Author: A.T.

From Thorsten Kril, recently arrived from Germany: “What is your verdict on EE-Series Saving Bonds? You have only a short paragraph about it in The Only Investment Guide You’ll Ever Need, basically saying they were bad once and not too bad now.

“Here is my situation: In my taxable account I only hold stocks for the long term, adding to the positions every month. Mostly industry leaders, and once in a while some small caps. I avoid Mutual funds and bonds because of the tax mess. Buying funds/bonds every month for dollar-cost averaging and reinvesting the distributions would require a full-time job to figure the taxes once I sell something. Also, I’m comfortable to pick the stocks myself.

“To balance the risk, I have allocated 40% of my 401k and Roth to Bond and Money Market Funds. But I’m 30 and have 30 more years to retirement, so I would rather have a bit more of my 401k and less of my brokerage account in stocks. And since I already maxed out the 401k/Roth contributions, I need another place for my Retirement money. (And you just counseled against annuities.)

“So, the solution that appeared to me is the EE-Series Bond. I can buy them every month and not pay taxes for years. Since every bond matures after 30 years, I could sell the bonds I bought this year when I’m 60, then sell the bonds from next year when I’m 61 and so on. I’d have a steady income beside the volatile stock holdings. It would last until I’m 90.

“So, what do you think? Did I miss anything? It sounds to me like a perfect retirement saving plan.”

Well. You’re obviously doing great – no wonder Germany’s savings rate is so much higher than our own. But you raise a lot of interesting issues, the net of which is: I’d skip the savings bonds.

But let’s start at the beginning:

Savings bonds still make sense for the small saver. For a completely safe investment, the yield is good – set by law at 90% of the yield on 5-year Treasury securities. And the tax advantages make it better still. Like all Treasury securities, they are free of state and local income taxes. On top of that, the EE-Series savings bond interest is free of federal tax, if you choose to defer it, until you cash in the bonds. Certainly this is better than a certificate of deposit at the bank.

But for retirement money you don’t need for 30 years? Even the worst 30 years in stock market history (the beginning of 1929 to the beginning of 1959) would have grown your money much faster, after tax, than savings bonds. And if you think the U.S. market is high today and are looking to diversify, why not buy a little Russia and Thailand this year, something else next year? You have your 401(k), Roth IRA and Social Security to fall back on. Surely you can take the risk that Russia and Thailand (and who knows what else next year) will not all disappear in the decades to come.

Or even just buy some more of today’s robustly priced blue chips. Is there much chance the Hewlett-Packards and Ford Motors and FedExes of the world won’t ultimately be able to grow faster than a savings bond? (I’m not recommending these specifically.)

Says my friend and sage Less Antman: “Nothing makes me sadder than the conservatism of a man of 60 being practiced by a man of 30, so that he’ll need to show the aggressiveness of a man of 30 when he’s a man of 60.”

You should keep ample cash for emergencies . . . to be able to comfortably increase insurance deductibles to the maximum . . . to take advantage of special opportunities to purchase in bulk or at a big discount . . . to send monetary gifts to undeserving and unreliable friends with large upcoming tax bills . . . and to fund for short-term personal goals. But of the rest? “Keep safe money safe,” Less likes to say, “but keep growth money growing.”

(As for the difficulty of dealing with mutual funds: not so. Every large fund family and discount broker keeps average-cost information on mutual fund holdings and provides it on sales. It takes just a few minutes at tax time to copy the sales and cost information to Schedule D from the information sheet mailed by most funds along with the Form 1099.)

Aren’t we getting just a LITTLE tired of these calls? They get you at dinner mostly, or when you’re on the phone with somebody really important, like Dolly Parton or Valéry Giscard d’Estaing, or maybe Elvis – yes, finally Elvis calls and is about to tell you exactly where he is, for real – and the phone rings and it’s some telemarketer for a magazine or MCI or a cold caller from one of the brokerage firms (“I don’t have anything right now, but if some time from now an attractive investment opportunity crossed my desk, would you like me to let you know?”) – and you couldn’t tell in advance who it was, because you have Call-Waiting and, yes, Caller-ID, but not the newfangled phones with Call-Waiting Caller ID, which display the caller who’s waiting – so you put Elvis on hold (because you have Hold) – and by the time you’ve depressed the Flash button to switch back, Elvis is gone and you’re . . . just . . . so . . . angry.

Well, I’ve come up with a solution. It’s not practical and it won’t work, but I offer it anyway.

Instead of politely waiting for some break in the script to interject a firm, “I’m really glad you called – I know you have a tough job – but let me save us both some time, because I’m definitely not interested, by hanging up [CLICK]” . . . how about this: See how long you can keep the caller on the phone. Make him/her hang up on you. Ask a lot of questions. Tell some nice stories. Ask some more questions. Keep your eye on the clock and each time try to break your personal record. Ten minutes? Twenty? An hour? Just don’t commit. “Oh, I don’t know. I’m pretty close to the limit on my credit card. Gosh, where would I be without those credit cards? I was once this close to starving to death, because of the layoffs, you know?, and then I remembered I could get a cash advance on my Visa, so I went down to the . . .” and just keep going until finally the telemarketer has no choice but to hang up on you.

Don’t think of this as a waste of your valuable time. Think of it as a game, like any other game that you spend hours of your valuable time playing. If the whole world did this, every telemarketer would go broke in a week. No more dinner-time interruptions.

OK, OK. The people who call are, for the most part, just kids trying their best to make a buck. They don’t run these businesses or write the scripts. It’s one thing not to bite at the pitch, another to try to punish some stranger for doing his or her job.

Still, most of these calls really are an intrusion. Better to make the offers on TV, in print ads, or through the mail. At least with junk mail you can make all but instant determinations from the outside of the envelope as to whether you have any interest. And the mailman doesn’t interrupt you in the middle of dinner or beep you in the middle of a conversation with Elvis.

What to say to the complete stranger who calls hoping you’ll entrust some goodly portion of your life savings to him? Leo Cullum had a great idea in his recent New Yorker cartoon. He drew an obviously-not-wealthy man watching TV, legs crossed comfortably, beer in hand, on the phone. “Oh, I’m really sorry,” he has the man saying. “I just placed three million with some broker who called five minutes ago.“

From Shirley W.: “An acquaintance who recently won a $27,000 minor lawsuit, but for whom this was a windfall, asked how to make some money with it. Being rather conservative, I told him to do what he wanted but that I would put two-thirds in a balanced fund and the rest in a 1-year CD. He said he could never make money that way, so promptly drove to Las Vegas and gambled away every last dime and then some. Oh, the humanity!”

From the lawsuit lottery to Las Vegas. Beware the will to lose.

Thanks, Shirley.

From L.B.: “I would like to get rich quick. I have a little spare money to gamble. I heard that margin trading can make a mountain of dough out of my little molehill of cash. Any experience in this?”

Yes. My experience is that you will lose your money.

The leverage you get with borrowed money does increase potential returns. (Buying out-of-the-money puts and calls increases it still further.) The more leverage you reach for, the greater the pot of gold you have an outside chance of winning – but the more outside that chance becomes. Sooner or later, you will in all likelihood lose it all, because even gamblers who do win rarely quit while they’re ahead.

“At the ripe old age of 36, netting mid 40’s in income, household assets listing about 10 grand, liquid about 25 grand, only started my IRA last year, I feel like I’m going to be working a long time. I would like some advice on putting my money to work for me. I am on a newly developed saving/investment plan of my own, to save or invest $1000 a month. I do not object to medium to high risk. At this time I have no investment vehicles working for me. Do you have any suggestions on what would be a solid way to add some spark to my plan????? I would like to retire at 45.” -Andrew

It’s great that you’re saving $1,000 a month but a little scary that you have your eye on retirement in nine years. At that time, if you’ve been able to grow your money at 8% after tax and inflation along the way – a very aggressive assumption – you’d have $158,000 to last you the rest of your life, which if you’re an average unmarried nonsmoker who wears his seatbelts will be about another 34 years.

This suggests several things. Ideally, you would find a job that makes you want to work a lot longer. Easier said than done, I know. Or is there a possibility of your marrying an heiress?

As to finding a solid way to add spark to your plan, I’m not sure solid and spark go together – they suggest that you’re looking for a good safe risk. But yes, for long-term investing, stocks have always outperformed more predictable investments. The problem is that everyone seems finally to have adopted that wisdom. Everyone and his shoeshine boy are now in stocks. This has driven stock prices well out of the bargain basement, at least in the U.S., leaving old fogies like me to worry whether this is a good time for young fogies like you to jump in.

But the answer again is yes. If you’re going to stick to your $1,000-a-month discipline through thick and thin, then ANY time is a good time to start investing in the stock market. And to add a solid spark, you might toss into your mix shares of whatever closed-end country funds seem most beaten down but likely to recover. (Just avoid closed-end funds selling at any significant premium to their net asset value.)

But I feel awkward just tossing that out – it seems to me you should get a more solid overview of how all this works, and of how sparks can lead to fires that burn the house down. May I suggest you go to the library or bookstore and grab Burton Malkiel’s A Random Walk Down Wall Street or even my own modestly titled paperback, The Only Investment Guide You’ll Ever Need.

“I don’t know if you follow Compaq but it seems the little guys again were in the dark over the recent ‘shocking’ quarterly earnings report. Seems only reporters and analysts are unaware of the real behind the scenes news. As usual, Compaq (insert any stock here), seemingly knocking the cover off the ball, started to bleed about a week before earnings were to be reported. The stock fell from a recent high of 35 to around 27 the day before earnings were to be reported (first thought was that people were not sure about the Digital Equipment deal). And surprise, surprise, Compaq reported flat earnings. Must be a lot of good information floating around out there that never makes it into an analysts report. On top of that, isn’t it convenient that only market makers and institutions get to trade this information after the ‘oh so grateful to their shareholders’ companies (again, insert any stock here) make these reports after the markets close (read that to mean only the day market available to little people, not Instinet). These after-hour announcements eliminate any chance of a small investor making a buy/sell decision based on the latest information. The poor little investor can only sit and watch as the market makers hammer his stock before it even trades the next business day. I guess this ranting leads to my question: Why do companies now report their earnings after the markets close?” -C.R. Hancock

Well ranted, C.R. You make good points. But here are a couple of other thoughts to consider:

• First, as hard as the SEC tries to discourage it, the little guy should be aware that he will always be the little guy – that neither Merrill Lynch nor his deep discount broker is going to call him first when there’s a whisper of good or bad news out there. He’s also unlikely to spot the CEO looking depressed or snappish out on the golf course (reason enough to sell, no?).

• So while there may be reasons to pay for Merrill Lynch’s personal touch, the value of its research is probably not one of them. Like anyone trying to predict the future, Merrill is often right, often wrong, and more likely to stress the former than the latter. Its analyst is certainly not going to call you before she calls the firm’s biggest clients.

• This is a reason to buy and hold for the long run, rather than try to catch short-term swings. Not only do you save on taxes (and commissions and spreads), you largely eliminate this little-guy disadvantage. Someone may know something you don’t about Compaq’s upcoming news release, but its next 10 years will be based on bigger trends.

• It’s also a reason to think twice about high-multiple stocks, or at least to be prepared for downside shocks.

• Second, no company, Compaq or otherwise, can provide a completely smooth information flow, free of surprises. Sometimes the surprises are good, sometimes bad. When they’re good and the stock jumps (and even if it creeps up before it jumps), they tend not to annoy us or raise red flags.

• Releasing information after the close of the market is intended to give everyone a fair shot at it, not just the pros who get the news instantly on their screens at work. This is done mainly for the protection of dental patients. The hope, as the drill nears their nerve, is that Dr. Payne will be concentrating on your molar, not the CNBC ticker. Later, as the Novocain is wearing off, he can leisurely review his portfolio and catch the news about Compaq along with everybody else.

• What happens in the after-hours market is probably not as unfair as you think. That’s because typically, if there’s been bad news when the stock closed at 35, the next trade will not be at 34¾, say, or even 34, but perhaps 32 or 29. Sometimes, because of overreaction, the first after-hours price will actually be lower than the price at which the stock opens the next morning — the price you’d get. So I’d say the part to be angry about is the pre-news creep (people trading on inside information, whether clear-cut or gray) but not particularly the after-hours trading.

• Releasing the news after the market gives you a chance to do things like cancel your good-til-canceled orders and reset your stop-loss limits. (Say you’d had an order in to buy at 34¾ — without this breather, that’s where you would have bought the stock; now, you have a chance to lower your bid or remove it altogether.)

• This is a good thing, not a bad thing.

“You write, in discussing the Beardstown Ladies, that it’s almost impossible to beat the market consistently. But what about Buffett? Surely it isn’t all just commission savings. He does seem to make good investments at the right prices.” -D.G.G.

Indeed he does. Warren Buffett is smarter than almost anybody . . . completely single-minded in his efforts . . . boosted by the financial leverage in his great and savvy insurance businesses (he gets to invest the premiums until you crash your car or the earthquake hits) . . . and the beneficiary, by now, of a couple of self-fulfilling special advantages. (People all take his calls; potential acquirees enjoy a certain cachet and might accept a lower price in Berkshire stock than in the stock of just any old company; once Buffett invests/anoints, the world follows.)

So Warren is clearly real, but an exception.

Still, many of today’s young investors can learn a lot from his example. Buffett never traded in-and-out, never made a nickel that I know of buying puts and calls . . . it’s been good, thoughtful, patient investing, with a great premium on value and the quality of management. My friend Roger Lowenstein wrote a wonderful Buffett biography not long ago, and there are other good books on him as well.

You have heard of the Truth In Lending law. The idea is to provide interest-rate information honestly and consistently so that people know the interest rate they’re paying and can sensibly compare loans.

Now comes reader Erik Sten with a refinement.

With regard to those “2.9% financing or $1,500 cash back” deals one so often sees, Erik suggests that the 2.9% may not be 2.9% after all. Accepting that it means paying $1,500 more than necessary for the car, that foregone $1,500 really should be considered part of the cost of financing the car.

So what is the interest rate really?

Say you are buying a $12,000 Ford Escort LX 4-door, which is more or less the example Erik supplied me with last summer. The dealer was offering 2.9% or $1,500 cash back. The regular 48-month car-loan rate available to people with good credit at the time, Erik says, was 8%.

Well, on a $10,500 48-month car loan (assuming you were financing all but $1,500 of the $12,000 purchase), the payments are $231.95 at 2.9% and $256.34 at 8%. So you save $24.39 a month or $1,170.72 in interest over four years. But you don’t save $1,500 – and what you do save, you don’t save all at once. No, the prevailing interest rate would have to be 9.4% or so for a 2.9% rate to save you $1,500 over four years. And because $1,500 up front is better than $1,500 spread out over four years, the “true” interest rate would have to be nearly 10.5% for this 2.9% rate to represent an equivalent saving.

Still not terrible, and not necessarily something to pass laws or enact regulations over. But to the extent the 1.9% and 2.9% financing deals make the average car buyer even less likely to pay cash, and thus even more likely to pay what may amount to 10% interest that’s not tax-deductible, it compounds a common consumer error; namely, someone who unwittingly earns 5% in a savings account (which may be 4% or less after taxes) while at the same time paying 10% to finance a car. Borrowing at 10% to earn 4% is no quick way to get rich.

Is truth-in-auto-lending a problem? Worth a crusade? Let me know your thoughts and I’ll pass them on to Erik.

“When I bought my last car, I offered to pay cash a la your friend Joe. Apart from any financial incentives to the dealer, the dealership’s general manager strongly recommended I finance at least part of it. In light of your column I realize it may have been for his own financial gain, but he told me that the owners of the dealership NEVER pay cash for their inventory, even though (according to him) they have it many times over. Basically, he said why risk your own money when you can risk the bank’s? I thought (perhaps naively) that if it was good enough for them, it should be good enough for me. Love to hear your thoughts on that one.” -Steven E. Rubin, MD

How is the bank risking anything when you take out a car loan? In the first place, they have the car as security; in the second, they have your personal guarantee. (To a lender, those initials after your name stand for Many Dollars.)

No, the only question is whether the 10% you pay, say, is greater than the after-tax return you expect to earn investing this borrowed money; i.e., can you borrow at 10% and earn 11%. And the answer, after tax, is: no. (Sure, it’s possible; but the odds are definitely against you.)

If it was one of those “2.9% or $1,500 cash back” kinds of deals (and I’m sure you would have mentioned it if it was), then you would still have been better off not borrowing. But in this regard, I owe one of you, Erik Sten, a crusade.

Tomorrow: I’ll explain.

From Scott Mains: “About a year ago my wife and I purchased a new car using a similar tactic to Joe. [As described recently in Joe Beats the Bank, Joe financed his car because it’s an option on which the dealer makes money. He then paid off the loan in full the next month. – A.T.] We went him one better though. When we purchased our vehicle we charged the down payment to our credit card, which pays a flat 1% back, and then of course paid it off in full when the bill came in. By getting the 1% back on the down payment, it offset the interest we had to pay for borrowing the balance of the money for one month. This also gave us an extra couple of weeks to sell the stock we had earmarked to pay for the car.”

I once got into quite a row with a car dealer over the size of my down payment. I wanted to make it at least $5,000, to get the frequent flier miles. He forced me down to $1,000. The rest, an hour or two later when they delivered the car, I paid for with a check.

From Rock Hopper (which I’m guessing may not be his real name): “Before you write an article about cheap ways to get cars via the Internet, do some research, especially on Auto-By-Tel. I have had poor service, as have friends. The sales pitch is awesome, the delivery is customer specific. I have heard both sides of the coin.

“For example, when I submitted my request, I was called back by a dealer, with a price, but for a car with the wrong options?!?! I thought the purpose was to get the car you want. Please just ask around, I think you will find other horror stories. [As horror goes, I’d call this particular example pretty tame. – A.T.]

“When looking for a new car, showing a dealer a printout of your http://www.edmunds.com dealer pricing info can save you a lot of time. If the dealer wants to play that game, they will. If they get rude, go somewhere else. Showing them that you have the info upfront is a lot easier than spending the day with them, then getting to the pricing, and totally annoying the dealer by showing him you’re not a total dolt.

“As for the extended warranty, I, for one, am sold on them. Unfortunately, the 94 Ford Taurus that we bought with 25K miles has had $3K worth of repairs over the 2.5 years that we have owned it. We still have 30K miles left on the warranty that we paid $1K for. You might say that I should buy a more reliable car? One would think that the best-selling automobile would be reliable. In general, it has been, but the (nearly constant) little things add up to big bucks, and the warranty has worked out well for us.”

From Mike Gavaghan:“Obtaining a car loan when we have sufficient stock savings is certainly the same as buying stocks on margin. Indeed, I’ve always planned on borrowing against my stocks, rather than selling them, when the time comes to buy another vehicle. Wouldn’t this give me a low interest used car loan with tax deductible interest? There are, of course, additional risks whenever an investor carries a margin balance. But, based on your article, I’m worried that there is something more fundamental that I’ve overlooked.”

Nope, Mike. You’ve nailed it. You’re not overlooking a thing.