Author: A.T.

“Nobody ever made a greater mistake than he who did nothing because he could only do a little.” — Edmund Burke

Happy New Year.

OVERDRESSED TO BE A PROGRAMMER

“I know that when I stick on a jacket and tie, my sense of seriousness and self worth change instantly. I’m not describing it very well, but I think you know the feeling.”

To which Michael Simpson (and a couple of others of you, in much the same vein) responded: “This made me laugh. In the programming profession, it is quite the opposite. The worse you dress, the more you make. I limit myself to T-shirts and jeans. But at Emerald Systems, their star programmer programs buck naked. (Behind a closed door.) When I was at Jostens, one highly paid consultant ran around in cutoff shorts and no shoes or socks. Regular bathing seems to be optional for programmers. Our self-worth is tied up entirely by how well we code. Dressing down seems to be a message to management that we are so good, we can do what we want. We seem to be correct. Want to destroy a good programmer, put him in a tie. Maybe it cuts off the blood flow to the brain?”

PIGGY WARBURG

Recently I quoted a fund-raising letter written during the depression by Paul Felix Warburg. This made my friend Dave Davis curious, and he came back from the library with all manner of stuff about the man, my favorite bit of which — from THE WARBURGS by Ron Chernow — follows:

“The third Warburg son, Paul Felix–invariably known by his nickname, Piggy–was . . . the family clown. . . . Although Piggy never graduated from college, Felix [his dad] had great affection for this incorrigible, madcap boy. When he left school, Felix got him a humble job with the B&O Railroad in Baltimore and used to write him letters that began with ‘Dear Railroad Magnate.’ While working on the railroad, Piggy met another rich young man who persuaded him to invest in his new business and Felix reacted angrily. ‘I love you dearly,’ he told his son, ‘but if you’re so irresponsible with money as all that, I’m going to put you on an allowance.’ The friend was William F. Paley and the investment was the nascent CBS.”

THE RICH ARE INVOLUNTARILY GENEROUS

I pointed out that at all income levels, on average, people give away about 3% of their income. But the rich are different from you and me, because on an after-tax basis (because they itemize their deductions and give appreciated securities), they give less money (on a percentage basis).

From Brian Annis: “Considering that the government FORCES someone with a higher income to give more of it to the needy, is it really fair to knock the rich for not giving more voluntarily? After all, a dollar received via the IRS is worth just as much to the recipient as one that has passed through the United Way. In fact, the contribution received from a rich person may have been given with a greater spirit of charity than a “voluntary” one coerced from someone else by an employer, church, etc. The only difference is really in the degree of choice about who the recipient is.”

That is definitely one way to look at it. Indeed, on that basis you could argue that only the poor should give much, since they are getting a relatively free ride off rich people’s taxes. The rich have more than done their duty just by paying tax.

But all this assumes that giving money, if one could afford to, is naturally something one would want not to do. Yet when you look at all that needs doing in the world, and how tantalizingly close we are as a species to making this thing work (or else having it all blow up in our faces), it turns out that for many people who see what’s going on, there’s nothing they’d rather do than be able to help. (Was Scrooge really happier before he started giving?)

The family that gets by on $30,000 a year yet gives $900 (3%) is perhaps giving 50% of its discretionary income (after basics like taxes, food and shelter). The family that gets by on $500,000 a year yet gives $15,000 (3%) is giving perhaps 4% of its discretionary income. If such a family went nuts and gave $90,000 to the causes it believed in — roughly 10% after tax — it would still not feel much of a pinch.

Let me be clear: I’m not saying anybody need give a penny if he/she doesn’t want to. I just think those who can afford to but don’t are missing out on one of money’s greatest luxuries.

Yes, the prudent and convenient thing for most people is to do their stock-market investing via no-load, low-expense mutual funds. But does that mean we all do? Hardly.

Herewith, direct from someone who has actually walked past the Ed Sullivan Theater in midtown Manhattan . . . The Top 10 Reasons NOT to Buy Mutual Funds:

10. Just not as darn much FUN as picking stocks yourself.

9. Lust for control. Well, I’ll admit it: control is a big thing with me.

8. Tax timing. With a mutual fund, your taxable gains and losses are realized largely by the fund manager. (YOU only get into the act if you choose to cash out of the fund itself.) On your own, you can arrange to take losses for tax purposes and let your winners grow untaxed and/or wait until gains go long-term. Not that this matters in a tax-sheltered account, or that you should ever let the tax tail wag the investment-decision dog — but still.

7. Can’t give appreciated securities. If you give to charity, there’s a big tax advantage in giving appreciated securities you’ve held more than a year. Say your mutual fund is sitting on a stock — Intel, perhaps — that’s up ten-fold . . . but it’s mixed in with all its other more mediocre holdings, and your fund shares themselves are up only modestly (or maybe they’re down). There’s no way to pull out just the Intel shares to give away.

6. Have to pay a management fee. Own a stock directly, and you get all its dividends and appreciation for yourself. Own it through a mutual fund, and the managers take a slice.

5. Have to pay administration fees. But at least the managers might be doing some useful research or making some savvy decisions. On top of their slice, you’re also socked for your share of the cost of printing up all those prospectuses and quarterly statements and answering the 800-number — all that stuff. It’s a drag on performance, plain and simple.

4. Loads. Most people still buy load funds — funds that charge a commission, either up-front, as a surrender fee, or via an annual “12b-1” sales fee. Yet another drag on performance.

3. Miss out on tiny stocks too small for funds. Few mutual funds can invest in small companies. For one thing, it’s just not worth their time. For another, buying — and eventually selling — $1 million worth of some small, illiquid company is bound to drive the price up (and then down), making it very expensive to get in and out. But some of the best, albeit riskiest, opportunities lie in these “micro-caps.” The little guy, with his/her 100-share or 500-share stake, can move in and out with relative ease.

2. Don’t get to vote on stuff. If you own shares through a mutual fund, you don’t get all those annual reports, you don’t get to approve the auditors or vote to toss out the board. (Not that any boards ever ARE tossed out — personally, I just toss out the proxies.)

And the number one reason not to invest via mutual funds . . . a little number one music please, Paul:

1. Not invited to the annual meetings!

So Grandpa, who gave you $100 on your first Christmas, $200 the second, and so forth (God bless Gramps), just gave you $3,800 yesterday, and you’re wondering how to invest it. The first $1,800 you’re going to use to pay off your credit cards — not having to pay 18% interest is like earning 18% tax-free, risk-free. But what to do with the remainder?

Earlier this month someone asked my opinion of the New Perspective fund. I knocked it for its load, and a couple of other things, without offering much of an alternative. So, OK. Here’s an alternative:

“The relatively new T. Rowe Price Global Stock Fund has all of the advantages of New Perspective with none of the disadvantages,” writes my friend Less Antman. “It invests in large companies all over the world, and has the traditional Price respect for low expenses. It is managed by the same Martin Wade team that has been running International Stock to the top of the Forbes list for 7 years running (not that the Forbes list has done any better at predicting the future than anyone else).”

I realize, however, that many of you prefer to throw most of the darts yourself. Me, too. When there’s such a strong argument that it’s best to invest through mutual funds, why “do it yourself?”

Come back tomorrow for the answer. (And please put in a good word for me with your grandfather.)

Tomorrow: The Top Ten Reasons NOT to Buy Mutual Funds

Now here’s a curious thing. Trial lawyers, it’s well known, care more than almost anyone else about pain and suffering. They spend their days feeling the pain of people crushed in car crashes, maimed by callous manufacturers, poisoned by reckless food and drug makers.

The greedy car makers may not care, the greedy hospitals may not care, and the greedy insurance companies certainly don’t care — but the trial lawyers care deeply, deeply, deeply. And I want you to know, it’s not the money they care about.

When a trial lawyer says he feels your pain, he doesn’t mean he feels excited by the 33% plus expenses he’ll get from the settlement, or the 40% or 50% he’ll get if it goes to trial. Sure, he likes the money. He never said he didn’t. But that’s not why he chose personal injury law. He went into this field because he cares about people.

Indeed, when the right to sue for pain and suffering is threatened, trial lawyers put up their own hard-earned dollars, fighting for victims everywhere — like Henry Fonda in The Grapes of Wrath. In California, they put up millions last March to preserve the current auto insurance system. Yes, California lawyers (on both sides) make $2.5 billion a year from that system, but that’s not why the trial lawyers fought to preserve it. As they told us over and over again, it was because they care about the little guy’s pain and suffering.

(Seriously, many trial lawyers do take great satisfaction in fighting for justice for the little guy. One need only read Jonathan Harr’s gripping A CIVIL ACTION to see that side of the story.)

So here’s what’s curious:

In California and Arizona last month, there were ballot propositions to allow medical use of marijuana to relieve the pain and suffering, and nausea, experienced by cancer patients and many others.

Perhaps you saw the related segment on 60 Minutes. It raised the whole issue of whether people should be kept in terrible pain rather than prescribe currently illegal drugs to relieve it. One car-crash victim on the 60 Minutes segment was in such agony after the state medical board cut off his painkillers that he made a videotape explaining he would rather die as a result — and killed himself the next day.

Pain and suffering is real.

Yes, there were reasons a thoughtful and compassionate person could oppose the marijuana initiatives (e.g., California’s required no written prescription). But a lot of thoughtful and compassionate people supported them, too. Key backers included international financier George Soros and auto insurance CEO Peter Lewis, who put up $500,000 each. And a majority of voters in both states voted YES. Both initiatives passed.

So you’re thinking, hey: maybe an auto insurance executive put up half a mil for this, but the guys who must really have ponied up big are the trial lawyers. After all, they have a track record of enormous generosity to politicians and ballot initiatives they support, and they really care about pain and suffering.

So how much did trial lawyers contribute to the California and Arizona campaigns to legalize medicinal use of marijuana to ease that pain?

That’s right: Not a penny.

Maybe Christmas Eve would be a good time for trial lawyers to undergo a Scrooge-like conversion and consider policy issues based not on what’s in it for them, but what’s best for those who are most seriously injured.

Well, I can dream, can’t I? It’s Christmas!

And may yours be merry and meaningful.

From Nallu: “I am trying to establish or start a college fund for my 5-year-old daughter. I would like to know if there are any funds or stocks which I can count on 15% to 20% annual return. Thanks in advance. Nallu Reddy.”

No.

There are lots of stocks and funds that have produced that kind of return in the past, but that’s no guarantee they can keep it up. Indeed, to a certain extent it may even suggest lower-than-average returns in the decade to come, as the overall market reverts back to its very-long-term trend (if it does).

That’s not to say a few funds and many stocks won’t grow at 15% or 20% a year by the time baby Helen (I’m just guessing) enters Vassar. They probably will. But only with hindsight can we know which they’ll be.

So your use of the phrase “count on” is kind of the deal breaker.

Typically, you’d be wiser to expect — and even then not count on — more like 9% or 10% pre-tax from dividends and appreciation.

Sorry.

Silver lining: you’re a step ahead just to be thinking about this and to be starting now to save for your daughter’s education. And if you DO earn the kind of return you seek, as you certainly might, then you’ll just have that much more for some other worthwhile purpose — like a baby brother.

Either you know this or you don’t. If you don’t, as I didn’t, it will come as a complete revelation: Every garbage bag comes with its own ties.

Or, as George Werfelman, world’s greatest fish purveyor, put it as we were cleaning up after a clambake he had catered this summer, and I was apologizing for having no garbage ties: “Every garbage bag comes with its OWN ties.”

I’m not saying I’m not handy around the house — or that you’re not, if you are as amazed by this as I was. I had just never known! I hated those little ties, especially the thick yellow plastic ones. And I was a sucker for the ones you couldn’t lose, because they came taped to the bag, or especially for the “drawstring” ones, never mind the higher price.

But now — well, now I feel so empowered.

Click here for a full-motion instructional video of me tying up my garbage. Your credit card will be charged just $39.95 plus $12.50 postage-and-handling, and you will soon begin receiving catalogs of special interest to people like you.

Or just follow these simple instructions:

1. Remove garbage bag from trash can when reasonably full (and fit to be tied), grasping it with both hands from either end.

2. Sit garbage bag on ground so that it slouches, and extend your hands to the left and the right until the top perimeter of the bag is more or less taut, with some bag bunched up in each fist.

3. Twirl the ends around a little, once you get really good at this, as if to make little bunny ears.

4. Now join your hands in the middle and tie the bunny ears in a knot. Tight.

Voila! Your garbage is tied, and you’ll even find the knot forms a sort of handle.

If this fails, just try it once or twice more until you get the hang of it. It isn’t rocket science. You will succeed. And if you’re someone 35 with a normal life expectancy and a reasonably typical garbage flow, this will save your having to pay for, hunt for and twist approximately 15,000 garbage ties over the remainder of your life.

You don’t get this kind of advice on Wall Street Week.

I was at Big Daddy’s the other day for my annual liquor run. I’ve never met Big Daddy himself. He’s a chain. He’s big! In fact, I was in Big Daddy’s Store No. 47.

(He’s not that big. Apparently, there are only about 10 Big Daddy’s. But if Hyatt can get away with adding ten floors to the height of its New York hotel merely by numbering the elevator buttons to skip straight from 3 to 14 — so that when you’re on 16 you’re actually on 6 — I don’t see why Big Daddy can’t number his liquor stores and lounges any dang way he pleases.)

Anyway, I was there for my basic 1.75 liter bottle of Absolut — top of the line — plus my basic two gallons of whatever’s cheapest to refill the Absolut bottle with, since in mixed drinks no one can tell the difference . . . OK, I don’t actually do that anymore, but I used to . . . But what I’m trying to tell you, if I could just get you to focus for a minute, is that I saw on the counter of Big Daddy’s Store No. 47 a revealing sign:

WE ONLY ACCEPT THE NEW $100 BILLS

And I suddenly realized how smart the U.S. Treasury was in bringing out those new bills and assuring everyone that the old ones would stay good forever. Didn’t want to start a panic. Didn’t want to suggest the U.S. would ever default on its own currency. Didn’t want to acknowledge the size of the counterfeiting problem. (I don’t know how big that problem is, but I did get stiffed with a bad $100 bill myself, which I keep in my wallet if ever I lose a bet on whether you can taste the difference between Absolut and Big Daddy vodka in mixed drinks.)

No, Uncle Sam could take the high road, knowing that Big Daddy and the rest of the world would inevitably enforce Gresham’s Law. I can’t quite remember what Occam’s Razor is, or Plato’s Retreat, but Gresham’s Law says simply that “good money drives out bad.” (Actually, it says bad money drives out good, but I’ll get to that.)

Like many simple things (“a stitch in time saves nine”), this is very easy to remember but not so easy to dope out. Only you feel too stupid to ask. (What, exactly, is a “stitch in time?” Is it like “a point in time?” Is it some woven relativity thing, like a time warp woof?) So I’ll tell you. Gresham’s law — good money drives out bad — means that a nice crispy new uncounterfeitable $100 bill is soon going to be considered more desirable than the old kind, if only because guys like Big Daddy won’t accept the old kind. (For all I know, failing to accept legal tender is illegal, but who’s going to stop Big Daddy?) So if you have two $100 bills in your wallet, which one are you going to keep for yourself and which is going to be driven out of your wallet at the first opportunity? Good money drives out bad. Gresham didn’t decree it — it’s not that kind of law, I eventually realized, just as I began to doubt Occam was a barber — he merely observed that, given human nature, it was inevitable.

Good money drives out bad. Especially in places like Russia, where the soundness of the money is not taken for granted. At first, Russians were hesitant to accept the new $100s, wondering if they were really good. But by now I’m guessing the good ones are driving the bad ones out like crazy, meaning they’ve become the hot potatoes, increasingly wrinkly as they get passed from one greasy palm to the next and then turned in to the bank for a “good” one.

The criminals and tax dodgers here and abroad who allegedly sit atop millions of the old $100s must dole them out slowly, hoping to get good ones in return, or find someone to launder them at, perhaps, 90 cents on the dollar. Or eighty cents? I’m just speculating — I’ve spoken with no one from the CIA — but let’s say you’re a Colombian drug kingpin, or a Russian mafia mogul, sitting on 50,000 old style $100 bills — $5 million. You fear that in time people will not accept them, so you want to exchange the old ones for new. But how? Maybe you just go to your friendly banker, who in turn remits the old bills to his central bank which remits them to Washington to be exchanged. In Washington, they’re shredded for novelty items. Thus good money has driven out bad.

Or maybe you don’t have a friendly banker and you don’t have such an easy time. You show up at Big Daddy’s or its Russian equivalent to stock up for New Year’s Eve and walk out empty-handed.

As for counterfeiters, they can still print old-style $100s, but what will be the point once no one will take them? Uncle Sam can guarantee banks will take them. But not without checking them very carefully first — and perhaps taking your picture, too.

Not to run on too long about this, especially given my striking lack of any real knowledge. But there’s $380 billion in U.S. currency now circulating around the globe — mainly $100 bills, I think — which Lester Thurow has noted comes to “almost $5,400 per [American] family. How many American families do you know with that kind of cash in their homes? Not very many.”

In other words (and even after accounting for cash in American cash registers, petty-cash boxes, cookie jars and bank vaults), most American currency is abroad, in places like Russia, where there are still no checking accounts and the American $100 bill is the de facto currency for much of the nation’s commerce.

What will all these old $100 bills be worth? Will you be able to trade one new one for two old ones outside the Hermitage? (Wouldn’t that be an easy way to finance your travels, so long as the old ones you bring home aren’t counterfeit.)

My guess is that Big Daddy is the straw in the wind, and that pretty soon the old-style $100 bills will be rarely seen.

And, OK, for you mizzable purists in the crowd, I suppose I’d better acknowledge that, strictly speaking, Gresham’s law is not that “good money drives out bad,” but that “bad money drives out good.” Not because the concept is so much different, just that by “drives out” he meant out of circulation, not out of favor. People won’t be paying for things with “good” money — they’ll hoard it — if they can get away with paying with bad. But Big Daddy says: not in my store.

Maybe the reason Gresham said it the way he did is that through much of history, governments have issued devalued, “bad” new money (like silver coins that were slightly underweight), hoping no one would notice. This bad new money would drive the good old money into hiding. But sometimes — as with this new $100 bill — the newcomer is the GOOD money (because it’s harder to counterfeit), and so any sensible maxim should make IT the subject of the sentence. NEW drives out OLD. WINTER drives out FALL. GOOD money drives out BAD.

And in the long run, this good money will drive the old money out of circulation, because people won’t accept it.

Yesterday, one of you asked about the prospects for oil drillers, and I provided some rather sage insider thinking on the topic (not my own, needless to say).

In rereading it, it occurs to me to remind you:

Free investment advice is worth what you pay for it.

Which is more than can be said for a lot of other investment advice.

Tomorrow: Big Daddy

From Andrew Berlin: “I have heard and read a lot about the surging demand for oil rigs and all the money oil drilling companies are going to earn in the next few years. Is it too late to buy oil drilling stocks now?? Parker Drilling Company was brought to my attention. Are the oil drilling companies really going to make a lot of money??

Oh, sure. Like I really know.

But I know guys who might — Texans — so I asked them. The only reason I think this might be of interest to folks other than Andrew Berlin is that it gives a glimpse of how the bigger boys talk about these things.

Texan #1 writes: ———————

1. There is a boom in the oil and gas business. Wellhead gas is well over $3. Wellhead oil is over $20. Natural gas liquids are through the stratosphere (ps…extremely good for me). [Make a note to hit him up for more money. — A.T.]

2. Activity is up, to the extent equipment is available. Rig rates are up. [Wellheads, rig rates — I only barely get the gist, but enjoy this kind of talk. Makes me want to go out and rent Giant. — A.T.]

3. Parker (PKD) just did an acquisition of Mallard, a very good marine contractor. Spent $400 million on acquisitions in November, including an oil tool company. Its market cap is only $650 million [meaning that the whole company is valued at little more than a tenth of, say, Netscape — A.T.].

4. At 9 5/8, stock is almost double the 1996 low of $5 [meaning that you’d have done better thinking of this a few months earlier –A.T.]

5. Two problems: oil business is cyclical….and as a provider of services for capital expenditures in the industry, PKD is in a cyclical spectrum of a cyclical business. [I.e., doubly cyclical. When the cycle turns, watch out. — A.T.]

6. Another…although the growth of worldwide demand for hydrocarbons, and the revolution of 3D Seismic is fueling a powerful upturn now, part of Parker’s business — historically — has been drilling dry holes for its clients (who pick the locations). To the extent 3D remains effective, there will either be fewer wells drilled after a few years — or much lower hydrocarbon prices, resulting in decreased demand for drilling services. [Oh, no! It will become so easy to find oil, drillers will have to drill fewer holes to find it. Bad news for drill-rig suppliers, good news for everybody else — unless you think it will lead to too-low oil prices, environmentally. — A.T.]

7. The roller coaster’s headed up, but it’s not a one way ticket to heaven. [Well, a roller coaster may be better than musical chairs, which some other parts of the market seem to be playing. — A.T.]

Texan #2 writes: ———————

Regarding the land drilling industry, I know it quite well. I remember well fearing — as Sadam was rolling tanks into Kuwait — that Bank of America would change its mind about selling us the land-drilling company it had repossessed in 1990. But we got it . . . and I’m still waiting for my chance to gloat.

Between 1990 and 1996, watching the profit margins improve has been second only to watching grass grow, in terms of excitement. During the last year, there has been a major recovery in certain parts of the market. Technically speaking, the 1500 horsepower diesel electric rigs which are used to do the deeper, more technical horizontal drilling, are very popular right now and almost non-existent for new oil companies that are trying to start programs. There is a difference, however, between “almost” and “totally” non-existent. As with any mechanical object that is owned by contractors, the land drillers can make something out of almost anything and at one time there were over five thousand rigs working, so there are a lot of spare parts around, although not many 1500 hp diesel electrics.

Land drillers are like penguins: they all look alike unless you are one. I would agree with the current consensus that the time has come for the land drillers, but would be fairly selective. I would focus on companies with larger rigs, strong, proven track records and good cash flow. I would also concentrate on companies with a strong North American presence. Nabors Drilling is the largest and actually has the best overall management. Some of the Canadian land drilling companies, such as Kenting, Precision and Ensign, are also excellent. Some of the smaller U.S. companies have seen a tremendous run up in their stocks recently; on a market capitalization basis, their rigs are probably selling on an equivalent basis close to new replacement [meaning, I think, in effect, it’s no bargain buying used cars at nearly-new car prices. — A.T.].

————

So there you have it, Andrew. In answer to your question, “Are the oil drillers really going to make a lot of money?” you have a firm, “yeah, maybe. Probably. Some of them.” And on the only loosely-related question of whether that makes their stocks these days a buy, I’ll step up to the plate and give you an even firmer answer. Not a “yeah, maybe” or an “I dunno — maybe” but a flat-out, unqualified maybe.

Tomorrow: The Value of Free Investment Advice