Author: A.T.

One of the reasons I enjoy collecting “historic documents,” so-called, is the way they capture tiny slices of the past.

Here’s a letter I just purchased, written by T.S. Eliot in 1960. (Remember 1960? Astonishingly, some of you don’t.) It’s anything but momentous; just a brief note to a woman at The League of Dramatists in London. But here’s the part I like: “I’m very glad that the videotape (that’s a new word to me) matter is settled, and that I have your support.”

Isn’t that great? Men were already making plans to walk on the moon, but here was videotape, a new word to a writer who surely knew them all. Our modern techno-age has just come rushing along so fast.

And here is a letter from William Howard Taft of Ohio, August 26, 1908, responding from Hot Springs, Virginia, to a lawyer in Boston. The lawyer had apparently advising presidential-candidate Taft that it might appear unseemly for him to make speeches. “The question of my making speeches or not,” he writes back, “is a question that I must submit to the National Committee, whose advice in matters of this sort I may properly follow.” And then goes on to dispute “the English criticisms” some Brit must have made. (“Certainly it would be very remarkable for an Englishman to criticize the making of speeches in a campaign when we have had such great exhibitions of campaign discussion as were made by Mr. Gladstone and Mr. Disraeli and other English leaders, without detracting in the slightest from the dignity of the office to which they were aspiring, to wit, that of the Premiership of England.”)

Can you imagine — a presidential campaign without speeches? Taft went on to beat William Jennings Bryan by a landslide, speechifying all the way. (Four years later, his mentor Teddy Roosevelt would run against him as a third-party candidate, splitting the Republican vote and throwing the prize to Woodrow Wilson. In 1921, Taft was appointed Chief Justice.)

Lest you think I’ve lost my mind, I should say that minor letters like these cost just a few hundred dollars. (I know, I know — you still think I’ve still lost my mind. But, please! Williams-Sonoma is selling a toaster for $375 with delivery and tax . . . albeit a very classy toaster . . . so every time I buy a letter I just pretend to buy a $12 toaster, as well, applying the putative $363 saving to the cost of the letter. I have a lot of letters and a roomful of imaginary toasters.) And think about it. For at least a couple of minutes on a hot Virginia August day, Taft must have been annoyed or bemused but, in any event, occupied answering the Boston lawyer’s letter. In a sense, I own those two minutes.

If a man is called to be a streetsweeper, he should sweep streets even as Michelangelo painted or Beethoven composed music or Shakespeare wrote poetry. He should sweep streets so well that all the hosts of heaven and earth will pause to say, “Here lived a great streetsweeper who did his job well.”

— Martin Luther King, Jr.

For our part, we should treat that streetsweeper with respect for a job well done, and with genuine gratitude for doing a job we’d pay big bucks — but don’t — not to have to do ourselves.

Lest you think I’m lecturing you, I should say I’ve written this largely as a reminder to myself. “How are you today?” I too often forget to ask as I get into a cab. “Thanks — good ride!” I too often forget to say as I leave.

Monday: T.S. Eliot and President Taft

Your average guy goes for a haircut every few weeks. I don’t have time for that, so I have a guy come to me. He charges ten bucks, but I say: what the heck; time is money. I’d rather pay the big bucks and save an hour.

I even give him a $10 tip, which makes it a $20 haircut.

This is a level of extravagance you might not expect of a man like me, who once cut his own hair. It’s because I feel bad for my haircut guy.

He’s underpaid.

Not as a haircut guy, but in his primary profession: teaching fourth grade. When you think about it, what job carries more responsibility or is more important to the future of our community-country-species? Why do salesmen earn more than teachers? Why do plumbers?

Supply and demand. But demand in the teacher business is a funny animal, given our system of mostly-public education. Parents would certainly demand good teachers and low student/teacher ratios. But parents aren’t the ones making the “buy” decision, unless they can afford private school tuition. (Vouchers may or may not be a good idea — school choice and magnet schools certainly are — but vouchers would not raise the overall number of teachers, and thus lower the student/teacher ratio, in any appreciable way.)

Anyway, whenever I get my haircut, my haircut guy comes over along with his partner — another elementary school teacher — and I learn something about life in the trenches.

Here’s what I learned today:

My haircut guy, who teaches inner city kids, has 34 of them in his class. His partner, who recently switched to a private school, has 15.

And there, ladies and gentlemen, you have it. At the critical stage, the point of maximum leverage, when kids are young and impressionable and not-yet-gang members . . . when they crave love and attention all too many don’t get at home . . . when their social behavior and productive capacity are being formed for the next six or seven decades and their citizenship skills are being honed . . . we are sticking 34 of them together in a class and hoping that my haircut guy will somehow be able to maximize their human potential.

Well, he can’t — no one can — and he knows it. Especially because the kids from the toughest backgrounds are precisely the ones who need the most attention, who are the most difficult to control.

Not that all these kids will fail. I have one employee, 26, who graduated high school unable to read or write and fell prey to crack — yet who, amazingly, somehow beat his addiction before I ever knew him and who, for the last few years, has been a hard-working, tax-paying illiterate member of society. He now has two kids of his own soon to enter elementary school, to whom he can’t read and with whose homework he won’t be able to help.

His kids at least have a loving father who’s “there” for them. They may turn out fine. But they will be in class with 32 or 33 other kids, some of them less well behaved, and a teacher whose primary function becomes keeping order.

How do we get more bright, enthusiastic young people to choose teaching over, say, personal injury law or real estate? (Not that we don’t need good personal injury attorneys and real estate agents. But our deficit in those areas, and many others, is less than in teaching.) The first thing I guess we need to do is create the jobs for them — the demand. Fewer kids in a class means higher taxes, or shifting money to education from other things — neither very appealing. But what more important investment can we make?

It’s not new schools that are so badly needed — staggered scheduling and summer sessions could wring more use out of existing buildings. Computers can help — see Monday’s comment if you have a ratty old 386 in the attic collecting dust. But is there really a substitute for a good teacher and personal attention?

What would you advise my haircut guy to do? With 34 young minds and characters to help mold, many of them coming from fatherless homes, and/or illiterate parents — can he really be expected to break the cycle of poverty and disaffection? It would be tough at any class size. But 34?

I know, I know. I’m getting pretty far afield from your immediate money concerns. “He used to cut his own hair?” you’re thinking. “Wonder what that would save ME? There’s Bill’s hair, and the kids’ . . . we could save $500 a year tax-free doing that, which invested at 14% a year would grow to a million dollars in just 43 years. Where do I get a haircutting doohickey like that?”

Well, I say you’re being ridiculous. First, you’d never earn 14% after taxes on your money over 43 years. Second, the kids — and very possibly your hair — will be gone long before then. So this million bucks is illusory. But the 34 kids to a class are not.

Tomorrow: The Not-So-Wealthy Streetsweeper

Earlier this month, I suggested that a capital gains tax cut could trigger some heavy selling in a stock like Berkshire Hathaway, which at $32,000 a share, up from around $16 thirty years ago, could have some long-term holders eager for a chance to cash in a few chips.

The last thing I want to do is turn this page into a sort of ongoing Motley Fool-like discussion of BRK. But Buffett’s is, after all, a remarkable story, both personally and mathematically, and — because I am anything but expert in valuing Berkshire Hathaway stock — I thought I should share two of the responses I got, both bullish. My apologies if what follows reads more like an accounting text. Tomorrow I’ll go back to ostriches or paper towels or something.

The first bullish message came from Chuck:

If long-term capital gains rates were cut (or even eliminated ala the flat tax proposal), do you have any idea what would happen to the ‘liability’ holding down BRK’s intrinsic value? Presently there is $5 or $6 Billion ‘accrued’ on the supposition that if holdings were sold at today’s prices, this is the amount which would have to be paid.

My own thinking is that the market intrinsically values BRK’s public holdings at 65% of market value- reflecting the PRESENT VALUE of the double taxation which will eventually have to be paid under an optimal buy-and-hold-forever strategy. This 35% tax discount REPLACES (it should not be combined with) the ‘liability’ which the accountants accrue on the ‘unrealized gain’ in Buffett’s public holdings portfolio.

The flat tax idea was never a certainty but the serious attention it enjoyed in the Primary season explains a lot about BRK’s run-up to $38,000 and it’s subsequent decline back to $32000.

Interesting! I hadn’t thought of that. But if the $6 billion paper liability you speak of were instead halved by a 50% cut in the capital gains rate — adding $3 billion to the value of BRK shares — that would work out to $2,500 a share ($3 billion divided among about 1.2 million shares).

(This also assumes that if Berkshire Hathaway someday did sell its highly appreciated stake in, say, Coca Cola or Wells Fargo, it would not drive down prices in the process. Or that even if it didn’t, some nasty Congress a decade hence might not have ratcheted the long-term capital gains tax back up.)

So the impact here, at “only” $2,500 a share, would not justify a run up from $32,000 to $38,000. My own thought is that many BRK holders, even knowing of the felicitous accounting change, would still want to take some profits if the capital gains tax rate were cut — while relatively fewer investors would be rushing in to buy.

But as I say each time: I’ve foregone many fortunes underestimating BRK’s future.

Now, for those of you who are still with me, this second bullish analysis may be of interest, as well. It comes from a man who recently bought 55 BRK class A shares at an average cost of $30,500 each. (Ah, to be such a man.)

He writes:

Here is why I do NOT believe Berkshire stock is currently overpriced (all these numbers are approximate):

Book value per share as of June 30:	$16,600
Increased value in major stock holdings since June 30 (very rough estimate, includes dividends)	1,250
Add back about 80% of listed deferred tax liability on security holdings, since most profits will not be taken for a very long time [the item Chuck was talking about — A.T.]	4,000
Value of wholly owned non-insurance businesses above carrying price (1995 pre-tax earnings were $244 per share, against book value of $705 per share. True value should be at least $2900 per share)	2,200
Non-Geico Insurance float (this number is essentially worth face value because it will probably continue to rise, which more than cancels out any risk of their insurance arm becoming smaller or going bust, and BRK will receive the entire income on this float indefinitely.)	3,000
Value of non-Geico insurance business exclusive of float. (Premiums minus losses and expenses for 1993 was $26; 1994 was $108; 1995 was $17)	500
Add back profit based on present value of unearned insurance premiums	250
Value of Geico above carrying value (this is merely imputing the same value on Berkshire’s original holdings as Berkshire just paid for the rest of the company)	900
Value of finance business (earns about $20 per year)	200
TOTAL REALISTIC VALUE PER SHARE	$29,000

I’m sure I’ve overlooked a few nuances in both directions, but I think
the figures above represent a fair approximation of Berkshire’s value
WITHOUT Buffett.

If these approximations are right (I can’t vouch for them), then BRK stock is selling at just 5% or 10% above its fair value “without Buffett,” as my friend puts it — the not unreasonable implication being: would you not pay an extra 5% or 10% to have Warren Buffett managing your money?

Well, I’m still not buying. But if the past is any guide, that bodes well for BRK.

Footnote: I was surprised to see that Standard & Poor’s STOCK GUIDE — that ubiquitous horizontal monthly paperback — is inaccurate. It shows Berkshire Hathaway being divided into 1.8 million class A shares, more or less (of which my friend owns the aforesaid 55) . . . plus the recently issued class B baby shares . . . when in fact the true number is more like 1.2 million. What’s more, S&P has been wrong about this for some months now. One result: in my October 1 comment, I misestimated the “$50 billion” market value of the company, multiplying the price by too many shares. It’s more like $37 billion, give or take. Geez: if you can’t trust the STOCK GUIDE . . .

Tomorrow: The Not-So-Wealthy Barber

There are those who’d have us think the world has plenty of room for garbage, virtually infinite supplies of renewable resources. And maybe they’re right.

But just to be on the safe side — and because there is a certain elegance in trying to live light on the land and in finding the most efficient solution for any problem — I ask you to consider paper towels.

Have you ever given them much thought? Do you cringe when someone rolls off an arm’s length of two-ply to do what a sponge just as easily could? Sure I’m neurotic to let this affect me, but think of the waste! Cutting down a tree, burning diesel fuel to truck it to the mill and then grind it into pulp (or however they do that) . . . then wrapping the paper towel in plastic (another oil derivative), having, God forbid, printed designs on it first, before boxing it up and shipping it to the store (again: fuel) . . . and then the problem of disposing of it, once used, even if it does eventually biodegrade.

So there’s a lot to say about paper towels, and most of it ends with: “use a damn sponge!”

But that’s just my take on it. For a more practical look at paper towels, comparing their prices-per-absorbent-ounce, you could not be better served than by clicking here.

In so doing, you reap the added bonus (my ulterior motive) of a visit to up-and-coming website Shop! Information Services, which has weightier stories even than this one. It’s an ad-free consumer “newsletter” founded by and aimed especially at women (e.g., exposing false make-up credits by women’s magazines) — hence its acronym, SIS — but often of interest to people of any gender (e.g., an expose concerning anti-lock brakes).

Indeed, if you’re not all that interested in paper towels, no matter how absorbent, skip Scott vs Bounty (which is never likely to rival in gravity Roe vs Wade) and go straight to the SIS home page instead, by clicking here.

Old clothes I take to the thrift shop. Old furniture I leave on the street. (In Manhattan, nothing stays out there more than an hour. In Miami, the bugs eat through it in under a week.)

But what does one do with old computers?

If you’re someone who’s physically incapable of throwing away a book — as I am, no matter how worthless — imagine the gag reflex involved in throwing away a computer.

Think of all the starving-for-RAM children in India, or even our inner cities.

But having thought of them, what then? What are millions of us supposed to do with these things?

I was all set to start researching this thorny problem — by asking YOU what to do, naturally, knowing that your ideas would be better than mine — when I flipped on ABC Nightly News and found the Solution. (This is a particularly appealing feature of Peter Jennings’ show: the segment called: “Solutions.”)

Basically, what you do with your old machines is send them to the the Computer Recycling Center (2971 Mead Avenue, Santa Clara, CA 95051) along with a letter explaining what you’ve sent (anything but dead monochrome monitors) and a self-addressed stamped envelope so they can send you a receipt.

The receipt is only valuable to you if you itemize your deductions — and even then only if you grossly exaggerate the value of your gift, since (let’s face it) your old computer is worth very little on the open market.

But the computer itself, and the act of sending it, are indeed valuable. The Computer Recycling Center will refurbish it for classroom use (even a 286 machine can handily help teach a child to read or to multiply); or if that’s not possible cannibalize it for parts; or, occasionally, sell it to the general public to raise needed operating revenues. Any of the three sure beats adding it to the local landfill or consigning it to that spot in your closet beside the fondue maker.

Tomorrow: Paper towels

“My father told me you could stop paying social security and forfeit all the money you’ve already paid in,” writes young Michael Mattox. “My friends say this isn’t true. Since I’m 24 and maxing out my 401k, I think I’d be better off investing the extra $200/month I pay in Social Security taxes into a non-deductible IRA. So the question is, is this true? And if not, WHY NOT?”

The answer is: no, it’s not true. No one can opt out of the Social Security system. Your dad’s wrong. Your friends are right.

And the reason is: It’s a law. You’ve got to pay Social Security tax.

And the reason for that is that the system needs cash from current workers to pay benefits to those already retired — your grandparents and, one day, your father.

Exceptions:

There are a few Americans who don’t participate in the system, most notably railroad employees. Even today, if you go to work for a railroad, after 10 years’ service your social security files get sent over from Washington (or wherever) to the railroad and you’re covered under the railroad retirement system. Toot! Toot! So I suppose you could always leave your current employer and go to work for Southern Pacific (or whatever it’s called now) and opt out of Social Security that way. At least I . . . think . . . you . . . can, I think you can, I THINK you can, ITHINKYOUCANITHINKYOUCANI…

Federal employees hired before 1984 are covered by the civil service system. And employees of a relatively few state and local governments, which opted out of Social Security, are not part of the system. You could try to find one of those and go work there. But Congress forbade any further government entities to bolt from the system — and odds are new legislation will one day pull even those back into the system.

I recognize many of you are internexperts, while I barely know which end of the surfboard faces front.

But for those of you who, like me, are just beginning to get the hang of it, I have a suggestion. Go to http://my.yahoo.com/ and set up your personal Yahoo page. It’s really easy, free, and allows you to put on one “page” all the stuff that really interests you. Up to 30 stock symbols (including some really obscure ones that not all stock-quote services handle); the weather for cities that interest you; stupid sports stuff; and headlines in various fields, which you can then click to see the full story.

It’s similar to Pointcast, which is also amazing, but which makes me nervous. It keeps popping up as a screensaver, a feature some people love but I don’t. Pointcast requires that you click to get the particular page — news, sports, weather — you want, whereas My Yahoo has it all there on one page. What’s more, Pointcast has a team of Wells Fargo horses, or some other 30-second animated ad, running across the top right frame of the screen to attract your attention — i.e., distract you. This is great for advertisers but not necessarily for you and me. (I suppose Yahoo will follow soon, but so far it’s peace and quiet by comparison.) Would you like ads in the middle of your movies? How about an ad that sprang into motion as you were reading an article in the newspaper?

It’s amazing to watch the web develop. This month, My Yahoo is a hoot. (The other way to get there is to go to the Yahoo home page and then, way at the bottom, at the left, click on the little blue “My Yahoo.”) Who knows what it will be next month?

Come to think of it, many of you probably know — and I trust won’t be shy in cluing me in to.

You know I don’t think you should be buying stocks on margin, though of course a “margin loan,” being cheap and, generally, deductible, is a heck of a lot better than a credit-card loan. Your after-tax cost of a margin loan, might be 5% versus 12% or 18% or 22% on the credit card.

The problem is that it’s too easy. With no one hounding you to repay it, or even “monthly minimum” payments required . . . you might easily let it slide. And then the market drops and, through the power of leverage, it hits you doubly hard.

So I advise people to avoid buying stocks on margin, and urge them to pay off quickly the occasional margin loans they might take as a convenience. (E.g., your year-end bonus comes in January, but your Christmas shopping can’t wait.)

Many people ignore my advice and carry fairly sizable margin balances. I certainly do from time to time. (Hey: if I followed all my own advice, I’d have nothing to write about. The wild risks I take are the selfless price I pay to amuse you.)

Which brings me to the point. I called my famous “full-service” broker and asked what interest rate they were charging these days. Then I called my deep discounter.

Guess what. It’s not just commissions where a deep-discount broker saves you money.

On anything under $10,000, Mr. Famous You’ve-Seen-All-Their-Ads Full-Service Broker currently charges 10-1/4%, which scales down to 10% up to $25,000, but only really gets good, at 8-1/4%, if your balance is over $100,000.

At my deep discounter, balances under $10,000 are charged 9-1/4% these days — and reach the magic 8-1/4% at $50,000.

(Note that margin interest rates can bounce around without notice, so to make a valid comparison, you need to call each broker the same day.)

Say you were almost as foolish as I am and ran a perpetual $20,000 balance. At Mr. Famous You’ve-Seen-All-Their-Ads Full-Service Broker, that would cost you $2,000 in interest a year. At my Deep Discounter: $1,750.

Assuming you can deduct the interest, the $250-a-year difference is less great. Still, one needs a good reason to borrow at 10% when an 8-3/4% loan is available around the corner.

You may have that reason (or your balances may routinely exceed $100,000, so you get the same rock-bottom rate you’d get from a deep discounter). But it’s one more factor to consider in your choice of brokers.

Now tell me this: the market is higher than it’s been at any time since a superheated gaseous cloud cooled into what we now call Planet Earth (not that I really buy this explanation), and you’re buying stocks on margin?

Be careful!

Love,

Dad

Tomorrow: My Yahoo vs Your Pointcast

I was in Washington for the display of the AIDS Quilt and was struck most not by the Quilt itself but by the dinner Friday night (although 38,000 panels stretching the length of the mall from the Washington Monument to the Capitol are not unimpressive, representing, as they do, about one panel for every ten of the 350,000 Americans who have now died of AIDS).

The dinner was held in the National Building Museum Building, which the first few times I visited it I assumed was some sort of bureaucratic parody — the National Building Museum Building?

I might also say that the first few times I visited — for the annual Medical Education for South African Blacks benefit, another fine group — this gargantuan space was only barely utilized, like a giant cardboard box in which you’ve collected all your toy soldiers in one corner. That was true even this past April, when billionaire international financier George Soros (bless his heart) was MESAB’s honoree. Barely a third of the floor was used for the benefit.

Not so this past Friday night. Every inch was filled with tables, to the point that fire marshals apparently had required tents to be pitched outside for the actual cooking — a sort of caterer’s bivouac. Fourteen hundred tuxes, dark suits and evening gowns, raising $1 million between them, seated at more than 150 tables of 8, each centered by a 3-foot candelabra, thousands of candles running the length of this colossal building, that had once been known as the “pension” building before it was turned into a museum but now, with all those candles, and with small portions of the Quilt hanging down from three stories, looked more like a church.

But that wasn’t what most struck me either.

I was most struck before we even entered the Building building, as we stood in line waiting to show our tickets and file in. (It takes a while to register 1,400 people.) We were a dignified group, not quite somber, but each filled with memories of a brother or a son or a daughter or a parent or a lover or a friend — or many of them — lost to AIDS. It was basically a giant memorial service.

And there across the street (this is the part that most struck me) were perhaps a dozen Christians quietly singing, holding up signs only one of which I could clearly read: 2 Gay Rights: AIDS and HELL! The group leader had a bullhorn and, in between the quiet songs, would say things like, “Sodomites, repent!”

What a great country. Here were these citizens, outnumbered perhaps 100 to one, safely and peacefully and selflessly doing what they felt Jesus called upon them to do — so they were feeling pretty good about the evening — and here were 1,400 friends and relatives of victims of a disease that’s now infected some 30 to 50 million (mostly straight) adults and children around the world doing what they felt called upon to do, also feeling good about the evening — indeed, the whole weekend.

If God was displeased by the Quilt, He wasn’t showing it in the ordinary ways. The weather all weekend was magnificent.

And then He pushed the Dow up above 6000.

Tomorrow: Margin Interest