Author: A.T.

“I don’t want to tell you how much insurance I carry with the Prudential, but all I can say is: when I go, they go.” — Jack Benny (quoted in Janet Bamford’s forthcoming Smarter Insurance Solutions)

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To me, Public Citizen is one of the basic “good guy” groups, along with Norman Lear’s People for the American Way, the American Civil Liberties Union, Common Cause, Planned Parenthood, Amnesty International — all that. I was a charter member.

But it’s precisely because I think of Public Citizen as being among the good guys that I was troubled by its latest solicitation.

For starters, the address on the envelope has a goofy computer-generated font designed to make me think the it was hand-addressed. And the envelope says: “Registered Document Enclosed,” even though there isn’t, in any meaningful sense, a registered document enclosed.

I don’t find either of these things terrible — all the junk mailers do it, and I guess Public Citizen feels it has to, too. (But why couldn’t the envelope have just been straightforward? “Big Tobacco is buying Congress, and YOU can help stop it! Please open immediately!”)

No, what got me wasn’t their attempt to fool me into thinking this was an important personal letter. And I certainly wasn’t offended by the goal of the mailing — to urge legislators to stop accepting tobacco money.

What got me was this passage:

“[In return for campaign contributions], Congress continues to protect the tobacco industry’s corporate welfare benefits. Did you know that this $60-billion industry is able to deduct the cost of their cigarette advertisements from their taxes? — a subsidy financed through higher taxes on you, me, and every American citizen. That means you’re helping to pay for all those ‘Joe Camel’ ads aimed at kids.”

Now, please. This is such blatant demagoguery. It suggests that tobacco advertising somehow gets a break other advertising doesn’t. But of course ANY advertising to sell ANY product is considered a deductible business expense. It doesn’t matter whether it’s tobacco, toothpaste, or machine tools.

To suggest that it’s a “subsidy” to allow businesses to deduct costs before figuring profits displays a fundamental misunderstanding of economics — or, more likely, I fear, a callous disregard for honest discourse.

I’ve long advocated that all tobacco advertising be banned. I can make a good case for that, my ACLU membership notwithstanding. And I’d be happy to see, as a modest step in that direction, a law that did single out tobacco advertising and keep it from being counted in figuring a company’s taxable profits.

But this letter didn’t make those cases. Instead, it served to mislead the average recipient. Demagoguery shouldn’t be a Public Citizen tactic.

The irony is that Public Citizen’s founder, Ralph Nader, who remains very much its guiding light, is running for president against the first president in the history of the United States who has taken a tough stand against the tobacco industry.

Obviously, he has no chance of winning. And right now, it looks as if he’ll have no impact whatever. But when Nader first declared his candidacy, there was the slim but real prospect he could tip California — and thus the entire election — to Dole. If something truly unexpected happened between now and Election Day to narrow the race, he still might. In that case, inasmuch as Dole is a friend of Big Tobacco and Clinton is its worst nightmare, Public Citizen founder Ralph Nader would prove to have been (unintentionally, to be sure) the best friend Big Tobacco ever had.

Tomorrow: Jack Benny’s Life Insurance

Did you see that remarkable little piece in The Wall Street Journal reporting how employees deploy their retirement assets? Typically, employees in a 401(k) plan get four or five choices: their company’s own stock; common stocks in general; some sort of guaranteed-income account; and maybe one or two others. Right?

Based on a survey of 246 of the largest employers in the country, employees put fully 42% of their retirement money into their own company stock.

Loyalty is great, but talk about putting all your eggs in one basket! Now, if the company begins to do badly, not only might you lose your job — you could see your retirement nest egg devastated as well!

SOURCE: IOMA via The Wall Street Journal

Think of it this way. If you were advising someone else, would you suggest they invest most of their retirement money in your company’s stock? I don’t think you’d advise that. So why would you advise it for yourself?

People who choose their own company’s stock are insufficiently diversified and, chances are, chose it irrationally. They didn’t choose it because they decided it would outperform the mutual fund (although it might). No, chances are they bought it out of loyalty, and/or fear the company will think less of them if they didn’t. (No good company should operate that way. If you need an excuse, tell your boss I made you choose the mutual fund.)

And it gets worse. That’s how 42% of retirement assets were deployed — in the participants’ own companies’ stock.

According to the IOMA study reported in The Wall Street Journal, of the remaining 58%, most didn’t go into broad stock-market mutual funds, where it belongs. Rather, the second highest category was GICs — “guaranteed investment contracts” provided by insurance companies.

GICs seem safe (although they are certainly not as safe as, say, Treasury bonds — they’re backed by insurance companies, not Uncle Sam). And GICs actually might be a good choice at a time like this when the market may be peaking (although the market’s seemed a little toppy for years now and just keeps going up). But this heavy reliance on GICs is nothing new — employees have been making the mistake of choosing them ever since they were invented. The stock market has kazoopled since 1982, yet people liked the “certainty” of knowing their investment fund would be 8% higher next year than this and so missed out on much of the gain.

Over the long run there’s little chance that a GIC will do as well as a broad basket of stocks.

That said — especially if you’re nearing retirement and might need to start withdrawing funds soon — I wouldn’t rush to switch everything out of GICs just now, either. I know, we baby boomers are going to be putting everything into stocks forever, so they can only keep going straight up (until the baby boomers stop adding to the pile and start withdrawing from it, years from now — yipes!). But by that logic, no price would ever be too high to pay for stocks, and that reasoning scares me.

Anyway, the table above shows 42% in your own company’s stock — dumb. Another 24% in GICs — dumb (though even a stopped clock is right twice a day, and this might be one of those times). Yet another 7% is in bonds and cash — dumb (much like GICs, but cash yields even less). A smidgen in “other,” whatever that may be. And only 18% in equity mutual funds (with another 6% in “balanced” funds), which is in fact where most of it should have been.

How are your retirement funds deployed?

From S.N. at Carleton College: “My question pertains to Warren Buffett’s Berkshire Hathaway shares. I was wondering what would happen if Buffett died tomorrow. Wouldn’t the shares tumble in value? And if so, considering that he will die someday, isn’t it a good stock to short for a long-term investor? Excuse me if the question is a tad morbid.”

You’re excused. And, yes, if Warren died tomorrow, the shares would doubtless tumble.

But just before you short a share, there are two things you should know:

1. It would be really dumb.

2. I mean, really dumb.

I could see shorting Berkshire for a quick dip if you think it’s gotten ahead of itself. It’s $30,850 a share as I write this, but that’s already down from its $38,000 high earlier in the year. (In hindsight, that would have been a better time to short it.)

I could also see shorting it if you think a long-term capital gains cut will pass and the market hasn’t discounted the selling pressure that would result, as people who bought shares 20 years ago run to take their immense profits largely tax-free.

I’m not saying I’d do these things (or that a capital gains tax cut is imminent), but they at least are plausible things one might do.

Shorting Berkshire “for the long-term,” on the other hand, rivals going on an arsenic-and-lead-paint health regimen.

Buffett turned 66 August 30th. According to the life expectancy module of Managing Your Money that I once helped put together, his odds of dying this year are less than 12 in 1,000. Given the fact that he doesn’t smoke, has no money troubles to worry about, and so on, he can be expected to live about 24 more years, to age 90. Of course, this doesn’t take into account the rather extraordinary medical care he’d be likely to be get if anything ever went wrong.

One of the entrepreneurs whose company he bought, “Mrs. B” of the Nebraska Furniture Mart, was tooling around the mammoth store in her golf cart issuing orders well past her 100th birthday, and I think you can expect Warren to be doing much the same.

If something did happen to him tomorrow, Charlie Munger, Buffett’s brilliant but older partner, would doubtless be able to keep the business growing nicely and find a way to leave it in good hands, which should cushion the blow to the stock. If he died tomorrow, the stock would tumble — but certainly not collapse. I’d guess you’d see a 20% drop.

But let’s say he hits 90 on the dot, then retires. And let’s say that instead of growing Berkshire’s book value at a compounded 23% or so, as he has for so long, he can grow it only 18%. (It gets harder as you get bigger, and maybe Buffett’s bulb will dim a bit with age.) Under these assumptions, the long-term investor who shorts one share today at $30,850 and hangs in there for 24 years would see the stock at nearly $2 million a share.

Of course, if I really expected the stock to be $2 million a share in 24 years, I’d be buying it, and I’m not. It’s always seemed a little, or a lot, ahead of itself, even when I first wrote about it at $300 a share. But shorting Berkshire Hathaway until Warren Buffett dies? Why not just shoot yourself in the head and get it over with?

From Syd at Auburn University: “We apply your four-prong technique to our investing, and it has been very rewarding. We also invest for my wife’s foster mother who is 96 years of age. She has always been a very conservative investor, primarily in CD’s and treasury notes. We have broadened her portfolio to include a few mutual funds which include the Janus Fund and Mutual Qualified. We’ve kept most of her money during the past two years in the CD’s and treasury notes, and we plan to substantially add more mutual funds when the market corrects. Since we have had a long period without a significant correction, and one will come at some point, that strategy is not adding as much income as we would like. Would you suggest dollar cost averaging at this point? Her net worth is about $500,000.”

The four prongs Syd refers to are, basically, liquid money (like cash or a money market account); an inflation hedge (like your house, or someone else’s house if you can afford it); a deflation hedge (like 30-year Treasury bonds); and a prosperity hedge (stocks). There’s more to it than this, but the real art — which I don’t claim to possess in more than common-sense measure — would be in knowing how to deploy your assets among those four prongs. That depends in large measure on your own financial situation.

Anyway, it sounds as if you’ve got almost all your foster-mother-in-law’s dough on a single prong, and the least exciting one at that: liquid money. How is this woman expected to live another 20 or 30 years if you don’t give her something to dream about? Buy her a few Netscape Shares! Some Lucent Technology! Ask her how she’d like to own some UUnet!

Just kidding. But I do think you could put at least half the $500,000 in the Lindner Dividend Fund, conservatively but brilliantly managed by Eric Ryback. You can buy it directly (call 314-727-5305) or via several discount brokers. It’s grown at 17% a year for the last two decades, and typically goes up, at least a little, even in years when the market IS correcting.

There are no guarantees, of course. But check out this fund and I think you’ll feel pretty good about it.

Ted Turner, who gave us CNN, one of Television’s Seven Best Sibilants (the others being Seinfeld, the Simpsons, C-SPAN, 60 Minutes, Sesame Street, and CBS Sunday Morning), has done it again.

This time, all it took was one of his typically brash, clear-thinking riffs, of the type he used to lay on Tom Snyder, back in the days when Tom followed Johnny and Ted was considered an upstart outsider.

According to Maureen Dowd’s account in the New York Times earlier this month, Ted thinks rich people don’t give enough to charity. Well, that’s not a particularly novel insight. Even I had it not long ago. (See: August 21 – Private Charity: The Dole Solution).

But Ted Turner has figured out why this is and, better still, how to fix it.

The culprit, Turner explains, is The Forbes 400. That damn list, he says, has all these intensely competitive guys fighting to stay on it and improve their position. After all — other than by inheritance — you don’t get on that list if you’re not intensely competitive.

And intensely competitive guys keep score.

After your first $100 million it’s all a game anyway. How can you possibly “need” more than that (other than to make it onto The List, for which you need lots more)? Sure, they say the thing’s an invasion of privacy, inaccurate, and all the rest. They don’t want to be on it. But they love it!

So there you are, fiercely competitive, knowing that your score will be posted in the next annual Forbes 400 — and you’re going to handicap yourself by giving money away? Oh, sure, you may feel the necessity to give away a few million to keep up appearances, 2% or 3% of your income. But give 10% of your income or 25% or 50% — are you mad? That would be like trying to win the 100-yard butterfly with one wing tied behind your back.

So here is Turner’s simple solution: a new list. The 400 Most Generous. Get the competition going on THAT one.

Mark my words: Turner is right. In a year or two, giving among the mega-rich would double. A single issue of Forbes each year could add billions to the philanthropic pot.

The law of unintended consequences requires that I state:

(1) that this could then add a bit to the budget deficit (increased giving means increased deductions means less tax revenue); and

(2) it could also clip a bit from the nation’s capital base (turning investment capital into, say, support for the arts). But to the extent the philanthropy were wisely directed, much of it could be investment capital of the most valuable kind. Placing a new computer on an office-worker’s desk is a capital investment to make that worker more productive. But placing a new computer on a high school student’s desk could have a substantially higher long-term return to the economy. Investing capital to build a new luxury high-rise is nice. But investing the same capital in programs to keep kids doing sports rather than drugs after school, say, could produce an even higher return.

Anyway, Turner’s comment, as amplified by Maureen Dowd’s column, should do the trick. I’ll bet you anything we start seeing Most Beneficent lists like this (ranked in absolute dollar terms, but also by percentage of income and net worth), and that once we do, the dollars given will rise a lot faster than inflation.

Thanks, Ted. You’ve done it again.

Yesterday I told you how “due diligence” saved publisher Steve Brill from buying a Moscow newspaper from people who didn’t own it.

Today I get to tell you my own latest Russian escapade. I tell you this largely to make you feel good (who doesn’t enjoy another person’s problems, especially when they’re not contagious?) but also to help you understand how a Russian would pronounce the word “caper.” It’s –KEHprrrrrrrr-. (Rhymes with pepprrrr.)

Ready?

It was last October and my friend and I were going to visit a Moscow brokerage firm. Here in America, there would have been a big sign out front, an electronic ticker in the window, maybe a digital clock. But Moscow’s capital markets are still young. Merrill Lynchski this was not. We entered an unmarked door and were greeted by three big guys with holstered guns. They came at us with big plastic metal detectors and frisked us. Carefully. (Due diligence?)

Then they lead us down a quarter-flight of stairs, along a narrow corridor, around to the left, up a half-flight of stairs, around to the right, down some stairs, through a door, up some stairs — this was not a place you could escape from easily — and finally to the conference room, which may once have served as a tiny interrogation room, on the second floor overlooking the street. Not that you could see the street. The curtains were closed.

We talked turkey. Specifically, Rostelekom, Russia’s main phone company, then selling for 91 cents a share.

Their notions of valuation were quaint — earnings? dividends? what this mean? — and had mostly to do with “stocks been going down, will be going up soon.” But I had read that Russian companies were wildly undervalued, even considering the risks, and I wanted to help these guys out. They were clients of a partner of mine, trying to make it as beez-ness-men in the new Russia. I want to see the new Russia succeed. Plus, it’s kind of fun (albeit really stupid) to be able to tell friends, “hold on a sec — it’s my broker in Moscow.”

I bought 25,000 shares of Rostelekom. (That’s also kind of fun to say; 25,000 AT&T would have been about 24,000 beyond my reach). Then, a couple of weeks later, I bought shares in a giant Russian nickel complex, too.

It’s easy. You just send an e-mail placing the order; receive your confirm by e-mail; wire the money to an account in Cypress (I don’t know and I don’t want to know); and for the next 11 months you get weekly e-updates.

Paper? Who needs paper?

When Rostelekom had climbed from 91 cents to $2.56, and when my partner told me he was beginning to have his doubts about these clients of his, I decided to sell. A small earlier sale had gone smoothly — $1,450 had actually cyberblipped from Cypress to my bank account in the States. But this one, in late July, was the real test. Would I get my money back and a rather huge profit?

I got my e-confirmations that the trades were done. Hello, $67,000!

I got my e-confirmations that the paperwork would be completed in early August and the cash wired immediately thereafter.

I got an “unforeseen technical difficulties” e-message notifying my of a minor delay, and then another explaining that there would be two wires — one right away, returning my investment, the other a few weeks later, my profit.

But it’s now been about eight weeks and so far that’s all I’ve gotten.

And do you want to know something really silly? I actually think I’m going to get some of, and very possibly all, my money. I guess that shows you how naive I am.

Just to improve my odds a little, I’m in the early stages of hiring a firm that collects Russian debts. I’ll let you know what happens.

But isn’t it nice to live in a country where, by and large, routine commerce can be conducted without much worry? In Russia, they still have no checking accounts or, for the most part, credit cards. Here we are going “check-free,” and they haven’t even gone “check” yet.

The sensible way to speculate on Russia, as I’ve noted in the past, is through the Templeton Russia Fund (TRF on the New York Stock Exchange). It’s risky. But at least if you call your broker to sell you’re likely to have the cash a few days later.

The phrase, of course, is “due diligence,” and it means (at least to this layman), the basic verification and research any fiduciary needs to perform before going ahead with a deal, especially a merger.

I’m not sure what the phrase would be in Russian, but my friend Steve Brill tells a wonderful story of why it’s so important.

There he was, owner of most of the legal newspapers in the world — American Lawyer is his flagship, but he owns lots of regional rags as well (e.g., The Recorder in San Francisco) — in Moscow, about to pay “six trillion rubles,” as he puts it (which is to say “12 cents,” give or take, in dollars) to buy the local legal paper and thereby, he hoped, wrap up what might become the thriving Moscow franchise for this sort of thing.

I mean, the deal had progressed to the point that he was actually in Moscow, had actually met at their offices several times, was actually getting ready to wire funds.

But in the course of the lawyers’ due diligence, it developed that the people from whom he was about to buy this paper did not own it.

No, and the reason they always met with him at the offices around 5PM was that by then the owners had gone home.

Haven’t we seen something like this on TV? Didn’t the Mission Impossible folks use this ploy a lot?

One of the sellers was a part-time employee of the firm, and so had access to the offices and knew how to talk the talk. The others weren’t even connected with it.

Due diligence. It’s boring, but fundamental. Just try getting 6 trillion rubles back from these guys once you’ve paid it out.

Tomorrow: My Own Little Russian Caper

“I would love to read your opinion about the Welfare Reform Bill. Frankly, I’m worried.” — David Bruce (not a welfare recipient himself)

I’m worried, too, but here’s my optimist’s view:

The new law will jog 20% of the people — those who really just need a good sharp push — off the welfare rolls and onto the tax rolls. Long-term, that will be an enormous plus for them and their kids and the rest of us.

Then, with 80% still on welfare and the two-year limit rapidly approaching, weeks before the checks stop coming, the President will propose, and Congress will pass, some extensions and humane modifications. And that will be repeated in various ways as the years go on: a sort of brinksmanship, pushing people to work (and, hopefully, helping them find it), but not pushing so hard that they, and especially their kids, get crushed in the process.

Just cutting 20% out of the problem, if we do, would be a huge plus. And being then forced to come to grips with the rest of the problem will be healthy, too.

In the short run, welfare reform may cost us more, not less. Helping the remaining 80% get the kind of training or treatment they need will be expensive — as will lifelong care for those who simply can’t fend for themselves. But in the long run, it should prove to be an excellent investment. Not to break the cycle of dependency would cost far more.

To an optimist, what’s happened is that we’ve launched a process that will indeed “end welfare as we know it,” forcing those who can to work, and forcing the rest of us to come to grips with the fact that for many welfare recipients it’s nowhere near that simple.

In the spirit of “tough love,” if you will, it’s a good first step. But more steps must and probably will follow to keep it from being cruel or inhumane.

What do others of you think?