award because of its 12th consecutive year beating the average international fund). Not to mention T. Rowe Price Spectrum Growth fund, which holds about 30% foreign stocks and some natural resource stocks, making it a useful global fund for someone who wants a bias toward U.S. stocks and a hedge against the risk of inflation.

Or you could just do what everyone else seems to have done as a proxy for global investing — buy shares in Coke. Unlike global or international funds, you can buy shares in Coke (and other American-based global companies) without giving up 1.5% or 2% a year in fees. But you know what? I don’t care that Warren Buffett owns Coke or that there are a billion-plus thirsty Chinese. At Coke’s current price, I think I’d go the mutual fund route.

“At what point do you take your losses? I’m the same stubborn and egotistical person you are and it’s not fun to take a loss (and if you haven’t sold: no loss!). My investment club purchased MLG at 7 (unfortunately, it was my presentation and they never let me forget it), so with your theory and mine and those Beardstown ladies, we kept purchasing more all the way down. This week I have to face them and the price of MLG has hit the magical number of 15/16. Translation: for the price of 7 CD’s you can own 100 shares of stock. So would you have sold at say a 25% loss or at what point would you reassess a stock?” — Janelle

Clearly, this is a CD problem. You paid $700 per 100 shares of this stock, which now could be traded for seven (rather cheap) compact discs. What you were supposed to do was spend $700 on a stock that could one day be traded for seven $1,000 certificates of deposit. This is EXACTLY the kind of mistake Roseann Roseannadanna used to make, and while funny on “Saturday Night Live,” it has no place in your investment strategy. The market is not even open on Saturday night. Is this an investment club or a bunch of gals who get together with a few six packs to watch TV?

Of course, to say that I have made the same mistake myself many times would barely begin to express the depths of my empathy. I bought 500 shares of one stock at $4 (the underlying real estate alone, the expensive research report disclosed, was worth $5) that has by now led me to own so many shares at three-sixteenths bid, nine-sixteenths asked, that (a) I now own nearly 1% of the company and (b) if it ever struggles back to a dollar a share (it was once $153), I will be rich beyond imagining. Or flush, anyway.

So I feel your pain.

But I know nothing about MLG, other than it seems to be the symbol for Musicland Stores, which must be how you got confused about the CDs. If they’re selling seven for $93.75 (the value of 100 shares at fifteen-sixteenths of a dollar per share) — or $88 plus tax — that’s the first problem. They’re selling them too cheap. No wonder the stock tanked.

That concludes my knowledge of and opinions on MLG. Why not sell it for the tax loss and buy an equivalent amount of some other wild speculation like the one I’m stuck in? Common decency (not to mention embarrassment) prevents me from naming it in public. But there are loads of ridiculous under-a-buck speculations out there. If you can’t find any on the New York or American Stock Exchanges, just head up to Vancouver. Any one of them should serve to complete what seems to be your journey, on this particular flier, toward a total loss.

The real answer? Reassess whenever something major changes, either in your company itself or in the world that would affect the company (or, of course, when the stock price hits your target). And, tax considerations aside, sell when you no longer think the stock represents compelling value. It’s as simple, and as difficult, as that. Maybe you were wrong about this company, or maybe something happened that you didn’t foresee.

Then again, I remember when Compaq first came out at $10 — pre-splits — and fell to $3 not too long afterward. Holding on would have been a very, very good idea. So if for some nutty reason you think Musicland might be another Compaq, double up your position now, wait 31 days, and then sell the original shares for a tax loss.

• If you don’t wait, the IRS will disallow the loss as a “wash sale.”

• If you don’t double up — that is, if you sell now, wait 31 days, and then go to buy it back — the stock will have quintupled in the meantime. Don’t ask me how, but Mr. Market knows and takes special pleasure in maneuvers like that.

PS – One reason to take a tax loss on MLG is to shelter the gain from some other stock your club might have in mind to sell. Is there anything, with the market having risen six trillion percent in the last fifteen minutes, you feel might no longer represent compelling value?

Ford is sponsoring Schindler’s List on NBC this Sunday night — uninterrupted by commercials. When was the last time you saw three hours of commercial-free television?

I tell you this in part, of course, because it’s a wonderful film.

But what jumped out at me is that the sole sponsor is Ford. The original Henry Ford, as you may know, was anti-Semitic.

I’m sure he would never have gone so far as to condone Hitler’s policies. But what I had long assumed was just a casual bigotry on Ford’s part, backed by little actual thought on the matter, was in fact something bordering on obsession. I mean: he was really anti-Semitic. Hugely anti-Semitic.

I know this because one of the items in my little “historic documents” collection is a collection of newspaper columns financed by Henry Ford that appeared in the Dearborn Independent in 1920 and 1921. Reprinted in book form at his expense — four volumes — it is entitled THE INTERNATIONAL JEW: The World’s Foremost Problem, and inscribed, in his hand, “From your friend, Henry Ford.”

Hitler had Ford’s picture hanging on his wall.

One of the things that’s always struck me is how people are rarely all good or all bad. I like to think that — George Wallace-like — Henry Ford might be up there looking down (unless the standards are pretty high, and he’s down there looking up), thinking, “Well, I was wrong about that one. I’m glad my company has chosen to sponsor this movie.”

Monday: When to Sell?

You won’t get a lot of management tips in this space, because I’m a lousy manager. (Well, one tip: be sure the withholding from your employees’ wages gets to the IRS on time. Oops.)

But I’m on a plane from Jackson Hole, Wyoming, where I was the only human within 500 miles in a blue blazer carrying a loose-leaf binder — everyone else was in a North Slope something or other, carrying ski poles or antlers — and I learned something that may be old hat to you but made my eyes widen. (“Why didn’t I think of that?”)

Have you any idea how geeky it feels to walk into the world famous Cowboy Bar in a blue blazer? But this has nothing to do with what I learned.

I was there to interview Foster Friess (pronounced “freeze”), who manages the highly successful $11 billion Brandywine Fund. (It has a $25,000 minimum and very high turnover, so it’s out of the reach of small investors and — in my view — poorly suited to taxable accounts despite its remarkable record. But Foster sure has done well for the Nobel Foundation, among others. If you should ever win the Peace Prize, you’ll be getting a good deal more dough than you would have without him.)

Foster is a piece of work, in the best sense of the phrase, but that, too, is another story, which curious readers will have the opportunity to watch on Public Television in the fall. To be called BEYOND WALL STREET: The Art of Investing, it is being directed by the same fellow who directed CIVILIZATION (not to put the two undertakings in exactly the same league).

Anyway — leaving Foster’s investment insights ’til then — I wanted to share one of his management innovations. He has about 60 employees in Jackson, in Delaware, and in Phoenix. They tend to be highly competitive people. One we filmed is a top-notch stockpicker Monday through Friday and the world’s fourth ranked stunt pilot on weekends. She’s amazing. Another is a downhill racer. Yet Foster wants them all to be a happy family and to share their insights and ideas.

How do you get that to happen?

One way he does it is through administration of the bonus pool. The pool — which can in some years amount to 400% or more of base pay, so it’s taken very seriously — isn’t divvied up by Foster. It’s divvied up by the employees themselves. At the end of the year, Foster asks each to fill out a form showing how THEY would split the pie (themselves excluded). He then more or less averages their responses.

Think about it. All year long you know that your bonus — which can be the bulk of your pay — will be decided by your colleagues. How likely are you to be backstabbing or sarcastic? How likely are you to want to go out of your way to be helpful and constructive?

I’m no management guru, but it seems to me this scheme (which includes everyone from the receptionist up to the most senior people) sends incentives that are pretty much win-win.

Any comments from those of you who know a lot more about managing, and being managed, than me?

Listen: I planned on writing little daily comments in this space like, “Neither a borrower nor a lender be.” Fortune cookie kinds of things. But as those of you who can’t figure out how to delete this site as your “home” URL know, I can’t shut up. Partly that’s because it’s easier to write a long piece than a short one. (Franklin spent months working on “Neither A Borrower,” as it was known, for short, around his shop.) And partly it’s because I can’t shut up.

So I hope you will forgive one that really is short (especially after yesterday’s monster). Indeed, it may become a monthly feature, because I love cartoons.

The one I wanted to share is by The New Yorker’s wonderful “Levin.” It shows two perplexed middle managers standing behind a computer. At the keyboard is a man — who is apparently something of a mystery — pecking away.

“I haven’t the slightest idea who he is,” says one of the onlookers to the other. “He came bundled with the software.”

Too slim? Hungry for more? OK, chew on this for awhile (not original with me, of course, anymore than the cartoon): 111,111,111 times 111,111,111 equals 12345678987654321. Never mind waiting for all the little dials on your odometer to rollover to 100,000 — there is a number worth waiting for. (If only McDonald’s had kept counting one by one.)

Quite a few of you responded to the two comments on Social Security a couple of weeks ago. One of the best and most straightforward questions came from James Griffin:

I wonder if you could give us some FACTS about how the current trust fund (ha!) is invested. I had thought the Gov issued some special IOU’s paying about 1%. However, some pundit stated in a recent news column that the fund was making 8%. At 8% we should be rolling in it? Yes? What is the real rate, if any?

There is good news, bad news, and good news — all of it rather important to understand.

The good news: Yes, Social Security is finally salting away some money as “reserves” for the looming Baby Boom generation. That money — about $70 billion this year alone — is invested in “special” Treasury securities of varying maturities that are actually special only in one important respect: the Trust Fund can redeem them “at par” — 100 cents on the dollar — any time it wants, to pay benefits. (That’s a nice feature. If you or I wanted to cash in long-term bonds early, at a time when interest rates had risen, we’d lose money, because they’d be selling at a discount.) As of the most recent annual report, issued in April 1996, the average interest being earned on the accumulated reserve was 7.8%. Since then, new funds have been invested at somewhat lower rates, because interest rates have fallen, so when the new report comes out in a few weeks, the average interest rate being earned by the whole pot might have slipped to around 7.5%.

I know that in a world of huge increases in the stock market each year, 7.5% must seem paltry, but actually — historically — it ain’t hay. The more typical, long-term return that can be expected from the stock market (dividends plus price appreciation) is around 9% or 10%, and there have been long periods when it’s been lower. (Did you know, for example, that the market was no higher in 1978 than it had been 14 years earlier?)

The bad news is that what you may have heard is true: when politicians talk about “balancing the budget” in 2002 (or whenever), they are including as “revenue” the excess Social Security taxes being set aside as reserves for the future. In other words, that money is being double counted. In 2002, if the budget does indeed “balance,” as Democrats and Republicans are using the term, it will still be in deficit by a projected $96 billion. (That’s the excess Social Security expects to collect in 2002 to augment its reserve.) So it won’t be balanced at all.

One can certainly get a bit hot under the collar at the lack of candor on this issue. I’m frankly surprised more hasn’t been made of it, except that I guess neither party feels it can convincingly blame the other for sweeping this under the rug.

The good news about the bad news is that impossibly large as these numbers are, viewed in context they’re actually not so bad. I know you’ll find that hard to believe, but bear with me a minute.

Let’s say we pretend to have a balanced budget but that, in fact, after being honest about Social Security, we’re actually running a $100 billion deficit, adding that much, year after year, to the national debt. Sounds awful.

But let’s say, also, that at the same time the economy is growing 5% a year — 2.5% inflation plus 2.5% real growth. What does that mean?

Well, it means that our national debt, $5.25 trillion or so now, would be growing by just under 2% a year ($100 billion is about 2% of $5 trillion), while the economy as a whole would be growing at 5%. And what does that mean?

Imagine a home you bought for $100,000 appreciating at 5% a year while the $80,000 mortgage you took to buy it grew at 2%. After 20 years, the home would be worth $265,000, while the mortgage would have grown to $119,000.

Naturally, it would be nice to have a house with no mortgage at all. But it’s a lot less nerve-wracking to have a $119,000 mortgage on a $265,000 home, I should think, than an $80,000 mortgage on a $100,000 home.

Run this out yet another 20 years and the home’s value is up to $703,000, while the mortgage is $177,000. A century later (just for the fun of it) — since one might imagine the U.S. economy really might be around a century from now, growing 5% a year, just as it was around a century ago — this hypothetical house would have grown in value to an astonishing $92 million, while the mortgage would be barely $1 million.

Really, when you think about it, so long as the debt is growing slower than the economy as a whole, it’s shrinking relative to the economy as a whole.

At the end of World War II, the National Debt was well over 120% as large as the Gross National Product (140% is the number that sticks in my mind). Then it got down as low as 30% or 40% (forgive me for not having the precise numbers at hand). Today it’s climbed back toward 70% . . . which is actually fairly low compared to most other nations. But the main thing is this: until recently, the annual budget deficit was so large, especially when reported honestly, without double-counting Social Security reserves, that the National Debt was actually growing faster than the economy as a whole. Big trouble. Lately, and even after admitting that the Social Security “reserves” should really not be counted as “revenue,” the National Debt has been growing slower than the economy as a whole. So we’ve begun the long, gradual process of shrinking the debt again.

That’s good.

Is it important to be “leaning against the wind” and, in all but recession years, have the debt gradually shrink relative to the size of the overall economy? I think so. Must it ever be paid off in full? Not really. Lots of healthy enterprises have some debt. Unless the U.S. economy is going to close up shop one day, it is perpetual, and can perpetually have some debt on its books.

So: it’s reasonable to be concerned and vigilant, but not necessary to panic. The sky is not falling.

Writes management consultant Jonathan Rotenberg (founder at 13 of the Boston Computer Society), who finds himself dating another management consultant from a competing firm:

“Two management consultants dating can be scary. We never argue; we just have facilitated conversations guided by conceptual frameworks.”

Whatever form your relationship, or future relationship, takes: Happy Valentine’s Day!

(And answer me this: shouldn’t cupidity have more to do with love than love of money?)

“A full service broker told me that the discount brokers make more on the spread than full service brokers. Therefore, the $18 to $40 price quoted is not the real price. Could you please comment.” — Barbara

Ah, just the sort of unbiased, straight-shooting selfless advice some full-service brokers are famous for.

I don’t want to appear to be shilling for Ceres, because I’m not. My own accounts are in three places: at a deep-discount brokerage owned by the same parent as Ceres, at one of the large discounters of the considerably more expensive Schwab or Fidelity variety, and at a well-known, full-service broker who gives me a big discount but still costs far more than a deep discounter. I’ve had a personal relationship there for 25 years, long before there were discounters of any kind. If I were starting from scratch, I might well have an account at Ceres or one of the other really-deep discount brokers and might well not have an account at a full-service broker.

But while it may — or may not — be true that some firms will occasionally do better in terms of “price improvement” than a deep discounter would, I’ve never seen anything that convinces me this is true. I could be wrong, but I believe the price advantages of deep discounters are dramatic.

And in a related issue, thanks to the S.E.C. in these last few Clinton years, some really important changes have been made to help split some of the hairs that were costing us investors a lot of dough. “Spreads” are being shrunk, and the basic “eighth” that used to dominate all trading is giving way to finer measurements that narrow transaction costs as well.

The transaction costs of trading — especially in a tax-sheltered account where taxes are not an issue — have plummeted since I opened my first full-service account, and even in the last several years since I opened my first deep-discount account. America’s transaction machine has become more efficient. We are getting a better deal.

Then again, if you believe as I do in buying and selling relatively infrequently, there comes a point where the difference in price makes very little difference. To someone who trades in and out all day, the difference between $15 or $50 (let alone $300) is huge. To someone who buys $25,000 of a stock and holds it three years, who cares?