Author: A.T.

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

No.

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

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

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

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

Sorry.

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

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

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

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

But now — well, now I feel so empowered.

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

Or just follow these simple instructions:

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

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

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

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

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

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

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

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

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

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

WE ONLY ACCEPT THE NEW $100 BILLS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Free investment advice is worth what you pay for it.

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

Tomorrow: Big Daddy

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

Oh, sure. Like I really know.

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

Texan #1 writes: ———————

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

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

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

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

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

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

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

Texan #2 writes: ———————

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

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

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

————

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

Tomorrow: The Value of Free Investment Advice

How often are we bombarded with requests for money, especially this time of year? Even the most generous among us has to say no much of the time. Indeed, the more generous you are, the more you are asked, and the more you are asked, the more you have to say no.

Take Andrew Carnegie. He came to America at 13. His first job was as a bobbin-boy for $1.20 a week. I don’t know exactly what a bobbin-boy did (how much yarn could a bobbin-boy bob if a bobbin-boy could bob yarn?), but I know that even in 1848 this would not have been a lot of money. His mother took in washing.

With time, he moved up to “stoker” in the cotton-mill furnace room, then became a messenger, then a telegraph operator, then personal telegraph operator for Thomas Scott, superintendent of the Pennsylvania Railroad.

In 1856, at Scott’s urging, he bought ten shares of Adams Express. By 1863, if I’ve gotten all this straight, his investments provided him an income of over $45,000 a year. No Vanguard Index funds for him. He had “the touch.” He was also an accomplished stock manipulator. This was long before enactment of the securities laws.

One thing led to another and, in the course of his lifetime (1835-1919), he gave away $350 million. A good chunk of this came from selling, in 1901, his 58% interest in U.S. Steel for $250 million, 90% of which he immediately set about giving away.

Can you imagine how many people wanted a piece?

But he took his philanthropy seriously. “Surplus wealth is a sacred trust which its possessor is bound to administer in his lifetime for the good of the community,” he wrote. (And he further believed — not wholly irrelevant to the debate today — “there is no use whatever trying to help people who do not help themselves. You cannot push anyone up a ladder unless he is willing to climb himself.”)

So you can imagine how he reacted to the young couple that had apparently written to him in June, 1905, hoping he might join in their anniversary celebration. From the sound of it, they were complete strangers, and not in dire straits, either. I don’t have their letter, but you can more or less imagine it from Carnegie’s response:

Dear Sir and Madam [he writes, in his own hand, from Scotland]

I am in receipt of your notification that you are about to celebrate your 3rd wedding anniversary and while I am interested to know the facts, do not see how it can possibly make any difference to me.

I have so many calls on my pocket book that it is impossible to respond to 1/650,000,000th of them [written out as a nice fraction, with 1 over 650,000,000]. However I suppose you expect something and therefore forward the enclosed sum which is to be retained by you SOLELY ON CONDITION that you change the name of your boat “Felicia” to “Carnegia.” If you don’t care to do this, please return the money by return of mail or I will put the matter in the hands of my solicitors.

Very truly yours,

Andrew Carnegie [with a flourish]

One has the feeling from this letter — on Andrew Carnegie & Company note paper that features the profile of a Scotsman drinking what appears to be a hot toddy — that Mr. Carnegie lived life with a permanent twinkle.

Tomorrow: Last-Minute Funny Money Gift Ideas

In keeping with the last few days’ topic of charitable giving, and with my addiction to “historic documents,” I wanted to share a couple of letters from my “collection.”

The first is a letter written at this same time of year 63 years ago, in 1933, when things were tough. It comes from Paul Warburg, of the important investment banking family, and is addressed to the Star Towel Supply Corp. of Brooklyn, New York. It is individually typed (mail merge, like prosperity, were only distant dreams back then) and reads, in part . . .

Gentlemen:

May I plead with you to repeat for 1933 the special donation of $15 which you so generously gave to Federation [the Federation of Jewish Philanthropies] last year.

I had hoped to have an opportunity to tell you personally how much you and other Federation loyal friends helped last year . . .

Whatever may be happening in the business world certainly the demand for free service in all of the Federation institutions has not yet shown any letup. In fact, the institutions are really worse off because not only do they have to care for more suffering and needy men, women and children, but everything they has gone up so much in price that in the very nature of things, the deficits must be even larger than before.

Unless we succeed in raising the $4,200,000 which is needed this year, the institutions will have one of two choices — either they must care for fewer men, women and children, or they must cut down on the essentials which these cases require. And when I say essentials, I mean just that, because for several years now every institution in Federation has been operating on the barest minimum budget.

These are the simple facts. The answer rests entirely with you and the Federation’s other loyal and generous friends. I do hope that you will find it possible to be at least as generous as you were a year ago and that I shall have the pleasure of hearing from you within the next day or two.

I don’t know whether Warburg got that $15, but my guess is he did.

(OK, OK. So it’s a little less quaint when you realize that $15 back then was equivalent to about $180 today. But still.)

Tomorrow: How Andrew Carnegie Said No