Author: A.T.

From a reader by the e-name of AASLCS (whatever that stands for): “Okay, in an up market the evidence is clear about just riding an index fund. But what about those funds Forbes rates as an ‘A’ in down markets? I think American Funds’ New Perspective is one of them. Do you think they can do better than the index when the market falls?”

Yes. The problem is in knowing when the market is going to fall.

Index funds will always do just about the same as — a little worse than, because of expenses — the underlying index they’re meant to mimic. So in an up market, aggressive funds will often outperform them (but not always, by any means, given the much higher expense ratios of the aggressive funds), and in a down market, conservative funds will often fall less far (but not always, because although they are more conservative, they are also more heavily weighed down by expenses and fees).

As for New Perspective (800-421-4120), it has a good Morningstar rating, but to my mind a huge handicap in that it sports a 5.75% load.

One reason it does relatively well in down markets is that it’s a global fund — much of its money is in European stocks, which only sometimes act the same way as US stocks. And as compared with other global funds, its weightings in riskier Latin American and Asian countries tend to be quite light — so you’d expect the ups to be less up and the downs to be less down. Another reason: it’s a large fund that tends to invest in large US and foreign companies — which rise less in up markets and fall less in down markets.

One plus in being large is a relatively low expense ratio. Expenses are spread over a lot of money ($10 billion or so). But that 5.75% load is tough to justify. Yes, $10,000 invested in New Perspectives 15 years ago would have grown to more than $80,000 — but that’s still a shade less than had it been invested in the Standard & Poor’s 500 all that time, or about the same as an index fund with no load.

Why would you pay $575 to invest $10,000 and get the same likely return as you could investing it “for free?”

If you feel pretty certain the market is headed down, New Perspective may well head down less. (It has a beta of +.9, meaning that it’s likely to rise or fall only about nine-tenths as much as the market rises or falls.) But unless you sell at roughly the bottom, you’ll also do less well on the way back up. And if you do sell at roughly the bottom, switching to some other, more aggressive fund, you may not have held New Perspective long enough to trivialize that 5.75% load. (Sell a week after you buy, and it’s a killer; sell 40 years from now, and it will make an only trivial difference.)

How’s that for more than you ever wanted to know about the New Perspective fund?

I called to wish a friend a happy half century and was dismayed to find him at work. At work on his fiftieth birthday?

“I was home most of the day.”

“Oh. Were you sleeping-in when I called?” (I had first called at home that morning.)

“I was at my shrink.”

Perfect.

Monday: New Perspective: Fund for a Down Market?

You can easily have all you want by not wanting much. You can’t possibly have all you want by making more money.

And isn’t “want” the most intriguing word? It means lack (“For want of a nail the shoe is lost, for want of a shoe the horse is lost, for want of a horse the rider is lost” – George Herbert, 1651) and it means wish for – which are so often one in the same.

But we don’t want (wish for) the things we don’t know we want (lack) – hence the importance of advertising and the scary power of “Dallas” reruns in the Third World.

And “want” is only sometimes synonymous with “need.” Sure, for lack of a nail – but how about for lack of a Sea-Doo?

The miraculous thing about this country is that almost everybody has food, clothing, shelter, and extraordinary devices undreamed of until a moment ago in human history: radios, telephones, color televisions, cars, radios in their cars – even enough dough to fly across the country once a year, if they plan ahead and stay over a Saturday. I speak here not just of the great middle class. This list pertains to most (sadly not all) lower-income Americans as well.

I consider myself blessed that, in material terms, I don’t want (lack) anything, and don’t even really want much. (My friends will tell you this is just a lack of taste. They marvel at my satisfaction with mid-priced cars and mail-order clothes.)

How might you become similarly blessed? Well, maybe you already are. Or maybe you will decide that not having to strive for stuff you don’t need is the greatest luxury of all.

Happy Thanksgiving.

Friday: Turning 50

I love American Airlines, I really do. And I am addicted to frequent flier miles, I really am. But it’s not a bad thing every once in a while to take a peak at the competition.

Here was the scoop. A friend with a $181 round-trip ticket American Airlines from New York to Miami and back around Thanksgiving (the power of planning ahead) needed to come back unexpectedly early — Monday instead of Tuesday. The best he could do on American was use the $181 round-trip to come down, but then buy a one-way full-fare coach ticket to return — and that ticket cost $622. Oops, no, when we went to reserve it the computer gave a $528 price. But still: $528 for a flight at some ungodly hour of the morning.

On a whim, unaccustomed as my fingers are to doing it, I dialed Pan Am’s 800-359-7262 number. No frequent flier miles there. Maybe I was able to do this because I was making arrangements for my friend, so there’d be no frequent flier miles in it for me anyway. Even so, my fingers felt oddly wooden — and I expected the worst. A long wait on hold, a reservationist about whom I’d have instant reservations, and then the news that everything was already booked, you idiot — we’re talking about the day after Thanksgiving weekend!

Instead the phone was answered (by a human) on the first ring and we got a First Class aisle seat, coach being sold out, for $231. And at a civilized time of day.

Now you’re thinking that as between coach for $528 at dawn’s early light on American, and First Class for $231 at noon on Pan Am, you’d go with American to get the miles. I probably would, too. But because I was doing all this for a friend, the frequent-flier spell seemed to have been lifted, if only momentarily, and I took the leap. I booked Pan Am. (And, no, it’s not a DC-3, it’s an Airbus 300.)

Tomorrow: Thanksgiving Thoughts: What Do You Want?

“I checked EVERYTHING out,” writes 24-year-old Doug Bross, who’s made a business out of finding people the best deals on phone service, and who scoffed at the cheapie service I reported on a few months ago. “Dime-line, by VarTec, charges a 3 minute MINIMUM. (I.e., get an answering machine, pay 30 cents.) WealthCom is 6-second billing increments, 6-second minimum, and a 3.50 monthly account fee (no matter how many residential or business lines per account, it’s $3.50). Take a look, and feel free to call me, because there is high income potential based on referrals.”

Hey, Doug pays for the calls — 800-956-9241 — so I called to find out if he’s still in business (he is) and whether he still likes WealthCom. He does, but says they’re swamped with new business, because it’s a multi-level marketing thing, so if you’re looking for customer service, this may not be the long-distance carrier for you.

Doug represents no fewer than eight discount long-distance companies, and tries to match you with the one that best suits your calling habits.

I call long distance a lot within the U.S., and my main overseas calls are to Russia, I told him. He said WealthCom might not be the best — their Russia rates are pretty high.

“Is CTS Telecom one of the eight you represent?” I asked, trying to show off. (I had that morning gotten a thing in the mail from CTS, with stickers to paste on my phone, hoping I would preface my calls with 10834, thus to by-pass AT&T and be billed by CTS at a lower rate.)

It wasn’t, and when I told him their rates — 9 cents a minute 24 hours a day, one-minute increments, a flat $4.95/month “access fee,” and 69 cents a minute to Russia — he seemed a bit unnerved. To a guy in the discount telecom wars, it was as if I had just launched a surprise attack. Which I really hadn’t meant to do, because he sounded like a nice young guy. I gave him CTS’s number — 800-569-8700 — and I wouldn’t be surprised if, by the time you read this, Doug is representing nine low-cost carriers.

I’m not saying you should switch to CTS — that $4.95/month access charge can turn your 9-cent-a-minute rate into a 19-cent-a-minute rate if you use only 50 minutes of long distance time in a given month, and it’s a hassle to dial those extra numbers, and AT&T gives me a lot of frequent flier miles and all the rest. But especially if you make a lot of international calls, it would seem to be worth trying. According to the CTS chart, you’ll knock 50% to 75% off the cost of those calls compared with AT&T, MCI and Sprint basic rates — e.g., $3.90 for a ten minute call to Japan versus $11.65; $2.90 for ten minutes to Ireland versus $9.70; $6.90 to Russia versus $20.63; $1.90 to London versus $8.38. Save big to Canada, too.

To start using CTS, just preface your interstate and international calls with 10834. To call the White House, you’d dial 10834-1-202-456-1414. To dial the Kremlin you’d dial 10834-011-7095-KRE-MLIN (or whatever — when I tried that number I reached a woman who was none too pleased). When your next regular phone bill comes, expect to see a $4.95 CTS access charge plus toll calls for any month you use the service.

Or give Doug a call and let him make a recommendation.

Tomorrow: Airline Savings

ABSOLUTION FROM SOCIAL SECURITY TAX

Ben Tobias-no-relation writes: “In your short list of people who can escape the Social Security system, you left one out: Ordained Ministers (priests, rabbis, etc). With a claim of poverty, they can opt out of Social Security. That along with their parsonage allowance makes being a minister a taxless profession.” Ah, but not a thankless one.

SORRY, DR. SHECKLEY!

University of Illinois chemistry professor Dana Dlott writes: “Your ‘joke’ about the computers was actually a paraphrase of a very short story written by Robert Sheckley. (With all due respect, his was better than yours.) He was the master of the ultra-short story genre, and the story was maybe two pages long. In the story, the head scientist throws a great big switch to turn on the linked computers. When he asks “Is there a God,” the computer says, “there is one now.” The head scientist gets upset and tries to turn the switch off, but then a big lightning bolt comes out of the heavens and fuses the switch together. This story was written I believe in the late Fifties or early Sixties when the big computers were actually big because they were full of tubes.”

E-NVIRONMENTALISM

“Forget paper towels,” writes Rob Myhre, one of the many of you who seem to have found that comment particularly absorbing. “What about newspapers, magazines, and catalogs? Those things must be destroying thousands of times more trees. I’m hoping the Internet will do away with some of this waste. I get the Washington Post, WSJ, and some mags via the Internet now. I’ve reduced the amount of paper I consume very substantially. In some ways, it’s not as convenient, but I can’t stand buying five pounds of paper (the Sunday Post), when I read only a few pages of it.”

Monday: More Phone Savings

BUSINESS REPLY POSTAGE

Boy was I wrong! My only hope is that when I ran this well-meaning but erroneous item this past summer you were sensibly on vacation, enjoying the July sun, having none of it. I wrote then that putting a stamp on a business-reply envelope saves SAVE THE WHALES, or whomever, not just the 32 cents it costs you, but a whopping 76 cents (because of USPS administrative fees). Well, that’s what I was told by someone I thought should know. But apparently I was way wrong — you basically save the whales only about the cost of the stamp. Sorry.

SAVING ON LONG DISTANCE

From Ben Tobias (no relation), reacting to some of my comments on Sprint’s “Dime Lady”: “I went from AT&T to MCI to Sprint and didn’t notice much of a difference until about two years ago I switched to LDDS (the #4 guy in town). Saw an immediate 35 – 40% decline in monthly cost and the bills have stayed there, with excellent service. I’m happy with it — only drawback, no frequent flyer miles.” Commercial accounts: 800-737-8423. Residential: 800-275-0100.

PAPER TOWELS

From Barbara on AOL: “Regarding your comments about paper towels vs. a sponge, I would not use a sponge for any reason. A sponge is a veritable petrie dish for organisms that I don’t want to have in my kitchen or bathroom. I have used paper towels for a year, and find they work just fine for most sponge purposes. Paper towels are so flimsy now that I can’t believe they would cause a disposal problem. Yours for fewer germs, Barbara”

From Dana Dlott, a chemistry professor at the University of Illinois: “Your column on paper towels reminds me of coffee cups. You must have noticed how so many food service places have replaced the Styrofoam cup with the paper cup. The idea, I believe, is better ecology. I won’t mention the paper cup burns your fingers, so you have to use two.

“A couple of years a peer-reviewed article appeared in Science magazine. It analyzed the ecological benefits of paper cups vs Styrofoam cups. In brief, there are none whatsoever. Sure Styrofoam is made of foamed plastic. But the paper cups are bleached (chlorine pollution) and much worse, they have a waxy coating. (Of course they have a waxy coating. Try to take a sheet of paper and make a coffee cup out of it). The waxy coating is at minimum equal to, and quite possibly less ecologically friendly than the Styrofoam.”

RECYCLING OLD COMPUTERS

What to do with that old 286 or 386 or even your not so old 486 now that you’ve moved to the Pentium blazer? I recently suggested sending it to the Computer Recycling Center at 2971 Mead Avenue, Santa Clara, CA 95051.

Writes Paul Bates: “Why not contact a parochial school in your area and give it to them? These schools generally have a very limited budget so your donation will be most appreciated. By doing this you are saving on the postage and cutting out the middle man.”

This strikes me as an excellent suggestion, and indeed, like many of you, I have given computers to local schools, charities, even a passing Russian or two.

But what I may have failed to make clear in that earlier comment was that this place can use even the stuff a local school would be insulted to take. Such as: broken computers. Computers that are really only worth being broken down for spare parts.

So I get this invitation to speak to a ballroomful of insurance executives (which I have to do on my own nickel, lest the trial lawyers who oppose my auto-insurance-reform efforts claim that I work for the insurers) and it seems they have assigned me a topic.

In my own mind, my topic is surely going to be, “How to Fix the Damn Auto Insurance Mess, and Why You Guys Owe it to Your Customers (and Your Shareholders, in the Case of a Mutual Company) to Help.” But that’s not what I see on the fax.

The fax is a little blurry, but as I first run my eye across it, it appears I am to address the question:

“How I Would Ruin an Insurance Company.”

Well, that’s easy!

First, I told them, I would fire the underwriting department. Taking a leaf from AT&T, I’d just have one simple flat rate for all. AT&T offers 15 cents a minute, and they have those funny commercials where the guy just can’t believe how simple it is. I’d do the same thing: young, old, good driver, bad driver — everybody pays the same.

Second (although, in truth, first would be more than enough), I would shift all the company’s reserves from bonds to a couple of high-tech stocks.

Third, I read them a clip from Chuck Shepherd’s News of the Weird column: “In July, according to a fire department official in Pullman, Washington, the cause of a fire in a parked truck was the magnification of the sun through a plastic prism hanging from the truck’s ceiling, onto a stack of papers. The truck’s owner said the prism was a gift from his insurance company.”

So for the holidays, I told them, I would send everyone prisms.

The fax, as it turned out, was assigning me the topic, “How I’d Run an Insurance Company,” which I was much less well qualified to address. But that didn’t matter, because after the part about the prisms I simply segued into “How to Fix the Damn Auto Insurance Mess, and Why You Guys Owe it to Your Customers (and Your Shareholders, in the Case of a Mutual Company) to Help.”

My speech, I will throw modesty to the wind and say, was worth every penny they paid for it.

Tomorrow: Feedback, Updates and Corrections

Not long ago I found myself in Manhattan, which I am not that often, and in a suit, which I am even less often, and actually going out for lunch, which I never, ever do.

And I figured, well, I have this big check to deposit (another all-too-rare situation), so rather than put it in the mail or FedEx or whatever, why not just drop in on the bank and say hello? It’s a small bank with a beautiful town house in midtown Manhattan — Bank Audi — run by none other than Joe Audi himself. Joe belongs to a prominent Lebanese banking family. If you happen to be in Beirut or Paris, you can visit its affiliates, and other Audi family members, there. (I have never been to Beirut, but know I will appreciate this convenience if I ever am.)

I love a bank that gives me a 4-digit account number.

Anyway, I get to the bank through typical bustling midtown traffic — a Monday, midday, people on cell phones checking the stock market, office workers pouring out of buildings to get an early seat at the lunch counter, business as usual — and . . . that’s funny. The bank’s huge wrought-iron-and-glass doors are closed, with newspapers wedged into it and “tried to deliver” slips flapping in the breeze.

Hunh?

I tried the door handle. No dice. I peered through the glass. Not a creature was stirring. No mice.

Oh, boy.

I can’t say I was really alarmed. But I did worry that maybe some key figure at the Bank — perhaps Joe himself — had died, and the Bank was closed for the day out of respect, so all the employees could go to the funeral. That’s what we did with the Tip Toe Inn when my grandmother, who had run it for so many years, died.

“Poor Joe!” I thought.

Or else maybe it’s Lebanese Kwanza or something I just don’t know about. I could see people going in and out of the Citibank branch across the street . . . so why was my bank closed?

And if there had been some scandalous hanky panky of some kind — if Bank Audi had just up and disappeared — would that mean I didn’t have to pay off my loan? This could be very good news indeed.

I pulled out my cell phone (how I love excuses for doing that) and tried calling the bank. I got a recording. The best I could do was to leave a concerned message.

“Hmmm,” I mused, as I walked over to the lunch that had taken me to midtown in the first place. And then, with one thing and another, I sort of forgot about it the rest of the day.

At dinner, the undeposited check still in my pocket, I suddenly remembered. “Excuse me,” I interrupted whoever was speaking, “but is today some sort of Lebanese holiday, do you know, or did my bank just go belly up?”

That’s when I found it was Veterans Day. Everything was open but the banks. The people I saw going in and out of Citibank were just going to and from the ATM machines.

Why does Wall Street stay open when the banks are closed? Simple: they don’t want to lose any trades. (That’s why casinos are open, too.) Banks, on the other hand, are a little less concerned. They know you’ll be back. And I was.

Tomorrow: How to Ruin an Insurance Company

I’m indebted to my friend Peter Vanderwicken for the following insight from a recent issue of Vanderwicken’s FINANCIAL DIGEST. He notes the almost uncanny jinx that “moving to beautiful new headquarters” seems to cast.

Part of it may just be the extra overhead. I was once a child tycoon, vice president of the then fledgling (now extinct) National Student Marketing Corporation, with offices on the 35th floor of the Time-Life Building in New York’s Rockefeller Center. It cost $15 a square foot back then (that would be $62 a foot in today’s dollars), and I thought it was pretty spectacular.

“Not good enough,” felt our leader, who moved us into the brand new $35-a-foot Bristol Myers building on Park Avenue, across from the Four Seasons, only to see our stock drop from $140 (unadjusted for splits) to $3 a short while later. (He would eventually occupy free office space in a federal prison, but that’s a different story.)

So part of the jinx may be the increased overhead, and perhaps management distraction with the move (picking out the sharpest carpets instead of the sharpest marketing plans). But mainly I think it’s just a good contrarian indicator. This is the sort of move a company makes at the top, not at the bottom.

Peter recalls writing about Levi Strauss for Fortune, back when it was about to move from “a funky old building” to “San Francisco’s glitzy Embarcadero Center.” Bang: bad years followed. Or look at AT&T and IBM, Peter suggests, building “their elegant towers on New York’s Madison Avenue — just as their fortunes peaked.”

Well the point of this, as you may well have surmised, is: guess who’s planning a major glitzy expansion? The New York Stock Exchange.

Could that mean that computerized, human-free trading is really about to swamp the Exchange? Or could it be a somewhat scary symbol for the market itself? (I’d think the former more than the latter.) I don’t know, but I’m not sure I’d pick right now as a great to buy a seat on the New York Stock Exchange.