Author: A.T.

Mark Wall writes: “Your Paul Warburg piece put me in mind of a question that never quite gets answered and so never goes away. Perhaps you can help. How does one compare a 1996 US DOLLAR with the same unit in any other year? You mentioned that 1933’s $15 equals $180 of 1996’s. How did you figure that out?”

The easy answer: I summoned the Inflator/Deflator module of my trusty old Managing Your Money (DOS Version 12) and just plugged in the numbers. Out popped the answer.

But you may want to know how we programmed Managing Your Money to do this. Basically, we stuck a table into MYM’s innards with each year’s inflation, going back to 1885. If a dollar in 1933 was subject to 10% inflation in 1934 (it wasn’t, but just suppose), then $15 in 1933 would have been the rough equivalent of $16.50 in 1934. I.e., it would have taken about $16.50 in 1934 to buy the same stuff you could have bought in 1933 for $15. Applying each successive year’s change, MYM came out to about $180 by 1996.

What’s interesting of course, in light of the Boskin Commission’s report, is how you measure inflation. Has the cost of living gone up if, by shopping at a warehouse store, you can get stuff for less than you could before there were warehouse stores? Has the cost of living gone up if gas costs twice what it did before, but cars go twice as far on a gallon? Has the cost of living gone up if cars are more expensive but safer? Has the cost of living gone up if steak gets more expensive, but chicken holds steady and you switch to chicken (which health nuts would tell you is better for you anyway)? Has the cost of living gone up if food costs more, but the cost of computing power has plunged?

Some of this is a matter of tinkering with the numbers so that they more accurately reflect the real world. (Because the “basket” of goods regularly priced by the Bureau of Labor Statistics changes so infrequently, many of the downward-plunging prices, like the cost of a megabyte of computer memory, aren’t even included.) But some of it is more a judgment call. I would argue that a safer car is inherently more valuable than a less safe car. Someone else might argue that safety has no value, and thus only the price of the car is relevant. If it’s gone up, the cause is inflation, not “more car for more money.” (Even if it is “more car for more money,” that’s scant consolation to someone living on the edge who simply can’t afford more car, no matter how good the value.)

Movie ticket prices have gone way up compared with 1933. But they’re free on TV and only $2 at the video store . . . has the cost of entertainment rocketed since 1933?

Some of this is taken into account by the statisticians at the Bureau of Labor Statistics, as best they can. But an adjustment in the CPI is long overdue, and — as almost every reputable economist who’s looked at it agrees — it’s not a trick or a scam.

Much has been written about this. If you feel like reading a typical good editorial on the subject, click here.

The good news: a very minor recalibration of the CPI has big, positive implications for our economy. The budget balances easier. (And productivity these past few decades seems healthier and less cause for despair.)

Tomorrow: Inflation-Adjusted Treasuries — Beware

Yesterday, I described a forthcoming book whose author has made a fortune in what he calls the “secret hiding places” of the market — and who kindly shared his latest idea with us.

The case for that stock — NCR — certainly seemed compelling (I bought some), until you read the comments of a leading computer analyst who thinks it’s a screaming short. (I bought it anyway, but chastened.)

Isn’t it interesting how really smart people can have diametrically opposed views?

That reminded me to tell you about a different book, and a different stock. The book is Investment Gurus by my friend Peter Tanous. The stock is (was?) Marvel Entertainment (MRV).

For me, Peter’s book — a series of interviews with 18 “gurus” only a couple of whom, Peter Lynch and Michael Price, you’re likely to recognize — pretty much sets to rest any lingering notions one might have that “you can’t beat the market.” Perhaps you can’t. Perhaps I can’t. But for some of these very smart pros, working at it full time (and delighted to compete with us amateurs), above-average returns clearly are more than luck.

Anyway, there I was reading these interesting interviews Labor Day weekend — which I had to do because I had promised Peter I would write a Foreword to his book, but which I didn’t mind doing, either, because I was learning a lot — and I came to the interview of Laura Sloate. Laura is the only one of Tanous’s 18 I know personally, as a friend. I met her even before she started her own brokerage firm in 1974, Sloate, Weisman, Murray, which now manages more than a billion dollars (remarkable less for the fact that she’s a woman perhaps than that she’s blind).

And there she was talking about Marvel and how she liked it at $14, a price at which billionaire Ron Perelman was buying it too. “And now it’s come down to the $11 area,” she told Peter. “We looked at the cash flows; we looked at the underlying values of the company’s divisions . . . the baseball season should be better than last year — no strike — which will help their trading card business. Ron Perelman is a resourceful guy. He’s got his right-hand man at Marvel, and it’s my guess that at 10-1/2 bucks it’s probably bottomed. So we increased our position. The market won’t believe their story until the turnaround is evident. But in the Spring, these guys got up at a meeting and gave earnings projections by division. Either they want to hang themselves, or they banked those numbers and they’re pretty certain they’ll hit them.”

Hmmm. Wonder where MRV is trading now, I thought as I read this. Would it be cheating, I wondered, to buy some months before this book came out? Some sort of insider trading?

To my surprise, the stock that brilliant Ron and brilliant Laura had bought at 14 — and more of at 10-1/2 — was now 8-5/8. I bought some.

Then, the next time I was on the phone with Laura, I mentioned Marvel. “Oh, we’re out of that,” she said.

“You are?”

It seems she just felt it wasn’t going anywhere and that, while, yes, it was probably undervalued, she had decided not to wait. Indeed, rather than dump her million shares on the open market, which would have depressed the price, she had “shown” them directly to Perelman’s people, who bought them at $10.

This made me very happy. For one thing, it meant that the guys who knew more about MRV’s true value than anyone else — Perelman’s people — were betting $10 million it was going up. For another, it meant that, for once, I was smarter than Laura. (After 23 years, it was about time.)

As those of you who follow these things might guess, I bought more MRV at $4.75, still more at $2.50 and, finally, a few of the bonds at 19 cents on the dollar. A few days later, Perelman put MRV into bankruptcy.

I might do OK on the bonds and the last batch of stock; more likely, I suppose, I’ll lose it all. (Don’t cry for me, Ike and Tina — I had a few good ones last year, too.) But my reason for describing all this is simply to give you the pleasure of feeling superior and to point out what a tough game this is, even when you get to see the manuscript months before anyone else.

Next Week: Thinking About the CPI

I met Joel Greenblatt in 1980 at the Harvard Club in New York — allegedly. I have absolutely no recollection of this but take his word for it. At the time (he claims), he told me he was thinking of writing a book, and I volunteered to take a look.

Comes Mr. Greenblatt 16 years later — or, at least, come the galley proofs of his book, You Can Be a Stock Market Genius (Even If You’re Not Too Smart): Uncover the Secret Hiding Places of Stock Market Profits — with a very charming letter asking whether the offer is still good. Might I write a blurb?

And a blurb he got, too, because for those of us foolish enough to shun low-expense mutual funds — who try instead to beat the averages (and the pros) going solo — this book, due out from Simon & Schuster in March, provides a bit of help.

Mr. Greenblatt has not written it, so far as I know, to attract new clients. He has no clients anymore, he says, having shut down that part of his business and investing only for his own account. Nor has he a pricy newsletter he’s trying to sell you.

Doesn’t need to. If Mr. Greenblatt is to be believed (and I have no reason to doubt him), he has earned in the vicinity of 50% a year on his money for the last decade.

An awesome performance. (It would turn every dollar into $57, pre-tax, or into $14 if federal, state and city tax cut the 50% annual gain to 30% after tax.)

The reason I’m inclined to believe it is that his book makes a lot of sense.

So I sent him a blurb and, by way of thanks, he sent me a stock tip.

I don’t accept gifts from people or institutions I write about, and I certainly don’t accept payment for blurbs. But how do you return a stock tip?

The easiest way, I suppose, is simply not to act on it. But that would have required a level of self-discipline to which I have not yet been able to rise. So — fair warning — I bought some of this stock at 33-3/8 (and plan to buy more if it goes lower this week).

Needless to say, it could certainly work out badly — so many of my little forays and sorties do! — which is one reason I don’t usually write about specific stocks.

Then again, some of you come here every day, often suffering through the most inane musings without complaint, so, for what it’s worth, I wanted to share Joel’s tip with you.

It comes from an area of the market that Joel has become a specialist in: the “spin-off.” You can read lots about this when his book comes out in March, but here’s the essence of it: When a company spins off one of its parts — as AT&T spun off NCR last week — the spin-off frequently represents a good opportunity.

For starters, a lot of people (and institutions) sell the spun-off shares just because they’re a nuisance or because they don’t want to do the work of analyzing them. There you were with 200 shares of AT&T, and now you’ve got these silly 12 shares of NCR in your account (the spin-off gave holders one NCR share for each 16 AT&T), so, to tidy things up, you sell them.

Index funds, meanwhile, must sell, because the spin-off is not part of the index they’re supposed to reflect.

There’s nothing rational about that selling, so it may create an opportunity for you and me. It certainly seems to have done so for Joel.

Another reason to favor spin-offs: at first, few analysts follow them.

And another: generally the management of the spin-off is given a strong incentive, by way of options, to make them work. As part of a larger company, their efforts are less directly rewarded.

And another: sometimes an effort is made to bring the spin-off out at a low price or to “talk it down” at first, so the manager’s option price can be as low as possible.

And there are a few other reasons — although considerable analysis is required to separate the best spin-offs from the average ones from the clunkers. A little luck doubtless helps, too.

All that said, let me give you the benefit of Joel’s analysis, with the caveat, once more, that there are no sure things in the stock market, and very smart, very successful people are frequently wrong. Here’s what Joel wrote me last week:

NCR closed in when-issued trading at 33-3/8 New Year’s Eve. [This is approximately what Joel himself paid for his shares — he waited until it had dropped from around 40.] It begins regular trading today [January 2]. Many index funds that have not already sold should be selling in the next day or two. Management’s substantial option package has been set based on the last 5 days of when-issued trading, just completed. The new management has gotten NCR back to break even in the first nine months and fourth quarter earnings should be a pleasant surprise. NCR will have approximately $7.5 billion in sales in `97 with 100 million shares outstanding. Approximately $1 billion sales in the ATM business and maybe $800 million in data warehousing — both businesses worth at least 1 times sales. With $8 per share in net cash, this totals approximately $26 in value. That leaves a $7 price for the remaining $5.7 billion in sales. This is 12 cents on the dollar of sales. Even rotten companies trade at over 40 cents on the dollar.

The bad news [Joel continues] — I know almost nothing about computer companies. In any case, if it works out, buy me lunch. If not . . . I’ll give you your blurb back?

Joel hopes NCR might hit $50 some time in the next 12-18 months. To order his book for delivery when it’s published, click here and search on Joel Greenblatt.

Note that computer analyst John B. Jones, of Salomon Brothers, described by the New York Times December 31 as “one of the few on Wall Street to look closely at NCR,” thinks the stock is wildly overpriced — even $25 would be too rich, he says. Either he’s right, or else management has done a good job of lowering expectations.

Tomorrow: Another Good Investment Book: One Can Only Marvel

OK, there are a lot of reasons; e.g., I would be almost entirely unqualified for the job. (Contrary to popular opinion — and especially as regards posts as important as Treasury Secretary — competence is one of the criteria.)

But had there ever been any thought of naming me, say, Assistant Under- Deputy Treasury Secretary for Making the Press Releases Snappy and Grammatical — a post I hope it is not boastful to suggest I actually might fill rather well — it was dashed in the summer of 1992 when I attended a fund-raiser for the candidate in Miami.

He was only the candidate, but I knew he would be president, so when a woman handed me her camera and asked me to take a picture, I went into quiz-show mode. (Quiz show mode is when you are asked something you know perfectly well — the capital of Kentucky — but because you are being watched by 100 people in the studio audience and 4 million people at home — you stutter, “Louisville?”)

The woman had a firm grasp around Governor Clinton, and he around her, and both were smiling — but with dozens of others eager for the moment to pass so they could have their moment — and I was fumbling. The natural ergonomics of the camera, where your eye just more or less automatically finds and frames the subject, and your finger just more or less automatically finds the button, was failing me.

“Turn it around, Andy” said the next president of the United States. Even from a few feet away, he could see I was about to take a picture (if I could locate the button) of my right cheekbone.

I knew at that moment I would never have to leave the private sector for government service.

The capital of Kentucky, by the way, is Frankfort.

Tomorrow: A Stock Tip

And I’ve done a lot of stupid ones. But there it was 1992, the President had just been elected, and names were being bandied about for various positions. One was Robert Rubin for Secretary of the Treasury.

A Wall Streeter I respected — I will never say who — told me he thought Rubin would be a disaster; and fearing (stupidly) that the Arkansans might not be Wall Street savvy, I felt the need to drop a note to Bruce Lindsey, who was handling much of the appointment process, and pass that opinion along. Not that I had ever met Bruce Lindsey, let alone Robert Rubin.

The main thing, of course, is that my note had no impact, so no harm was done. But I feel like a complete idiot, because after four years in the job, Treasury Secretary Rubin has been acclaimed worldwide with near unanimity as a superb choice.

Tomorrow: Why Clinton Didn’t Name ME Treasury Secretary

Ah, the exuberance. We all crave attention, and in business, attention means dollars. Hence the millions of press releases that go out each year. But is there no way to send them a little more intelligently?

PARADE is a weekly Sunday supplement that goes to 40 million households. Once or twice a year, I get to write for it and so have somehow been designated by the Mailing List People to be PARADE’s business editor.

Those of you who see PARADE may agree with me that it’s excellent — far better than the gossipy recipe sheet one might expect. But it has no “business department.”

Nonetheless, I get small boatloads of press releases, virtually none of which could possibly, conceivably, be of even the remotest interest to PARADE.

I have tried in years past to get off some of these lists, but it’s impossible. Public relations people feel they have achieved something by getting their press releases into the maximum number of mail rooms.

You never know (they must figure) — perhaps PARADE will break with its normal format and run a story on this item, which I believe qualifies as the dumbest press release I got in all of 1996. It seems that TV station WTXF, the Fox affiliate in Philadelphia, has acquired a new helicopter, complete with a gyro-stabilized camera. The station plans to concentrate its use of this new equipment on traffic news. The GyroCam has “a Fujinon 36x zoom lens with a 2x extender (yielding an equivalent zoom ration [sic] of 72:1).”

Now there’s something PARADE might want to do a story on. And if not PARADE, surely Reader’s Digest, Seventeen, Rolling Stone, or Prevention, along with the hundreds of others to whom this no doubt was sent. How about The Harvard Business Review or Sports Illustrated?

“For Immediate Release.” What could these people possibly be thinking?

(To learn more about the lens ratio, or perhaps to schedule an interview with the pilot, contact Sharla or Lisa at 215-627-0801.)

Tomorrow: The Stupidest Thing I Ever Did

From Valliappa Lakshmanan: “I bought some shares in an Israeli conglomerate (ELBTF) for $12. It recently spun off two companies that trade for about $7 and $4. The original company trades at around $2. I want to retain the spin-offs but sell ELBTF. Now, the question: What is the cost basis for my ELBTF shares? $12? Can I claim $10 in capital losses this year if I sell only the ELBTF shares? (I know the piper has to be paid some time and that the cost basis will then be $0 for the other two shares.) Is my understanding correct or does the IRS have some complicated formula for arriving at the cost basis of my shares?”

Are you serious? Our IRS?

No, you can’t take a whopping loss — or any loss — because you didn’t have one. Basically, you are required to adjust the basis of all three securities (all three of which, incidentally, were acquired, for tax purposes, the date you bought the ELBTF — the clock doesn’t start ticking all over again).

Sometimes the company will send an accountant’s opinion on how you should apportion the original cost. But unless we’re talking about tens of thousands of shares, I wouldn’t be concerned with that. In your case, you paid $12; and when the company issued these new shares, the market valued the resulting three pieces at $13. Just take the proportions the market assigned — seven-thirteenths, four-thirteenths and two-thirteenths — and apply them to your original $12 cost. In other words, 2/13 of your original $12 cost is your new cost basis for the ELBTF shares — $1.85. If you sell them at $2, you have a slight gain, not a loss.

(Technically, the proportions should be based on the prices of the three securities the day the two new ones were spun off, not the day you wrote me your message. But it doesn’t sound as if it will be much different.)

From Steven Kutz: “My grandfather has given me some stocks (five different ones), and when I asked him what he bought them at, he said he’s had them for a long time, and they’ve split, etc., so he doesn’t know what they were bought at. He said that I should just use the price of the stocks when he gave them to me as their costs. But that means that no one will pay for a gain if, say, one of them has gone from ten dollars (what he bought it at) to sixty dollars (what it was when he gave it to me). Can I do what he suggests? If no, and he doesn’t give me the price he bought them at, what should I do about the tax basis when I sell them?”

Good question. And, no, you can’t just use as your “basis” the prices of the stocks as of the date he gave them to you. You’re quite right about that. Only if he had died and willed them to you could the basis have been “stepped up.” The good news is that he’s alive and well. The bad news is that the IRS will expect you to make reasonable efforts to use the proper cost basis.

If you were given actual stock certificates, you will see on each the date of transfer, and you can get the price (adjusted for splits) as of that date. Otherwise, ask your grandfather to take a guess as to when he acquired them — he’s likely at least to know the decade, and his broker is likely to know what year his account was established (if he purchased the stocks through that broker). Unless we’re talking about big numbers, I wouldn’t spend a LOT of time on this, but you should at least come up with some vague notion — 1950? 1965? 1980? Pick a date, any date, and make a note in your records that this is your best guess.

Then, either by calling each of the five companies, and their shareholder relations departments, or by some other clever method, you can come up with a price for that date. (ValueLine, in the library, will show prices, and splits, going back 15 years, if it’s one of the 2000 stocks they cover . . . and if you then find a ValueLine from 1981, you could go back yet another 15 years.)

When you sell the stocks, use the date you chose as the “acquisition date” you report and, if you want to be really correct about it, include a note explaining the problem and why you chose the date you did. But — especially if you’ve gone about this in good faith — I wouldn’t raise that flag. I’d just declare my gain, using my good faith best guess, and pay tax on it. It’s highly unlikely you’d ever have to explain any of this to the IRS.

“Nobody ever made a greater mistake than he who did nothing because he could only do a little.” — Edmund Burke

Happy New Year.

OVERDRESSED TO BE A PROGRAMMER

“I know that when I stick on a jacket and tie, my sense of seriousness and self worth change instantly. I’m not describing it very well, but I think you know the feeling.”

To which Michael Simpson (and a couple of others of you, in much the same vein) responded: “This made me laugh. In the programming profession, it is quite the opposite. The worse you dress, the more you make. I limit myself to T-shirts and jeans. But at Emerald Systems, their star programmer programs buck naked. (Behind a closed door.) When I was at Jostens, one highly paid consultant ran around in cutoff shorts and no shoes or socks. Regular bathing seems to be optional for programmers. Our self-worth is tied up entirely by how well we code. Dressing down seems to be a message to management that we are so good, we can do what we want. We seem to be correct. Want to destroy a good programmer, put him in a tie. Maybe it cuts off the blood flow to the brain?”

PIGGY WARBURG

Recently I quoted a fund-raising letter written during the depression by Paul Felix Warburg. This made my friend Dave Davis curious, and he came back from the library with all manner of stuff about the man, my favorite bit of which — from THE WARBURGS by Ron Chernow — follows:

“The third Warburg son, Paul Felix–invariably known by his nickname, Piggy–was . . . the family clown. . . . Although Piggy never graduated from college, Felix [his dad] had great affection for this incorrigible, madcap boy. When he left school, Felix got him a humble job with the B&O Railroad in Baltimore and used to write him letters that began with ‘Dear Railroad Magnate.’ While working on the railroad, Piggy met another rich young man who persuaded him to invest in his new business and Felix reacted angrily. ‘I love you dearly,’ he told his son, ‘but if you’re so irresponsible with money as all that, I’m going to put you on an allowance.’ The friend was William F. Paley and the investment was the nascent CBS.”

THE RICH ARE INVOLUNTARILY GENEROUS

I pointed out that at all income levels, on average, people give away about 3% of their income. But the rich are different from you and me, because on an after-tax basis (because they itemize their deductions and give appreciated securities), they give less money (on a percentage basis).

From Brian Annis: “Considering that the government FORCES someone with a higher income to give more of it to the needy, is it really fair to knock the rich for not giving more voluntarily? After all, a dollar received via the IRS is worth just as much to the recipient as one that has passed through the United Way. In fact, the contribution received from a rich person may have been given with a greater spirit of charity than a “voluntary” one coerced from someone else by an employer, church, etc. The only difference is really in the degree of choice about who the recipient is.”

That is definitely one way to look at it. Indeed, on that basis you could argue that only the poor should give much, since they are getting a relatively free ride off rich people’s taxes. The rich have more than done their duty just by paying tax.

But all this assumes that giving money, if one could afford to, is naturally something one would want not to do. Yet when you look at all that needs doing in the world, and how tantalizingly close we are as a species to making this thing work (or else having it all blow up in our faces), it turns out that for many people who see what’s going on, there’s nothing they’d rather do than be able to help. (Was Scrooge really happier before he started giving?)

The family that gets by on $30,000 a year yet gives $900 (3%) is perhaps giving 50% of its discretionary income (after basics like taxes, food and shelter). The family that gets by on $500,000 a year yet gives $15,000 (3%) is giving perhaps 4% of its discretionary income. If such a family went nuts and gave $90,000 to the causes it believed in — roughly 10% after tax — it would still not feel much of a pinch.

Let me be clear: I’m not saying anybody need give a penny if he/she doesn’t want to. I just think those who can afford to but don’t are missing out on one of money’s greatest luxuries.