Author: A.T.

Sure it can.

But are we near the top of a mountain, about to go over the other side — or merely at the first base camp above the foothills?

And why a mountain? Why any ultimate peak? Why can’t the market just keep growing — with dips along the way — more or less forever? (Answer: It can. But, oh, those dips.)

You will notice these questions were not sent in by one of you. Your questions are generally a lot more succinct and your metaphors, more engaging. Still, aren’t these questions we all wonder about every time the Dow adds another grand?

(One thing to say right off the bat: 1000 points on the Dow ain’t what it used to be. Many of us grew up wondering if the Dow would ever reach 1000. When it finally did, adding another 1000 was a 100% gain. Today, an extra 1000 is about 14%. So one might now expect the Dow to rise 1000 points every couple of years, just in the normal course of things.)

Now, what I’m about to tell you is so basic we forget to think about it . . . or tell our kids. In case no one told you, or you’re dialing in from Albania, where there were no investors around for several decades to clue you in — read on.

Over the long run, two primary factors determine a stock’s price: its expected EARNINGS per share and the MULTIPLE people are willing pay for those earnings.

If people expect Ford to make an after-tax profit of $1 billion next year, and Ford is divided into 100 million shares, its expected earnings are $10 per share.

Now, what would you pay me for a share of stock expected to earn $10 a year?

“I’ll give you twenty bucks,” I hear one of you say.

“No, way, Cyberdude!” I say.

“Way,” you say. “For one thing, I won’t actually get that $10, the way I would from, say, a savings account. A bird in the hand is worth two in the shrub.”

“Piffle,” I say. “You do get part of it in cash, as a dividend . . . and you should be grateful you don’t get the rest — because that means you don’t have to pay tax on it! It gets reinvested for you by Ford management, very possibly better than you could reinvest it yourself.”

“Well, OK,” you retreat, “I’ll give you $50 a share.”

“Cyberdude, Cyberdude — you really are from Albania. Right now there are people paying nearly $150 to get $10 a year in earnings from long-term Treasury bonds. You expect me to part with $10 a year for just $50?” (A Treasury that yields 6.7% pays out $10 a year for every $150 invested.)

“Jzmlec!” you respond, reverting briefly to your native tongue. “You want $150? That is a multiple of 15 times the earnings! You want me to wait 15 years at $10 a year to get my money back? In Albania, we all went into a deal that promised to double our money every year!”

“Don’t give me ‘jzmlec,’ Genc.” (I actually hope to meet an Albanian civil rights activist named Genc in a couple of weeks. I expect he knows nothing of high finance.) “In the first place, you all lost 100% in that deal. We Americans are much smarter. Even those of us who bought Spyglass at 120 only lost 90% (symbol: SPYG). I personally lost 99% of my money in Kenetech, the highly-credentialed windmill company (symbol: KWND), but that’s still not 100% — and I got to ride it for several years.” (Some of my holdings are better viewed as amusement rides than investments — the longer the ride lasts, the more value I’ve gotten for my money.) “But I digress. The point is, Genc, I want more than $150.”

“Khlyep! Nyepryecz! That is riDICoolous. You think Ford as safe as U.S. Treasury? With Treasury, $10 guaranteed. For your shaky $10, I pay tops $95. Last offer. Take leave.”

“Genc, Genc, Genc. You totally miss the point. The Treasury bond will pay $10 for every $150 you invest. But just as the $10 is guaranteed not to go down, so, too, is it guaranteed not to go up. With Ford stock, you’ve got thousands of talented people working to improve profits. And if that weren’t enough, you’ve got inflation. Even at 2% inflation, car prices and car profits are likely to rise a little over time. So that $10 could well be $15 after a few years. How about $200?”

“Two hundred? Pfft!”

And around and around we — and thousands of others — go, debating the relative risks and rewards of various stocks, and of the stock market in general. According to the stock market, the ultimate arbiter of all such arguments, I would be crazy to expect Genc to pay me $200 for $10 worth of Ford earnings (just as he would be crazy to expect me to accept $20 or $50). Auto companies like Ford, being mature, cyclical, and faced with lots of competition, don’t sell at anything like 20 times earnings (unless those earnings have hit a trough in the cycle).

So that’s stocks. What will they earn; what multiple will those earnings command.

For the stock market as a whole, it’s the same thing. What will be the overall level of corporate profits; what multiple will investors assign those profits.

If U.S. companies as a whole are able to grow their earnings per share at 6% a year, on average, then U.S. stock prices should rise at 6% a year, if the multiple stays unchanged. For the Dow, that would mean adding about 400 points this year and reaching 10,000 in under six years. Dow 10000.

What’s been happening in the last few extraordinary, breathtaking years is that profits have been growing a lot faster than 6%, while at the same time multiples have been expanding, magnifying the good results further still. If profits double, the stock market quadruples if, at the same time, the multiple at which it sells expands from, say, 11 to 22.

In the Seventies, multiples were much, much lower because interest rates were high (why pay $220 for $10 in earnings when, with U.S. Treasury bonds yielding 15%, you need pay only $70 to get the same $10?) . . . and because people had forgotten how rewarding stocks could be. Today it’s just the opposite. Interest rates are low, and people have forgotten how risky stocks can be. And there are also the people piling into stocks, bidding up their prices, simply because “they have to” in order to reach their hoped-for retirement goals. The computer says they need to grow their money at 15% or 18% a year to reach their goals, so what other chance do they have? (Unfortunately, the stock market doesn’t care about your need, any more than the lottery does. Indeed, when it comes to investing, it’s usually the least needy who do best.)

The simple fact is that corporate profits very possibly will continue to rise more or less “forever.” There will be bad patches along the way — maybe even soon. Something awful or even cataclysmic could even happen. But it’s not unreasonable to think that our population, economy, technology, productivity and profits — just about everything, that is — will continue to grow. If the U.S. economy grows at 2.5% plus another 2.5% in inflation, that would suggest nominal growth of 5%. (Profits can grow faster than sales if profit margins rise — but that can’t go on forever. Math keeps them from rising above 100%. Taxes, labor, and competition keep them in far tighter check.)

But what of the MULTIPLE? Can that, too, continue to expand more or less forever? Emphatically: no. Just as interest rates can’t drop below zero, so is there is a limit — fuzzier, to be sure — to how high the stock-market multiple can sustainably go. It’s not reasonable to think that there are enough Albanians in the world to bid prices up to lunatic levels (you see how hard-nosed Genc has already become) . . . or, if there are, to keep them at such levels for long.

Most observers agree that the fun with the MULTIPLE is largely over. If you had the foresight, luck or resources to ride the great market multiple expansion that began around 1982, when inflation and interest rates started their long descent — congratulations. Long-term interest rates may yet have a ways further to fall. (From 1880 to 1965, there was never such a thing in America as a home mortgage at more than 6%. From 1925 to 1965, top-grade corporate bonds routinely yielded under 5%.) But the market multiple is at the high end of its range.

That means it’s likely to stay about where it is (very roughly speaking) — in which case earnings increases of 5% a year would mean stock prices rising at 5% a year. Or else it will fall — in which case earnings increases of 5% could mean stagnant or even falling stock prices for a while. And if you ever got falling earnings and falling multiples — the opposite of what we’ve had the last 15 years — watch out. It would not be pretty.

Of course, it’s all a great deal more complicated than this, which is why, fundamentally, I don’t have a clue. To the extent U.S. companies invest globally and reap vast profits from their operations overseas, the U.S. economy could grow slowly while those companies’ profits grow faster. (Just because a company is U.S.-based doesn’t mean all its profits come from sales that are included in the U.S. Gross Domestic Product. If they make stuff here and sell it abroad, yes. But if they own factories that make it there, no. Or at least I think that’s the way it works.) And to the extent companies use their profits not to pay dividends (the old-fashioned way to reward shareholders) but to repurchase their own shares (the new, tax-savvy way), earnings per share will grow faster than profits — because the number of shares shrinks.

And so on.

As is evident to any of you who are economists, I barely made it through Ec 1.

Still, I do draw these conclusions:

First, the market MULTIPLE is not likely to widen much from here — at least not justifiably (irrational exuberance is always a possibility). It could shrink a lot if fear or inflation ever returned. If it stays more or less where it is, and corporate profits rise more or less in line with the economy, the stock market will continue to climb . . . and the gains, even if modest in percentage terms, would seem large to us old-timers — 500 points on the Dow seems like a big deal.

Second, irrational exuberance is a possibility. Crowds have a way of going to extremes. People have seen how incredibly well stocks have done, and how whenever they do dip back toward a 10% correction, they quickly rebound with a vengeance. What’s the risk? In addition, you have the demographics of us baby boomers, finally saving for retirement, and shifting our money from “safer” investments into stocks (as I and so many others have long counseled). So there’s powerful momentum toward buying, and that drives prices and multiples up, too.

But these things can get out of hand and end very badly (witness: Japan). Or they can be moderated by a watchful force such as The Fed, which can serve as a sort of “governor” on the speed of the economy, so it slows down but doesn’t run completely off the rails. (Did you ever have model trains? Isn’t there an electrical device called a “governor”? Not for nothing is the Fed run by a Board of Governors.) Either way, stock prices will not rise at “above average” rates forever — of that I’m sure.

Which is why even someone like me, who’s spent twenty years trying to persuade people to put their really long-term money into stocks, “because over the long-run stocks always outperform ‘safer’ investments,” gets a little nervous when everyone seems to have come to accept that, and all the risk seems to have gone out of the stock market.

I’m going to get a real tongue-lashing from my friends who say — rightly! — “you can’t time the market.” But I nonetheless suggest that if you have all your retirement money in U.S. stocks, and you can make some changes without incurring taxes, I would consider doing so. A chunk of my own Keogh plan is in things like REITs (which are stocks, but essentially high-yielding real estate investments) and bonds (like the bonds of South Africa’s giant electric utility, ESCOM). After all, almost as well known as the tried and true advice about not timing the market is the advice about not putting all your eggs in one basket. And U.S. stocks — while magnificent and likely to do very well over the long run — are just one basket.

Next Week: The Star Arrives

“Forget the fact that this is a good idea,” says one of its most vocal proponents. “Washington is awash in good ideas. This is a BIG idea.” And indeed it is. In theory (I’ll get to that), it would amount to something like a $45 billion-a-year middle class tax cut — without adding a dime to the deficit. “It’s certainly the biggest tax cut we’re likely to see this decade,” said Senator Daniel Patrick Moynihan as he and Senators Lieberman and McConnell introduced last month what they’re calling the “Auto-Choice” bill.

Faithful readers of this column will know that I’ve long advocated auto-insurance reform. In a state like California — one of the worst, but only Michigan does it well — nearly two-thirds of the $7 billion consumers pay each year goes to lawyers and fraud (I speak here of the $7 billion that goes for the “people” portion of auto insurance, not theft or dented metal), and those worst hurt recoup, on average, just 9% of their actual medical expenses and lost wages from this $7 billion pool.

As Consumers Union said as long ago as 1962: the traditional auto-insurance lawsuit system “produces results which are so unjust, capricious, and so wasteful of both the policyholders’ and the accident victim’s money that most laymen find it hard to believe the facts when they are first presented.”

But the facts are true, and they affect YOU, if you drive. All that’s changed since 1962 in most parts of the country; it’s gotten worse.

Michigan, in 1971, was the first and last state to fix this system. A dozen others only thought they had. Massachusetts, for example, passed the first no-fault law in the nation. But the trial bar sabotaged it as they have, more or less, all the others save Michigan. In Massachusetts, all you needed to start the lawsuit game was $500 in medical costs. So guess what? Far from being a “threshold” to weed out minor suits, it became a target instead. How hard was it to build the costs up to $500? (When the threshold jumped from $500 to $2,000 in 1988, guess what? The number of doctor’s and chiropractor’s visits for the typical injury claim jumped from 13 to 30.)

But how do you beat the trial lawyers? When enough money is at stake — and for them, this amounts to billions of dollars a year — they will say and do whatever it takes to win their case. I went on at some length about that last year.

The answer just may be this bill, Auto Choice. At the press conference to introduce it (technically, reintroduce it — it began last year with Senators Moynihan, Lieberman, McConnell and Dole), not only were senators from both sides of the aisle stepping up to the mike, but so were Al From, who heads the Democratic Leadership Council, conservative Grover Norquist, and a honcho of the Perot party. The New York Times, USA Today and others have given it enthusiastic ink as well.

Here’s how it works.

States would be allowed (not forced) to allow (not force) consumers to give up their right to sue-and-be-sued for pain and suffering. If you chose to stick with the current system, little would change from today. Or you could choose “Plan B,” the “Personal Protection” option. In that case, you could still sue anyone for uncompensated economic losses (medical, rehab, lost wages), but not for pain and suffering.

Why would anyone choose Plan B? Two reasons. First, premiums would drop like a rock. The Joint Economic Committee of Congress looked at this and estimated that if every consumer in America chose Plan B, they’d save, in total, something like $45 billion a year on their premiums. (Of course not every consumer would. And in many states the trial lawyers would doubtless succeed in preventing consumers from having the choice at all. But theoretically: $45 billion a year in savings, or nearly $400 for every household in America.) Second, you’d be assured of swift compensation for economic damages even if you couldn’t prove fault, or the other car did speed from the scene, or there was no other car (you skidded and hit a tree).

As to the specifics of how it would work, basically, there are three possibilities:

1. If two “lawsuit” drivers collided

• If two “lawsuit” drivers collided with each other, they would sue each other just as today. Often they would get nothing, or next to nothing — but that’s just how it works today. It would be expensive — also about the same as today.

• This is the system almost everyone is forced to “choose” today. If you earn $7 an hour and would just as soon not buy into a system that pays defense attorneys $150 an hour to fight your claim, and plaintiffs’ attorneys 33% or 40% of the settlement plus expenses to pursue it, tough luck. All that’s built into your premium. You’d just better hope whoever hurts your child doesn’t leave the scene, can be proven to have been at fault (sometimes kids just run out between two cars), and has insurance — lots of it. Few accident victims are so lucky. On average, those with actual losses in excess of $100,000 recoup just 9% of their losses from this great, expensive auto insurance system of ours.

2. If two “Personal Protection” drivers collided

• By contrast, if two “Personal Protection” drivers collide, their medical, rehab and wage loss would come from their own insurer, just as a health insurance claim might today. Not every insurer would settle every claim fairly, but built into the law is a 2% a month penalty for delay (my idea, I’m proud to say), so the dynamic would change several ways. First, you’d have the choice of which insurer handled your claim. Today, the guy who hit you made that choice — and he may well have picked an insurer based solely on price, not service. Under Auto-Choice, you’d select an insurer you felt would give you a fair shake (which in turn would encourage insurers to compete more on that basis, to win business). Second, you wouldn’t be the insurer’s adversary; you’d be its customer. Not to say a lot of insurers don’t treat their own customers like dirt sometimes, too. But just as American Airlines treats its own frequent fliers better than it treats United’s (you’ve seen them: they’re the guys in the middle seats), so might insurers tend to try to please their customers. Third, insurers could no longer borrow at zero interest by stalling you. Now it would cost 2% a month. In their own selfish interest they’d say, “Hmmm. Money costs us 8% in the commercial paper market, so it used to make sense to borrow at zero, instead, from accident victims. But at 2% a month, or 24% annually — no thanks. The commercial paper market would be cheaper. And fourth, the vicious cycle of ill will would be broken, or at least weakened. Today, many people hate auto insurers — and with some reason. The rates are sky high, the claims handling is adversarial and in many cases outrageous. So people do things they ordinarily would not. Neck hurts? Sure it does! After all I’ve paid — overpaid, really — all these years, why shouldn’t I get my little $10,000 windfall like everybody else. (In California, people are three and a half times as likely to claim whiplash as in Michigan, where there’s no cash prize for doing so — only medical care and rehabilitation.) Yet the insurers are in a bind, too. They know statistically that most of the whiplash claims are faked — but there’s no way to tell which. So they treat everyone with suspicion, and they also have their eye on those zero percent loans.

• Removing victims’ incentive to defraud insurers with phony or padded medical claims, and removing insurers’ incentive to “borrow” from victims by stalling (because now the rate would be 24%), could go a long way to make auto insurance claims little more of a battle than most health insurance claims. There would still be horror stories — and consumers should be encouraged to shout like hell and, if need be, sue for bad faith, when there are. But by and large, the war would be over.

3. If a “lawsuit” driver collided with a Personal Protection driver

• What if you chose to stick with the lawsuit system and were hit by me, who had chosen Plan B? In that case, you’d make a claim against your own insurer, suing it, if necessary, much as you would today if I had been uninsured or underinsured and you had bought uninsured motorist coverage. (If you haven’t, incidentally, you should!) The other analogy would be two drivers who both happen to be covered by Allstate. With the larger insurers, obviously, that frequently happens. You wind up suing your own insurance company, not because you’re its customer, but because the guy who hurt you is.

• The amount you could recover would be based on how much liability protection you yourself had purchased (just as today it is based on how much uninsured motorist coverage you purchased, or else how much liability coverage I purchased).

One thought to remember: Anyone in this system who couldn’t at least get his or her uncompensated economic losses paid without a lawsuit would be completely free to sue for that excess, whether they had chosen Plan A or Plan B. It’s just the pain and suffering portion that’s handled differently, because under the current system, it costs so much in legal fees to administer and so much more in fraud.

There it is in a band shell. It would give you a choice. It would save you money. It would make our economy more productive. It would even do a little to improve auto safety. (Today, insurers can’t reward you much for buying a safer car, because it’s the car you hit whose occupants you are buying insurance to protect. But when the insurer knows it’s your safety its insuring, it has an incentive to give you a break for buying a safer car — which in turn gives you a reason to weigh safety a little more heavily in your decision.) Choice. Price. Safety. Feel free to send a copy of this to your congressman.

Tomorrow: Can the Market Keep Climbing?
Next Week: The Star Arrives

There was something very curious about the feedback to my thoughts on “Ellen” last month. It was 100% positive . . . at first. Then, after a couple of days, the positive ones stopped and there were a few pretty nasty ones. (Well only one really nasty one, with much talk about hamsters. The others prayed for my soul — and what’s nasty about that?)

I have no explanation for this. Do those less comfortable with this issue think slower? Have slower modems? I doubt it.

Four messages I particularly appreciated:

From Dr. Tom Novinger: “Although I consider myself politically conservative and am happily married with four children and am a pediatrician who subspecializes in the evaluation of children who are the suspected victims of abuse or neglect, I believe that your comments today were right on the mark. One of the great ironies of the homophobic people that you quoted in your column is that they know and work with (and probably like) gays right now but don’t know it. The joke’s on them. I believe that gay rights will become the priority in the next 10 to 15 years that black civil rights was in the 60’s. Already I see a much greater tolerance for and acceptance of gays among my own adolescent children as well as among the adolescents I speak with in my practice.”

From David Plumb: “Thank you! Thank you! Thank you for today’s great column. As one who is, as my lapel pin says, ‘straight, but not narrow,’ I really appreciated your calm and rational essay on “Ellen” and something of the reality of homosexuality. As a member of an “Open and Affirming” congregation of the United Church of Christ, I have come to a much clearer understanding both of the challenges gay people face, and the need for ALL of us to learn from and understand people who are not like ourselves. I’m not even sure that ‘Ellen’ is all that great a show, but I think no one who saw her interview with Diane Sawyer could believe that Ellen Degeneres has ‘chosen a lifestyle’ of homosexuality. My wife and I both just wanted to hug her!”

From a guy on Prodigy: “This straight ex-Marine, ex-high school English teacher now at 67 years of hanging out and watching offers KUDOS for your column today. More power to you.”

From “Jeff, a heterosexual”: “I’m sure you will receive plenty of hate mail and I just wanted to send a word of support. PS – Even if being gay were ‘(a) a choice’ — so what? So what if someone chooses it? This is part of the homophobe’s argument I don’t quite understand.”

There were a lot more like Jeff’s, worried about the hate mail, but as I say, I got only one nasty message — not to say I’m naive enough to think everyone else is cool with this.

(“Wow,” I wrote back. “Finally a negative response. I had almost begun to forget the deep residue of hatred out there. I don’t mean to offend you, but I remember that when I was a teenager, and trying desperately to hide how I felt, I was equally homophobic. I’m not suggesting you are fighting any of these feelings. But as you know, some of the worst gay-bashers are, in fact, simply trying to prove to themselves or others that they are not gay. Anyway, I hope you’ll try to keep an open mind. I can assure you whatever you may have heard about hamsters sounds every bit as unsavory to me as it does to you. Good luck . . .”)

There were a couple of cold but civilized notes (“I don’t care to know . . .”). And, finally, a couple of well-meaning religious messages like this one:

From Lewis Toms: “Consenting to illicit sex (everything other than a man loving his wife) brings destruction and misery to all parties; it is not love and care. You are attempting to deceive yourself and others by writing that no harm is done in a homosexual relationship. It kills your soul and body; as a result, all of society is harmed.

“I pray that God would give you a new heart and new understanding so that you will awaken to the truth that to escape eternity in hell, you must cease your sin and come before God and beg for His mercy provided through the shed blood of Christ who died and suffered in hell for all whose names are written in the book of life. Jesus is the standard for real love and care. Hoping the best for you . . . ”

I think Mr. Toms really does wish the best for me, and I wrote him a long letter back. But to my mind, of course, there’s quite a contradiction here. He wishes the best for me, but would like to see me abandon my happy, monogamous, long-term relationship for a life without intimacy. I think my soul and body are not being killed but rather nurtured by this happy relationship. And I don’t see what harm it causes society. I know it’s made my friends and relatives happy to know I’m happy.

But enough. In fairness to you (and Ceres), I don’t plan to make this a repeat topic, any more than I expect “Ellen” to be on the cover of TIME again. Still, like it or not, for the fifty or a hundred million Americans who have gay children or parents or siblings, bosses or employees, or who are gay themselves, this is an issue for the Nineties. And, from my perspective, most people, after some understandable initial dismay, are coming down squarely on the side of reason and goodwill. Hats off to every one of them.

As usual, your feedback is considerably more interesting than the original. Two examples:

A TAX-FREE WAY TO “TAKE PROFITS” — SORT OF

From Professor Dana Dlott: “You will laugh at this… it is so obvious, but I have found a way to take some profits with no tax consequences .. even in a non-retirement account! Start from the premise that I put $1000 every month into a non-tax sheltered stock mutual fund. After reading your column, I thought, ‘why not sell off $1000 of the stock and put it in my money market?’ Well, obviously this is no different from simply directing my next payment directly into the money market, bypassing the stock market entirely — except no tax liability. So readers who fit this description might consider directing their new contributions to the money market or bonds for a while as a way to ‘sell off’ stocks without paying capital gains taxes.”

G-II

From Todd J: “I really enjoyed your column about flying from DC to NYC on your friend’s G-II. My guilt restricts my pleasure a bit when someone loans me their jet — but my party spirit compensates just enough for me to be a mogul for a moment.

“My favorite solo passenger story:

“A college chum, Chuck, was called to Casa Pacifica in 1973 for an interview with Nixon. The interview got delayed; however, Chuck finally met the President and got approved to be Al Haig’s assistant. The delay, Nixon found out, meant Chuck couldn’t make my wedding rehearsal dinner on Cape Cod. Nixon’s response: ‘take Air Force One.’ And so he did, flying as the only passenger from California to Massachusetts. He made the dinner, with his pockets bulging with powder-blue matchbooks with a gold, embossed Presidential seal.

“Lord, Chuck was insufferable during dinner. Afterwards, he walked out to the end of a stone jetty and lit a cigar. Surprise, a rogue wave came along and washed him into Nantucket Sound. He returned to the ballroom of the Wianno Club, soggy and bent cigar in his mouth with his black tie still dripping — and announced that his ego had been tamed. Two days later, I got married.”

Tomorrow: “Ellen” Feedback (but just tomorrow, I promise)

From someone in San Antonio (geez: am I the only guy on the Internet with a first and last name?): "I read your book; therefore, I know how you feel about debt. However, I’ve read conflicting reports about the so-called ‘high debt load.’ And it puzzles me that one’s ability to repay debt is not given full consideration. For example, I’m able to repay with no problem, I don’t anticipate any job adjustments. Please shed light on this tortuous conflict of interest."

I’m not sure I understand the question, but I do understand the answer:

Not repaying debt only makes sense if you can earn more on the unpaid balance (after tax) than it costs (after tax) to borrow it.

Right? There can be exceptions. (You want to keep the creditor hanging, because he’s your brother-in-law and you just enjoy annoying him. You want to keep your options open, because you might need the money for something urgent and not be able to borrow again.) But basically, from a numbers point of view, this is it.

Paying 8% after tax on a loan makes no sense if you invest that money at 9% pre-tax — which is to say just 5% or 6% or 7% after tax (depending on your marginal federal and local income tax bracket).

Indeed, paying 8% after tax makes no sense even if you invest at 13% pre-tax, 9% after tax — because the 1% "profit" in this example is not worth the risk . . . and with any investment that returns 13% pre-tax, I promise you: there’s risk.

It doesn’t make sense to borrow at 8% to earn 9% unless that 9% is certain. (And what kind of schnook would be lending to you at 8% when he or she could get a certain 9% somewhere else?)

Sure, if you can borrow at 5% after tax (because you have a strong balance sheet and are in a high tax bracket), and have an opportunity to multiply your money tenfold in some risky venture, maybe it makes sense to take on a little debt to do it, rather than unload other assets that are illiquid, or that would subject you to high capital gains taxes if you sold.

The irony is that — from an investment point of view — it makes much more sense for rich people to borrow than for average folks. Rich people get lower rates because they’re less likely to default, because they "buy the economy size" (banks would rather lend a million dollars than a thousand), and because they’re in higher tax brackets (and itemize their deductions, which a majority of Americans don’t). So borrowing costs them less. Meanwhile, rich people generally have better investment opportunities available to them, are better able to spread their bets over multiple bets, and have the staying power to weather storms along the way.

So the people who should borrow are generally those who don’t need to, while the people who should not are generally those who must. Or feel they must. In some cases, if they really, really try, they can get out of debt — and it’s my aim to persuade them to try, because in the long run, not putting it on a credit card will make life 18% cheaper.

Some things are worth borrowing for: an education, tools, and sometimes a home. Not much else.

“Recently you wrote about the S&P 500 Index stock on the Amex. [Symbol: SPY, acronym SPDR, otherwise known as “spiders.”] I would like to know whether there is/are similar stock for the NASDAQ composite or other foreign market indices? Thank you in advance.” — Vichai Rojanavanich

So far as I know, there are two SPDRs and 17 WEBS, all traded on the Amex. The SPDR I wrote about (symbol: SPY) mimics the performance of the S&P 500. The other (symbol: MDY) — which may be an even more interesting choice now that the S&P 500 has had so many indexers piling into it — mimics the S&P MidCap Index of somewhat smaller companies. WEBS, meanwhile, are geared to mimic the performance of various single-country markets overseas. I don’t know of anything like this on the NASDAQ has just now.

Okay, okay, there aren’t any indexes on the Falklands or Newark — but wouldn’t those be the symbols if there were?

At the risk of repeating most of my earlier points, I think these “index stocks” are outstanding.

• Their low annual expenses are comparable to Vanguard for similar products. This gives them a hefty built-in advantage over actively managed funds, not to mention the tax advantages they share with index funds (i.e., they rarely sell, and thus rarely expose their owners to as much taxation as actively managed funds do).

• Unlike closed-end country funds, they are designed to keep premiums and discounts from developing, which gives you one fewer uncertainty to try to weigh. (Not that I mind buying country funds at a big discount. But buying them at a small discount is risky, because it could become big.)

• These index stocks also have the advantage of being marginable and shortable (or is that a disadvantage?).

My friend Less Antman opines: “There are, of course, brokerage costs for buying and selling these index stocks, but I think they make great buy-and-hold investments for IRAs. And WEBS, in particular, give one the chance to bet on certain countries. I may experiment personally with the ‘mean reversion’ data I’ve talked about — this notion that over time, strong outperformers or underperformers revert to their historic average performance. The current Journal of Finance reports a study that confirms that a valuable investment strategy may be to invest for the next 3-5 years in the countries with the worst performance of the last 3-5 years: WEBS are the perfect vehicle for executing this strategy. I’m going to figure out which 4 countries had the worst results over the past 3-5 years; I think Japan is going to be on the list and the United States isn’t!”

So maybe Japan and the U.S. will do a little “reverting to the mean” over the next few years, and Less will be the richer for it. This ties in a bit with what I was saying yesterday.

“And though I’m not the one to do it,” Less continues, “I wonder if there is a low-risk arbitrage available on the WEBS to buy one of the actively managed closed-end country funds selling at a deep discount (Germany comes to mind) and short the related WEBS stock. The problem is that these discounts often persist for a long time. Also, while waiting for the gap to close on a discount, the annual expenses and extremely high brokerage costs incurred by the actively managed closed-end product may eat away at profits. And those sickening rights offerings dilute shares as well.”

It’s an arbitrage, in short, Less is smart to recognize and even smarter to avoid. But not the WEBS and SPDRs themselves. They are a good deal.

Yesterday, in reviewing some of my birthday gifts, I told you why stock in Tiffany may have climbed so high (though not whether it would climb higher — I keep my record of predictions near perfect by making them all retrospective). But that was not the point.

I promised to stagger around today until I finally got to the point. So let me just tell you about a couple more birthday gifts first, which will eventually get us there.

From my partners in Moscow I got two amazing things. First, a matryuzhka, one of those great hand-painted Russian dolls-within-dolls-within-dolls. Only this one, far from having Marx, Lenin, Stalin, Khrushchev, Brezhnez, et al, inside each other — or even Bill and Al and Hillary and Tipper and Chelsea and Socks, or (my personal favorite) Homer and Marge and Bart and Lisa and The Baby — this one had a fat-faced lobotomized fellow on the outside whom, I slowly came to realize, was me. And inside me — me again, this time holding up a pack of Camels, as I once had in Russian TV commercials, saying “Nye Kuritye!”(Don’t smoke.).

However bad I looked (I looked bad), you’ve got to admit this is a pretty great gift.

The other thing I got from Moscow was a 5-minute video with actual news footage of the “Great National Celebration of Feeftief Burseday Andrew Tobash” (the narrator did his manful best). There were people marching in the streets, fanfare, amusing if suspect translations (could the people really have been holding up banners celebrating me?), sequences inside the offices of my little advertising agency, and finally a big “Kheppy burseday, Endi!” from my partners and all the employees. (We’re up to about 80 now; please let me know if you need a Russian advertising agency or have some computer graphics you’d like done on the cheap.) I was blown away.

And still I roam aimlessly, not even approaching the point.

It is time to home in.

Which brings me to my last birthday gift, the one I got for myself. (Oh, what the heck, I figured, you can’t always be a total tightwad.)

My surprise party had been held at the Sony building in Manhattan. (The printed invitation read, in huge letters, SUPRISE!, my boyfriend being a big-time designer but not a big-time speller.) It seems you can rent the Sony store after hours, slap some old home videos on 100 video screens, and crank up the band. Sony makes a little money on the rental and gets 200 potential consumers to troop through the sales floor on the way to and from the party. Smart, these Japanese. (And now, ever so gradually, I am finally getting to The Point.)

As one of those 200 potential customers, I got a glimpse of Sony’s shiny silver pocket-sized digital camera that stores up to 108 snapshots (108 good ones, because you can review and delete the bad ones as you go) on a single “roll.” Except of course there is no roll. It’s digital. You download the “shots” onto your computer and then print them out on your printer (or onto a special little printer designed to print near-professional-quality glossies specifically with this camera). Or maybe you don’t print them at all, you embed them in your e-mails or make them available to anyone who “clicks here.” (I have not yet learned to do all this.)

Yes, Kodak and Polaroid and a smaller firm whose name I forget have their own nifty, considerably less expensive models — I saw those at CompUSA and almost bought one. But Sony’s seems to take the cake (as for $850 it should). Among its dozens of clever little features is the rotating lens. Face it forward and you take a picture — as man has been doing since ancient times — of what’s in front of you. Flip it around and you take a picture of yourself and whoever’s standing next to you. This eliminates the age-old need to find some friendly passer-by to take the picture for you. What’s more, because you don’t squint into the viewfinder as you do with a traditional camera — you just look at the camera’s postage-stamp color video screen that you hold out in front of you (and doesn’t that take a little getting used to?) — you can get your face looking just the way you want it to before snapping the shot. Jim Carey could play with this thing for hours.

And, yes, it tells you when you need a flash, which is built in. The battery is rechargeable (and costs only slightly less than a trip to France). You can set it for “rapid fire” to shoot four frames in succession if you’re taking an action shot . . . and then delete the three that were too soon or too late to capture the instant bat hit ball. And more. It is, in short, amazing.

Which got me thinking: don’t count the Japanese out. Their economy and ours may have traded places somewhat — remember a few short years ago when the value of the Japanese stock market exceeded our own, and we imagined we would soon be ceding our global economic preeminence? But it’s never good to get cocky.

I love my new Sony camera. And around the same time I noticed some stories about Toyota’s aim to become the world’s number one auto maker, and how one of its new Lexus brands is outselling Caddy’s Catera two-to-one. (I like the Catera ad campaign. If my 1992 LeBaron didn’t have another five good years in it, I would seriously consider buying one.)

Not that Detroit is quite as important to our overall economy as it once was, or that there isn’t plenty of room for Sony success in a prosperous American economy. Indeed, it’s always important to remember that a healthy Japanese economy is good for our own, not bad. So we want lots of great Japanese products to buy here, just as we want the Japanese to take the money they earn from that and buy some of our great products.

Still, the point is just that, for those who assume there will never be another U.S. recession (economist David Bostian, who has an impressive and iconoclastic record with these things, predicts one beginning later this year), that U.S. corporate profits will never dip, that there will never be another bear market, and so on . . . well, just remember the economic news may not always be quite as good as it is today.

The future is wildly bright, to my eyes. But it’s not time to get cocky — any more than the Japanese were smart to get carried away a few short years ago when there was no cloud on their horizon.

I’m not saying we have gotten carried away, certain Internet stock bubbles notwithstanding (many of them already long since pricked), just that there is always that danger. Save for the future; live beneath your means; when it comes to investments, buy the best relative values, and don’t limit your horizon to the U.S. It’s a big wonderful world, of which we are only a big wonderful part.

A couple of weeks ago, I mentioned my surprise birthday party. It wasn’t actually a surprise; between one well-intentioned friend and another, I wound up knowing not just the date but the time and place of it in advance. I felt bad about that, because either I was going to have to disappoint people by not being surprised, or else I was going to have to fake it.

Drawing on decades of experience seeing friends’ movies and plays, reading their manuscripts, and going to their art exhibitions — most of which have been superlative, but not all — I finessed it pretty easily. “SurPRISEd?” I echoed incredulously, grinning and gaping, when asked by guests whether in fact I had been. “Surprise is not the WORD!!!”

But pretty soon I dropped that when I realized that, though not a surprise as to time and place, it really was, nonetheless, a complete jaw dropper. There’s my high school soccer coach! Clunk. There’s my partner from Moscow! Clunk. (By the way, this is the sound of my jaw dropping, in case that was not clear.) Oh, my God, there’s [a famous TV person]. Clunk. And on and on.

So it was a great surprise after all, and I’m still enjoying it, although that’s only 90% of the point of this comment. (There IS a point; you just have to be patient.)

Best card I got: “Why did the 50-year-old cross the road?” above a nice photo of a road. Open the card: “No particular reason. People your age tend to get disoriented from time to time.”

Best gift: Too close to call. I got a zillion terrific gifts (making any good liberal feel all the more guilty for his good fortune, but let us not veer there again), half of them from Tiffany. (Could this be the reason TIF is up so much from its 1995 low of 14-1/2? The dawning notion that all the baby boomers will now be turning 50 and that as they do, — millions and millions of them — Tiffany will be supplying half the silver clocks, silver key chains, silver bookmarks, silver business-card holders? Does TIF have farther to climb? Does silver? Who makes those blue bags and boxes?)

But this isn’t the point either. Come back tomorrow and I will surely have staggered around to it. (I’m sorry, I don’t usually do this to you, but people my age tend to get disoriented.)

Tomorrow: The Point

There was always the notion that, going into a bear market (not necessarily to say America will ever again experience one), it’s nice to own stocks that pay high, secure dividends — the dividend cushions the fall. Two reasons:

• Partly it does so simply by virtue of that quarterly check you get. A stock that drops 6% but pays a 6% dividend has, after a fashion, and after a year, broken even.

• More important, cushion-wise: for such a stock to drop by half, say, the dividend, if secure, would come to represent a 12% yield. Most of the time, stocks don’t pay dividends like that. Ergo, the stock will not drop by half — as without the dividend it otherwise might. The high dividend serves as a cushion.

Anyway, that’s always been the notion, and people seem to remember it. But in today’s environment, I’m sorry, I can’t help it — it makes me laugh.

Here is Dr. Stephen Leeb, in one of his newsletters, recommending Fannie Mae. “During rough markets,” he writes in part, “the company’s market beating dividend yield of 2.3% should support prices.”

Hello? Fannie Mae is a fine outfit, and its stock may be a buy under 41, as Leeb recommends. I don’t know. But the two things that jumped out at me were, first, that 2.3% is “market-beating” . . . and second, the notion that nervous investors would take comfort in that fat yield. The stock could fall by half, which would double the dividend as a percentage of the stock price, and still be yielding considerably less than Treasury bonds, real estate investment trusts (REITs) and utilities — less, indeed, than even tax-free municipal bonds.

So this isn’t a comment on Fannie Mae. But it may be a comment on what today passes for a market-beating dividend, and what that says about the market as a whole.

(In the very old days, stocks were expected to yield more than bonds, to compensate for the extra risk. I’m not sure that made a whole lot of sense, and it probably makes even less now. But it’s an interesting bit of history.)

Here’s what may be a great solution to the backup problem. I’ve never had a backup crackup myself, but picture it: all your records are on your computer, but your hard drive crashes. Ayeeeee! No problem? You are faithfully backing up to floppies every night? How do you think floppies hold up in a fire?

Many of you are far more computer literate and/or adventuresome than I, but for those who are not, I’d suggest your checking out www.connected.com and downloading the software and taking the free trial month. You don’t even have to give them your credit card unless and until you decide — as I did — to become a customer.

The basic cost is $15 a month, so it’s clearly cheaper to back up to floppies (which I do occasionally anyway) and then store those floppies under the cushion of the diner where you have lunch every day. Unless the whole town burns down, you should be OK.

But the advantages of www.connected.com are two or three or four. Maybe five.

• First, you can set it up so that it automatically backs up your data files every night when you’re asleep, or just Tuesday and Friday — whatever. Or you can do what I do: set it to remind you every time you leave Windows, so you can decide whether or not you want to do a backup. In short, if you’re someone who knows he should back up often but never does (you know who you are!), this solves the problem.

• Second, your data gets stored so far “off-site” that the fire would have to be of the Armageddon variety to destroy both your hard drive and theirs at the same time.

• Third, they have the capacity to send you back your data on a CD, which is a roundabout way of getting all your files onto a CD — and also a comfort if they should ever go out of business. Presumably, they’d at least do it gracefully enough to allow you to get a copy of all the data you had stored.

• Fourth, if you travel with a laptop, as I do, you can access your “backups” without having to fly home and grab the floppies from your drawer.

• Fifth, maybe you have a small group of whomever — a club, a family, a small business, a cult — and your mind glazes at the thought of installing a transglobal network. Well, if you give each member the encryption password, each will be able to access any or all of your/their backed up files.

The main drawback I see is cost — it will be $15 a month or more, so it’s not for people on a shoestring. (And even with this neat service, I still plan to back up to floppies once in awhile and print out my annual financial stuff at tax time each year.) Speed is another issue, but at 28.8, a great deal of data can be backed up in a fairly short time. After your first backup, only files you’ve changed get uploaded.

As between this system and a Zip or a Jazz drive (from Iomega), I prefer this. The 100-megabyte Zips almost became part of my life, except that I seemed to experience an occasional glitch — undoubtedly my fault. I just remember feeling inadequate and frustrated a few times. I may still pull them back out and start using them again. The Jazz drives, which store a billion bytes on a single chunky (if you’ve seen the little sucker, you know what I mean), are even more astonishing. But only after I bought two, one for each place, did I realize that, unlike the Zips, they require a Scuzzy card, installation, etc. — and at $500 each, well, I was pleased to return them for credit and buy an amazing new digital camera instead.

Anyone who follows this column regularly knows that neither my financial advice nor my computer advice is guaranteed to be anything more than enthusiastic. Still, I thought some of you might want to experiment with the www.connected.com free trial. Problems? Questions? I got through to Connected’s customer support on two rings each time I tried: 800-647-3078. (Of course, they hadn’t just been written up in my column that morning.)