Author: A.T.

So there I am at the Morris Healy gallery in New York — full disclosure: I’ve never met Morris is, but Healy’s a friend of mine — looking at The Exhibit I alluded to yesterday, when I was trying to figure out what stocks are worth.

The gallery is way over on the lower West Side of Manhattan, and The Exhibit was of the work of Meg Webster, whose medium is food. And other organic substances.

On the main wall facing you as you entered was a 10-foot-square slab of sweet creamery butter. Not counting its backing (plywood?), it weighed 400 pounds — just the butter — which the artist had applied (smeared? spread? buttered?) shortly before.

There was, if memory serves, a slight buttery scent in the air — vaguely like a movie theater, although this butter was unsalted and Ms. Webster (to my knowledge) does not work in three dimensional food, like popcorn, only spreadables.

The work as, as you might imagine, was yellow. But the art stemmed from the concept (I guess), but also from its contours and texture. We are not talking about a thin and even spread here — that might have been sprayed on with one of those low-fat imitation butter aerosols. No, we are talking about thick, textured globs and waves and folds of butter . . . which by now were beginning to sag.

On walls further into the gallery there were smaller works. Chocolate, for example, was done on a five-foot-by-three-foot mirror. It sold for $6,000 and, while essentially brown, did have quite a pleasing and interesting look to it. The chocolate hardens, its contours preserved like those of a dry river bed. (But lest I mislead you, the chocolate was not on parts of the mirror, in some sort of design: the chocolate covered the entire mirror, which you only knew was a mirror by looking behind it or hearing the story from my friend Tom Healy.

You know it’s real art for three reasons. First, somebody paid $6,000 for it. Second, it did look quite interesting — there was something visually quite appealing about the chocolate (and about the butter, though not — to me — about some of the other works, like the one done entirely in blood). Third, Healy went to Harvard.

You’re not entirely sold? Harvard not your be-all-end-all? Well, how about this? Meg Webster, the artist, was spending the summer in Skowhegan, the art colony in Maine; was exhibited in the 1988 Whitney Museum Biennial; and is a sought-after teacher at Yale, among other places.

I liked “Molasses,” also, which went to some lucky buyer for $10,000.

Mind you, these artworks were not under glass — you could reach out and put you palm print in the butter (no one seemed to have done so, so I didn’t either) or lick a little of the molasses (I held my tongue). So how durable were these pieces? What were you really buying? Did the emperor’s butter, I found myself wondering in the most confused of mixed metaphors, have no clothes? (Are these works, I wondered — borrowing a concept from the Eighties and cocaine — “Nature’s way of telling you you have too much money?”)

Tom Healy explained that most of the work is actually quite solid. Chocolate could last a long time. Butter, admittedly, could not. Butter, indeed, was beginning to droop in the summer heat (Morris Healy is air conditioned, but it was still summer in New York) and would soon, as the exhibit wound down, begin to smell. With butter, Tom explained, you were really buying the “concept.” You could have Ms. Webster come and do YOUR wall in butter (just before that special party), and would own the drawing for it, perhaps the photos of it. I think I’m getting this straight, but my mind kept wandering. What happens, I wondered, if globs of the butter actually came loose and slopped off onto the floor? It wasn’t anchored by the nooks and crannies of a giant vertical English muffin slab, after all. That might have provided some grasp. It was simply smeared on a flat surface.

Not to worry, Tom laughed. If that happens, it will be part of the art. The piece will simply be dismantling itself. (Or, as Meg told Tom when this did begin to happen: “it’s erasing itself.”)

So what is 400 pounds of butter worth? Four hundred pounds of beach sand, configured just right by Intel — I think that’s how they make those chips — is, after all, worth millions. Perhaps it is worth the $12,000 it was priced at by Morris Healy, but presumably less, because it did not sell. (Much of the rest did.)

But Meg — and you — may have better luck next time. You, because if you’re in Copenhagen in 1997, you’ll have a chance to see Butter again. Meg, because Copenhagen is a cooler climate. It may be longer before the gallery is pervaded by the faintly rancid smell with which, Tom Healy told me later, the exhibit happily, but none too soon, concluded.

In short: pay any darn thing for a share of Netscape (or any other stock) that you want. If you’re rich enough, or whimsical enough, what difference does it make? You’re not making an investment, you’re participating in a late 20th Century experience.

I’ve been meaning to write this one ever since The Exhibition. It’s just too great.

Yesterday, I wrestled with the question of what Netscape is worth. It’s both easy and impossible to know. (Easy: 55 bucks a share, or whatever it’s trading hands at this instant. Impossible: what’s it really worth?) Today, I want to tell you — finally — about The Exhibition. And the butter.

A stock is worth whatever someone will pay you for it. But its “real” value, investment professionals will tell you, is the discounted value of its future stream of dividends plus the discounted value of any final liquidation. You buy shares in a company because you hope for a share in its profits.

As a practical matter, few exciting companies pay much in the way of dividends at all. And many wind up going the way of the dinosaurs long before their dividend pay-outs can justify their earlier prices. But surely the theory is right: a company should be worth today the sum of all the future payments you will get from it until it dies or is liquidated or is bought out by someone else (in which case the buy-out, 3 or 30 or 300 years from now, would be one final huge liquidating dividend).

You can’t just add up your estimate of all those payments without adjusting for the “time value of money” — a $2 dividend check 10 years from now clearly isn’t worth $2 today. You need to “discount it back” to today’s dollars. To someone who expects a 9% annual return on his money, $2 ten years from now is the same, my pocket calculator tells me, as 84 cents today.

There is much more than could be said about the mathematics of logical stock-market valuation — most of it beyond my competence to say, and none of it whatsoever applicable to the recent valuations of high-tech IPOs, or anything else you’re really interested in.

Part of the paradox is that in many ways the most exciting, valuable companies are those that never pay dividends, on the theory that to do so hurts the interests of the owners two ways: first, taxes must be paid on dividends; second, the owner will not be able to reinvest the dividend with nearly the success that management could if, instead of paying out the dividend, it retained the profit itself (“retained earnings,” is the accountant’s phrase). Better, therefore, to keep reinvesting all profits and acquiring more and more earning power — even if the earnings are never passed on to the owners.

A lot of this has to do with “faith” and “trust,” just as dollar bills themselves merely represent units of “faith.” The bills themselves are just scraps of paper. You can’t eat them; stitched together they’d keep you only a little bit warm. But we take it on faith that everyone else will accept their value — and so we do, too.

So I don’t know what stocks are worth, though my greed and fright glands often seem to think THEY know, and are sometimes right. (The greed gland is located in the pit of the stomach, just behind the appetitum. The fear gland is located in the hindquarters, and makes you run like hell when scared.)

What, then, would you pay for 400 pounds of butter?

Here it is the end of my comment, time for Seinfeld (I’m sorry, but some things take precedence), so I have to ask you to come back tomorrow to hear about The Exhibit. And the butter.

Tomorrow: The Butter. (Really.)

For you high-tech executives and big-dollar investors, I’ve mentioned Mark Anderson’s electronic Strategic News Service. (For a free month: Markrander@aol.com. Thereafter, $195/year.)

I understand only about 15% of it.

A nugget I grasped a few weeks ago was Mark’s opinion that Netscape — though a loser to Microsoft in the browser wars — had cemented its position as a long-term survivor.

“OK,” I e-mailed him. “So Netscape is here to stay. But how would one value it? The stock market says: $4 billion and change (85 million shares at $50 each). Is that crazy high? Crazy low? About right? I’m as interested in how you’d approach the problem as in your answer (though I’m interested in that, too).”

After all, this guy has pretty exceptional credentials and a self-assessed 100% accuracy rate in all his predictions since Day One, so for my $195 a year (OK: there’s a 50% discount for students and journalists, but still!), I’m thinking: forget the future of telecommunications and social organization and paradigms and discontinuities. Is Netscape a long or a short?

I mean, one could grow quite comfortable after just a few years of 100% accuracy in the stock market. Even 90% would work.

“You have correctly anticipated the first part of my answer,” Mark wrote back. (Well, he doesn’t exactly write back: he publishes your letter and answers it for all to see.) “For most of the technology sector, the P/E is almost irrelevant (see Microsoft), and the company valuation is probably secondary in determining price. I tend not to work on valuations much. My assumption is that people are much more interested in whether the price will go up or down over a specific period of time.”

[Let me interrupt to be sure you’re clear what that means. It means: “Who cares what the stock is worth? These days, that’s not something buyers and sellers look at.” In my experience, that sort of attitude — not to pin it on Mark, he’s right to observe it — but that sort of attitude prevails either when there are ridiculous undervaluations, and everyone’s just too disgusted, depressed and scared to think rationally . . . or else when there are ridiculous OVERvaluations, and everyone’s just giddy.]

“I managed to cause a great amount of good-natured amusement a week ago, in a conversation with a small crowd of Wall St. fund managers. I told them where I thought a particular stock would go over the next year or two, and why. The ‘ringleader’ agreed, laughed, and then, turning to the rest of the group, said: ‘He probably doesn’t even know what the P/E is — or care.’ This seemed to absolutely delight him. He was right on both counts.

“As for Netscape, their recent re-positioning will do them well over the next 12 months. I think their price will continue generally to rise (rebound) over this term, despite the devastation of the coming browser debacle. Thanks for writing in. — Mark”

Well, he’s probably right, but I ain’t buyin’ it.

And now it’s 55.

Tomorrow: OK, Then, How About 400 Pounds of Butter?

This is the old joke promised in yesterday’s brief comment. I’m not great at remembering jokes, but here’s more or less how it goes. I apologize to those of you who know it.

This group of scientists at Princeton (it just feels right to me that it should be Princeton) decided they would try to answer the ultimate question. So they commandeered the university’s largest computer and asked it: “Is there a God?”

Of course, the question was phrased, ultimately, in a nearly endless stream of ones and zeroes representing state-of-the-art algorithms from theoretical physics and transcendental mathematics, but that was what it boiled down to: “Is there a God?”

Well, the computer chugged and chugged for a while but then spit out an error message: “not enough processing power” to derive an answer.

Anticipating this, the scientists had already begun negotiations with colleagues around the world, and managed to arrange for a hook-up of virtually all the world’s supercomputers, for the better part of an hour, to work on the problem in parallel.

Nothing like this had ever been tried before, but it was, after all, the Big Question.

The hour passed, during which time commerce around the world ground to a halt, as credit card transactions couldn’t be approved anywhere, and then out came the message: “not enough processing power.”

Wow. So then the scientists hooked this whole effort into the Internet, temporarily commandeering all the processing power of all the tens of millions of PCs in the world, as well.

Again! “Not enough processing power.”

One last attempt. They added to this already extraordinary global brain all the chips in all the appliances and carburetors and digital watches — all that stuff — in the entire world. (Don’t ask me how. This is a joke.) “Is there a God?”

And the answer came back:

“There is now.”

Tomorrow: What’s Netscape Worth

So “the network IS the computer,” as they say, or shortly will be, and we will have in our little finger as much computing power as 100 Isaac Newtons strung together in an intellectual chain gang.

(Today, I’m told, according to last month’s Fast Company, the world’s “computing capacity” approximates that of 100 trillion human beings.)

Ah, but can all that computing power tell a really good joke? With just the right shading and timing and inflection? I DON’T THINK SO.

Maybe that’s the ultimate fate of our species: to be the court jesters to a ruling class of supercomputers.

Tomorrow I will do my best to render the old joke that naturally flows from this thought. Do you know the one I mean?

Last week I had a private e-exchange with a man of many bucks (recently inherited) but few words:

Cryptic Cyberspaceman: “Which is better, a stock that appreciates at the rate of 4% a year and pays no dividends, or one that has a 10% yield but no appreciation?”

The stock that yields 10%, if it will do so forever, is better than the one that will grow 4% forever. If nothing else, you can take your 6% after-tax from the dividend (if you’re in the 40% federal-state-local bracket) and reinvest it. So each year, the value of your holding grows by 6% instead of 4%. Why do you ask?

Cryptic Cyberspaceman: “ZF (the Zweig Fund) pays about 10% and seems rock steady. It’s traded like a stock but acts like a cross between a mutual fund and a money-market. Do you know it? Own any of it?”

The Zweig Fund is fine. I don’t own any of it, but once did. It’s a “closed-end” mutual fund that, like many others, is traded on the New York Stock Exchange, just like GM.

It’s a perfectly good choice, but don’t mistake it for a true money-market fund. Yes, it’s stated goal is to distribute 10% a year (2.5% a quarter) and, yes, Marty Zweig (whom you may have seen on Wall Street Week) is a smart veteran, better than most at limiting risk. But in an extended bear market, I doubt you’d see those 10% pay-outs uninterrupted. Or if they were uninterrupted, you might well be getting your own capital back — i.e., the fund would be liquidating assets, at depressed prices, to keep paying the distribution. That’s not a return on your money, it’s a return of your money.

Just be sure you’re buying this or any other closed-end fund at par or a discount to net asset value.

Cryptic Cyberspaceman: “Hunh?”

With a regular “open ended” mutual fund, you buy shares direct from the fund manager, who takes your money and puts it to work with everyone else’s; and you redeem your shares from the fund manager. (Yes, some brokers can now do this for you, as a considerable convenience. But behind the scenes, that’s still how it works.) The funds are “open-ended” in the sense that they ordinarily keep selling shares to anyone who wants to buy. There’s no limit to how many investors, and how much cash, they may attract.

Closed-end funds, by contrast (also sometimes called “publicly traded funds”), gather a set pool of money in a public offering, and that’s it. The pool may grow as the fund’s holdings appreciate, but the only way to get into the fund is to buy shares from someone who wants to get out. I.e.: call your broker.

If a lot of people want to get in and not too many are keen on getting out, the price goes up — sometimes to a premium far above the value of the underlying assets of the fund. More typically, they sell at a discount, especially in a bear market. (So there you have a double whammy: the underlying value of the fund has dropped with the bear market, and the discount has widened, to boot.)

You’ll find a list of closed-ends and the premium or discount at which each most recently sold every Monday in The Wall Street Journal under the heading “Closed-End Funds.” (There’s probably a free place to get this on the Internet as well, but I haven’t found it — please chime in and I’ll post it next time I do an update.)

Closed-ends selling at, say, a 10% discount let you control (and reap the benefits from) $1 worth of stock for 90 cents.

The only problem is that, unlike owning that $1 worth of stock directly, there’s a management fee deducted from the fund each year. So a 10% discount may be wholly appropriate. Then again, if the manager is good enough, the value he adds may justify the fee, or (as hoped) more than justify the fee.

Some closed-ends are perceived to have such lousy managers, and/or high expense ratios, the discounts can widen to 30% or 40% in a bear market. Marty Zweig, on the other hand, is generally perceived to be worth what he costs. The Zweig Fund usually trades just a little below — or above — the underlying value of its securities (“net asset value” or “NAV”).

Which is a lot of background to a simple cryptic question. My short answer would be: ZF is fine, especially for someone in a low tax bracket. But ordinarily I prefer to buy closed-ends in the midst of a bear market, when their assets are cheap and their discounts are wide.

Of course, since we will never again have a bear market — or inflation, panics, or worries of just about any kind, other than what to wear — I guess this is all a little academic.

Oh, and one other thing: Never buy a closed-end fund on the initial public offering, no matter how eager your broker may be to sell it to you. You will pay a built in underwriting commission that does you no good whatever. Just wait a few weeks or months: ordinarily, closed-ends fall to a discount.

Monday: Does Your Computer Have a Sense of Humor?

And that’s whither, I hasten to point out, not wither. My natural take on the market, always, is that it will tend, over time, toward sensible valuations. The stuff that’s wildly overpriced these days will get clobbered, sooner or later; the rest may have some setbacks, but will for the most part tend to appreciate over the long run as it more or less always does.

I recognize that this is useless blather, so let us turn to two people who really know.

The first is Elaine Garzarelli, of whom I have written before, back when she thought, last Spring, the Dow was headed to 7,000. Now — well, a few weeks ago — arrives “an urgent warning from Elaine Garzarelli, who’s predicted every bear market crash of the last 20 years.” It is a bulk mailing from Elaine Garzarelli’s Private Circle (A Strictly Limited Membership Program), and right there on the outside of the envelope, in case you don’t want to spend the $149 a year to join that exclusive circle, is pretty much all you need to know: “SELL!” it says. “Garzarelli’s System Flashes Major New Signal. Details Inside.”

Inside we learn that not only has she called every bear market of the last 20 years, she has done so with “zero false alarms.” This is only the 4th sell signal of her career. And for $149 you can find out “What surprising factor has triggered this new SELL signal, and why it startled even Elaine.” But when you think about it, why bother? If she’s so good at this (and I’m not saying she isn’t), are you really going to second guess her? Are you really competent to evaluate whether she should have been startled, or whether she’s interpreting the implications of that surprising factor, whatever it is, correctly? If so, maybe she should be paying YOU $149. So it’s enough to know you should “Sell all U.S. stocks and stock funds.” Urgent. (To subscribe: 800-804-0938.)

But just before you do (although if you got the same Private Circle bulk mailing I did, you’ve presumably already sold, and paid all those taxes), here’s the November mailing from good ol’ F.X.C. Investors Corp. in the borough of Queens, New York (718-417-1330). F.X.C. stands for Frank Curzio, and I’ve been a paid-up subscriber for many years. Not to say it’s made me rich or anything. He’s just such an unlikely, unWall Street-like guru, with such an earthy approach, I couldn’t resist. In the last few years he seems to have acquired a copy editor, which has robbed his writing of some of its charm, but in any event I’m straying from the point.

The point is: “Approximately $100 billion annually will be invested in stocks and bonds throughout the next 10-20 years. As such, the market may double every five years. Dow Jones 12,000 by 2001 and Dow Jones 24,000 by 2006.” (He goes on to say that the blue chips appear pretty rich compared with the “secondary issues,” where he sees better value. So if the Dow is set to quadruple over the next decade, investments in some of the offbeat little issues Frank likes could do even better.

Which of these two gurus is right? And over ten years could both be right? (A plunge followed by a rebound and beyond?)

I don’t know, and no one else does either. But I do know that if you are going to lighten up in hopes of averting a downdraft, you should do it mainly in your tax-deferred retirement account (if you have one) so as not to see a big chunk of your assets eaten up in taxes. I also know that if you have money in the market on margin, or money you might need if you lost your job or got sick or your car broke down, you are taking a dumb risk.

And I know — or I think I do — that the economic future looks exceedingly bright. And that that, sadly, can be the worst time of all to invest in stocks. But not always.

Got it?

Tomorrow: Zweig (and Other Closed-End Funds)

I’m writing this early on election day, so maybe it will be one of those embarrassing DEWEY BEATS TRUMAN! deals (and you can frame this web page to show your grand kids), but:

CLINTON BEATS DOLE!

Not knowing the Congressional results, or any of the rest, I’d just like to suggest a couple of things.

First, as I’ve suggested before, despite its not being fashionable: we were lucky to have two such good and competent candidates to choose from. Unfortunately, it’s become the nature of the game for each side to try to demonize the other, but the fact is that these are both extraordinarily able, experienced men of good will, both of whom wanted to do a good job for the rest of us.

Second, the drumbeat of “scandals” surrounding the President is mostly hokum. To me, Hillary’s commodities scandal is a good example. Even the least financially savvy among us can snicker at the knowledge that she must have done something wrong. But as I’ve written before, other than being too defensive about it, this simply turns out not to be true. She didn’t. Likewise, the Clintons’ Whitewater investment and the Vince Foster suicide. These scandals turn out to be non-scandals — and yet, throw enough of them out there, relentlessly, and they begin to take on a life of their own.

Not to say the Clintons are perfect — or the Doles either, for that matter. Perfect is a pretty tough standard to live up to. And not to say the FBI files matter shouldn’t be looked into — someone screwed up (but why are his political enemies so sure it was the President?). Or that campaign finance reform is not badly needed (but it’s badly needed on both sides).

For those who disagree with the President’s ideas on social and economic policy, there’s naturally the strong disposition to believe anything that would “prove” he’s a bad guy — and thus discredit those ideas. We want to believe the worst about the people we disagree with.

And even the rest of us, not wanting to appear naive, tend to assume the worst.

But my own instinct — having through dumb luck had an opportunity to observe the First Couple a little bit back when they were merely Arkansas’ first couple — is that most of this stuff is simply without substance, overblown, or, with respect to his private life, really none of our business.

So if your man won — congratulations. And if he lost — well, I just want to suggest that it may not be as bad as you think. After all, the last four years haven’t been that terrible.

Tomorrow: Whither the Market

This comes from Brooks Hilliard, an independent management consultant. It has absolutely nothing to do with today’s election, so let me take a moment to remind you to VOTE. (Sloth and apathy, not to mention ignorance and cynicism, may be upon the land — but not upon the readers of this web site, I’m happy to say.)

If you liked the frozen chicken story [Brooks writes], you’ll love this one, reputed to be an actual radio conversation recorded by the Chief of Naval Operations, 10/10/95 (I can’t vouch for the veracity of the claim, however):

#1: Please divert your course 15 degrees to the North to avoid a collision.

#2: Recommend you divert YOUR course 15 degrees to South to avoid a collision.

#1: This is the Captain of a US Navy ship. I say again, divert YOUR course.

#2: No. I say again, you divert YOUR course.

#1: THIS IS THE AIRCRAFT CARRIER ENTERPRISE. WE ARE A LARGE WARSHIP OF THE US NAVY. DIVERT YOUR COURSE NOW!!!

#2: This is a lighthouse. YOUR CALL!!

There’s no question California’s auto insurance system is broken. Premiums are too high, benefits too low. More dollars go for legal costs when people are hurt than for medical care, and there’s tremendous fraud—California drivers are three-and-a-half times as likely as Michigan drivers to claim “whiplash” after a minor accident.

So, yes, California’s auto insurance system could hardly be worse.

But Prop 213 is not the answer.

Part of it is trivial but worthy—the part that would deny criminals the right to sue if injured in the course of committing (or fleeing) a crime. Who could fail to be outraged knowing that today a carjacker can actually sue you for injuries he sustains while speeding off in a stolen car?

If this is all Prop 213 did, it wouldn’t accomplish much—statistically, cases like this amount to nothing—but would still be worth a YES.

The real thrust of Prop 213, however, is entirely different—and mean spirited. It’s not directed at a few fleeing bank robbers, but at millions of low-income families. It says that low-income drivers—who simply cannot afford insurance today because the price is inflated by unnecessary legal costs and fraud—are somehow to blame for this situation. It implies that they are little better than felons.

That’s just not fair.

If they’re hurt, Prop 213 would prevent their suing, except for their actual damages. And as a practical matter, it’s not at all clear they’d be able to sue even for that when the damages are relatively modest — there’s may not be enough money in it to interest a lawyer to take the case.

Had the initiative specified that people who could afford coverage but didn’t buy it were penalized, that would be one thing. Were auto insurance costs not bloated by $2.5 billion in high-priced legal fees and billions more in fraud, and thus affordable, THAT would be one thing. But to tell someone earning $12,000 a year that he or she must buy unaffordable auto insurance (rather than feed his kids) is just plain mean.

It’s true that if Prop 213 passes auto insurance rates would probably drop a little, maybe 3%-5%. But is that minor saving worth depriving millions of hard-working lower-income people of the right to sue if injured?

Prop 200, the auto-insurance reform initiative many of us backed last March, would have deprived virtually everyone of the right to sue another driver (except a drunk driver). But the “pay-off” for that was enormous. By cutting out the lawyers and fraud, Prop 200 would have cut premiums far more than 3%-5%. More to the point, your benefits, if seriously hurt, would have soared.

The RAND Corporation’s Institute for Civil Justice estimated that under Prop 200, someone who today buys just the legal minimum $15,000 in liability coverage—which doesn’t even protect them, just whomever they might hit—would actually have saved 17% on average buying Prop 200’s “standard” coverage, which provided up to $1 million per person in benefits no matter what, even if you couldn’t prove the other driver was at fault (or catch him). It would also have provided universal injury coverage to every child under 18, and to every pedestrian (including kids on skateboards and tricycles or darting out from between two cars). THAT was a trade-off worth making. (As many of you know, faced with the loss of $2.5 billion a year in fees, the lawyers did what they had to to defeat it.)

Prop 213, by contrast, is a lousy trade-off. It’s like cutting “government waste” not by cutting government waste at all, just taking school lunches away from poor kids.

Let’s make auto insurance affordable by cutting out the legal fees and fraud, and then expect everyone to buy it.