Author: A.T.

Simply put: I want to put away a lump sum in a mutual fund NOW to pay for my 8 week old daughter’s college (yes, I will cost average it over several months). How about ranking several aggressive growth/small cap long term funds for me (or any other funds you think would be appropriate). Dave Waisel

Congratulations, Dave — mainly on the baby, but also on your foresight and sense of responsibility.

I knew just the man to field your query, my mutual fund guru. But before relaying his response, I have to share my own baby story with you.

We went to see BRING IN DA NOISE, BRING IN DA FUNK — which, if you’re in New York and have ever tapped your foot in time to a tune, you must float a bond issue and go see — with Benjamin and Jennifer Levy.

Benjamin’s principal claim to fame is that he can take a $100 bill someone has given him — jotting down the serial number first to be sure it’s the same one — and make it appear inside a sealed paper bag someone else, across the room, has been clutching. Indeed, not just inside the bag, folded and wet INSIDE A LEMON that’s inside the bag. This trick and others landed Benjamin a spread in Fortune recently. (If you happen to be a board chairperson, or better still a bored chairperson, grab him for your next meeting. Just click me for his number.)

Jennifer’s principal claim to fame at the time we sat down to eat was that she was very, very pregnant — estimated time of arrival just two weeks off. Sure, she has other claims to fame, but this one sort of overshadowed the others. We spent an hour trying to decide what to name the baby. (“Andrew” was my first suggestion. “Magic” was my second. Benjamin favored “Zebulon.” I thought “Ahab” would be arresting. There was much talk of “Nicholas” — too common.)

Anyway, off we went to the show, after which we put Benjamin, Jennifer and Ahab into a cab.

The next morning, I get this message on my machine. “Well,” says Benjamin, “BRING IN DA NOISE, BRING IN DA FUNK, brought in DA BABY at five nineteen this morning.” Less than seven hours after we parted — and this was Jennifer’s first. (Apparently, she woke at 1:30 dreaming that my friend and I were having contractions, we later learned — which I can tell you with some assurance we were not — only to realize, as the sleep-haze cleared, that she was having contractions. No great rush, but off they went to the hospital, planning on major anesthesia and a long day. Not Ahab! This kid — whom they inexplicably chose to name Nathaniel instead — was not letting any grass grow under his itty-bitty feet. Bang! Five nineteen a.m., nineteen inches, everyone’s fine, bless you for asking.)

OK, OK, so this is a little off the point. CNBC would not be taking your time with stories like this. So what about answering the question?

(As a service to the millions newly diagnosed with Attention Deficit Disorder, also known as the MTV disease, I herewith repeat the question: “I want to put away a lump sum in a mutual fund NOW to pay for my 8 week old daughter’s college. How about ranking several aggressive growth/small cap long term funds for me — or any other funds you think would be appropriate.”)

No one I’ve found is more sensible about mutual funds than my guru Less Antman. Having exhausted myself with Nathaniel, I figured I’d throw this question to Less. As usual, he did not disappoint:

“I’m godfather to identical twin pre-schoolers,” Less messaged back, “and their father asked me for exactly this same advice. At my suggestion, he established two mutual fund accounts with equal amounts being dollar-cost averaged into each:

(1) Twentieth Century Vista Investors Fund (TWCVX)
(2) Twentieth Century International Equity Fund (TWIEX)

“Both are available for starting investments of as little as $50 per month. These are maximum volatility funds with maximum long-term expectations. If you prefer index funds, then a 50-50 split between these two would also be a fine approach:

(1) Vanguard Total Stock Market Index Fund
(2) Vanguard Total International Index Fund

“These require $3,000 initial investments with additional investments of at least $100 per month allowed after that. The use of these broadly-based index funds should prove to be less volatile but, of course, somewhat less profitable over the long term than the Twentieth Century funds.

“A final excellent choice for someone who wants to use a single fund that balances off all of the different equity arenas, and includes an inflation hedge to boot (through natural resource companies) is the T. Rowe Price Spectrum Growth Fund (PRSGX). This is where I usually suggest friends put their IRA accounts when they want just one fund that will serve them for life. This is the only one of the choices I’ve made which I don’t think will suffer much in the upcoming bear market (assuming there is one). But if the fellow is dollar-cost averaging, he’d rather have a bear market right now anyway. And, of course, as the least volatile choice it will probably do a little less well over the long time periods.”

Looking at Less’s advice, I’d suggest his middle suggestion — those index funds — and then, if we ever get really decimated, with those funds down 30% and the Twentieth Century funds down 60%, I might switch from the index funds to the Twentieth Century funds. Or do half and half right now.

The main thing, though, is that you’re doing this at all. You will come out far ahead of those who can’t or don’t.

Have you seen what’s happened to the prices of caves in Southern Spain lately? A perfectly adequate two-bedroom cave that sold for about $150 ten years ago now fetches nearly $8,000! This according to last February’s issue of a newsletter called International Living. (Thanks to Los Angeles Photographer Pieter Lessing for sending it to me.)

“Antonia Requera is a bright, articulate, Spanish woman in her 30s,” reports International Living. “She dresses stylishly and speaks several languages. So it may surprise you to know that she lives in a cave.”

Apparently there are quite a few middle-class Andalucians living in caves, complete with all the modern conveniences, including phone and fax. Ms. Requera sees nothing strange about it — she was born and raised speluncularly.

It kills me that I didn’t think of this 10 years ago, of course. For $200,000 I could have all but cornered the cave market and been Caveman Numero Uno.

But even now it’s intriguing, if only because these caves keep a year-round temperature of around 60 degrees. Wouldn’t that be nice in August?

To get your feet wet, the newsletter suggests blowing $500 to rent a nice two- to four-bedroom cave for a week to see how you like it. For more information, they suggest the Spanish Government Tourist Office at 666 Fifth Avenue, NYC 10022 (remember physical addresses?) — 212-265-8822, fax 265-8864. [If you’re interested in International Living itself, a $34/yr monthly, you could call 800-851-7100 and probably get them to mail you a free sample (“we’re usually pretty good about that,” said the woman I reached).]

If I weren’t already spread so thin, with no time to get to Spain in the first place, I feel quite sure I would buy a cave. At these prices, how can you miss? The cocktail-party chatter alone would be worth the price. “Hey, Mister — you live in a cave?” someone might ask, stunned by my lack of knowledge on one topic or another. (I get that a lot.) “Why yes I do,” I could earnestly reply. “Would you like to see pictures?”

Tomorrow: What Shall We Name the Baby’s Mutual Fund?

My dad, who was a captain in World War II, told me more than once that if you want to estimate the range of a target and have no sophisticated equipment for doing so, just ask everyone in your platoon. The estimates you get will vary wildly, but the average will be remarkably close. I think you’re also supposed to throw out the lowest and highest estimates before taking your average. I can’t say for sure this works, but we clearly did win the war.

Anyway, last week I told you about the Albert Einstein autographed letter I had bought on the subject of infidelity (he was against it, but counseled his colleague not to let it make her crazy), and asked you to take a wild guess at what you thought it might be worth — to you, and/or what it would bring at auction.

I had so much fun with your responses! It was more evident than ever that most of you are a lot more interesting than I am, even if I’m the one who happens to be holding the mic.

Not to say you know the first damn thing about the autograph market.

But I thought I would share some of the responses.

Representative of one batch was this, from Brian Buonamici, with whom I agreed every step of the way until he finally blurted out his price:

“Regarding your question as to how much the Einstein letter is really worth, I feel compelled to take the conservative easy way out and say it is worth whatever a buyer is willing to pay for it – which will probably prompt you to mention something about the volatility of illiquid markets. However, such an answer would not be in the spirit of the experiment so I’ll give pricing it a whirl. Please keep in mind that I am the farthest thing from an expert in this sort of thing.

“There are a couple things I would consider. First, as it was signed “A. Einstein,” there is the off chance it wasn’t good ol’’ Albert but a relative named Alfred, Ann, etc. But I’m assuming that you have some sort of certificate of authenticity so it’s probably a moot point. Second, it’s in German. My knowledge of German goes about as far as “dopplebock,” so the letter could be about which of the seven dwarves had the best love life for all I know. The fact that it was handwritten and not a copy makes it one of a kind, this would hopefully add to the value. But probably the most important factor is the fact that Mr. Einstein’s contributions to society at large are almost immeasurable — which means, unfortunately, it probably couldn’t fetch more than the latest coke-snorting, wife-beating, sports hero’s used sweat socks.

“I’d put it somewhere around the $50 – $75 dollar range.”

Oh, Buonamici! More aptly be thou called Malamici, so cruelly dost thou appraise my treasured leaf! (I paid a great deal more than $75 for this baby.)

More to my liking, for reasons that will become clear, was Ken Powell’s astute, albeit incomprehensible, assessment:

“Seeing as the letter is from Einstein, its value must be related to a physical constant. Clearly the rest mass of an electron (mc²) or the rest mass of a proton (mc²) is the relevant constant. Given that the topic is infidelity, the electron is unquestionably more relevant (cf Heisenberg’s uncertainty principle). The rest mass of an electron is half a million ergs. An erg is one ten-millionth of a watt-second, or about 2.8 x 10^-14 kilowatt-hours. A kilowatt-hour is worth a nickel or so (depending on where you live). So, each electron in the paper is worth 1.4 x 10^-13 cents or so, if you could convert it to energy and sell the energy in the US market. You haven’t told me how big the paper is, but let’s say that it weighs about a tenth of an ounce — slightly less than an 8.5 x 11 sheet of paper. Less than 1/1835 of the paper’s mass is made up of electrons, so there is about 10^-5 ounces of electrons, i.e. 0.3 milligrams of electrons, or 3 x 10²³ electrons. With each electron worth 1.4 x 10^-13 cents, the note is worth 4 x 10¹⁰ cents, or $400 million. Sounds like you got a deal!”

Throwing out the lowest and highest estimates left us with estimates like these:

David Philip Gladstone: “I bid $2,000 Canadian.”

Steve Citrin: “Thanks for printing it. In fact I even printed out a copy, and saved it in my office. I believe it could be appropriate to many of today’s frustrating experiences and not just infidelity. I feel it would go for about $5,000 at auction. It’s advice well taken from the world’s great thinker. If Jackie Kennedy stuff sells-this is worth five big ones.

Tim (a surgeon): “I think that he may be the smartest scientist on the face of the earth, but his advice on infidelity was poor at best. Because of this, I think that it would be worth something because it gives a glimpse into his personality. My guess, which is a wild stab in the dark, is $500. I am sure it would probably go for much higher though.” [If so, isn’t your guess “much higher than $500?”]

Rick Frey: “$5,000 – $10,000.”

Dan Eisenberg: “The letter’s practical value is matched only by that in your excellent investment guide. The similarity continues in that both sets of advice appear to be rational and easily implemented. But, alas, the unpredictable real world effects of emotion enter into the “equation,” resulting in hostile divorce proceedings and buying high and selling low, respectively. I’d guess about 1,000 bucks.”

Bert Morano: I really would need to know the condition of the letter and some comparable prices of other letters which have sold recently. But since I have none of that information, and since I cannot really understand the Jackie O. phenomenon of outrageous auction prices, I would say the letter is worth what my personal finances could afford for such a nonperforming asset — $3,500.”

Daniel Helman: “$5,000.”

K. J. Baldwin: “If all that Jackie Kennedy [stuff] is worth millions of dollars, then a letter handwritten by the smartest man who ever lived ought to be worth at least a million by itself.”

(I like the way you think, Baldwin! But I guess I should throw out your estimate before averaging, too.)

Daniel Diachun: “Not having much background information I will hazard a wild guess of $3,000. In addition, I believe that the price any one day or any one auction could vary considerably. Say an auction were held the week that infidelity had received a great deal of press — the price might go up considerably. On the other hand, say it were held the week a forged historical document received a great deal of press — the price might drop. Of course, there are endless examples. Another factor could be the letter’s last sale price. Lacking influence of other factors, items tend to maintain similar pricing from one sale to the next. (Call this “Diachun’s pricing inertia law” <grin>).

David Davis: You are an experienced collector; you know what to look for in terms of authenticity and condition. Therefore, I’m taking it as a given that you are satisfied on both counts. You’ve purchased it from a reliable source. It’s in Einstein’s own hand–in German, no less. That could have been uncharacteristic of him; he may have preferred to type everything. Although the content of the letter does not reveal anything about the theories for which he is famous (“Now that we’re good friends, Thomas, I must tell you that my theory of relativity is just an enormous practical joke. The ‘equation’ came from the back of a . . .”), it does provide wonderful insight into his character. Also, I think this letter has been the subject of a newspaper story or has been mentioned in a book review recently. That favorable notice may also bump up the sticker price. Taking all of this into account, I think the gavel probably came down on $12,500 plus commission. But, to hold such history in your hands, what a bargain! You can bet it will appreciate in value, quickly, too.”

B. Foley: “I would guess (keeping in mind I thought the Red Sox would win the World Series), that this would be worth upwards of $10,000 — and possibly more in DMarks. The target market for this would be unfaithful husbands!”

D. Brubeck: “What it is worth at auction is so unimportant, and so utterly vulgar compared to the worth of the wisdom of his thoughts. I had no idea that he had that sort of a mind. I shall search the library for books that might reveal his thoughts.” [If you’re surprised to know he had an amazing mind, wait til you see his hair.]

John Simonet: “I have no basis to make this guess at all, but I would say $10,000 or thereabout — regrettably, not to me however.”

Eric Mueller: “Maybe $500 at an auction? I don’t know what Einstein stuff is going for; aren’t these things normally priced by a very fickle, fluctuating market for collectibles?” [Fickle indeed — which is one of the reasons I like Einstein. Madonna could fade. But Einstein?]

Jeffrey A. Roesener: “I bid $2000.”

Are you seeing a pattern? Take out the crazy ones, and they all bunch in a range of $500 to $12,500, averaging about $6,500. And that’s exactly what I paid.

I think I got it cheap, but beauty is in the eye of the beholder. Let’s give the last word to Michael Welford, who wrote: “I’ll guess an auction price of $1200. But what’s the letter worth? That question is unanswerable. I’d give $20 for it.”

Tomorrow: Living in a Cave (Nicely)

Yesterday I quoted this message from one of you in Japan, and then went off into the stratosphere with musings about the global marketplace. I ended by promising to come back to Earth today.

On May 10, Kohichi wrote:

In JAPAN there are 1,000,000,000,000,000 yen personal savings. But as you know, Japanes Ministry Of Finance forced a low interest policy to all Japanese banks (even Citi bank Japan). NOW an ordinary deposit is just a 0.01% interest monthly. But a loan interest is 4%!!!

So WE ARE VERY ANGRY (especially retire people). Now Japanese banks are very unclear by their real estate mistake. So we are moving our money to postal savings. We are looking for a good oportunity on a fair competetive trade market. And Japanese stock market is very unclear and they require trading tax (different from NY and LDN)

Unfortunately most of Japanese not be good at ENGLISH. PLEASE MAKE JAPANESE PAGE.

I wrote back that his use of the word “unclear” left me baffled. He wrote back a slightly less baffling message that leads me to believe “unclear” must be the polite, indirect Japanese way of saying “bankrupt” or “on thin ice” or I guess just “unsound.” Clear as a bell? Unsound as a Japanese bank?

With that adjustment, I had an easier time making sense of his frustration. Imagine savings accounts that yield just .01% a month (barely a tenth of a percent a year). Not that I’d mind borrowing at 4%.

It’s enough to make you turn to stocks, as relatively low interest rates in the U.S. got so many of us baby-boomers turning to stocks and driving the market up and up, until recently, with barely a breather.

But, as I pointed out to Kohichi, that doesn’t make stocks cheap. I spent most of my message explaining my incompetence at giving him advice — I know nothing about Japanese regulations, taxes or investment opportunities — but warning him that the U.S. market was not a bargain (especially not in May, when we were messaging back and forth).

So if you’ve put some of your money on the sidelines, or its been there all along, waiting for the bear market that never comes, take heart. It could be worse. Your money could be in yen accounts earning just .01% a month (and losing value relative to the dollar as the yen falls). Your bank could be unclear.

I’d like to say, “and this just in,” but actually it came in early May, from one of you in Japan. (If your first name is Kohichi, you know who you are.)

I was somewhat unclear what it meant — particularly because the word “unclear” itself in the message that follows threw me off. Well, you’ll see:

In JAPAN there are 1,000,000,000,000,000 yen personal savings. But as you know, Japanes Ministry Of Finance forced a low interest policy to all Japanese banks (even Citi bank Japan). NOW an ordinary deposit is just a 0.01% interest monthly. But a loan interest is 4%!!!

So WE ARE VERY ANGRY (especially retire people). Now Japanese banks are very unclear by their real estate mistake. So we are moving our money to postal savings. We are looking for a good oportunity on a fair competetive trade market. And Japanese stock market is very unclear and they require trading tax (different from NY and LDN)

Unfortunately most of Japanese not be good at ENGLISH. PLEASE MAKE JAPANESE PAGE.

I hesitated to print it just as written, since the English speakers among us will smile at the small errors — but then catch ourselves worrying that we are being smug or xenophobic or whatever. I, for one, am not being smug, because it dazzles me how anyone not born to it could learn English. I certainly couldn’t learn Japanese.

But I think it’s also interesting to see how the world is becoming one — here is a fellow in Japan suddenly as nearby as the family in the house next to you, at least as regards proximity in cyberspace.

Can it be long before computer users worldwide will routinely consider stocks from the whole globe as potential investments? We do that to some extent already, of course, as do the Japanese. But in a few years, if your account is at Ceres or Citibank or American Express or American Airlines or at Merrill Lynch or Fidelity or Microsoft or CompuServe — all of whom, and more, will easily have the technology to carry out your instructions and keep your account in their electronic vault — won’t it be joined by accounts owned by thousands of Japanese and Brits and Argentineans? And won’t they — we — all be interested in American stocks — but also Japanese and Swedish and Brazilian and Russian stocks?

English seems inevitably to be the likely global “standard” (just as Windows/Intel has, for now at least, become the global standard), which gives those of us born to it a guilty edge. But I wouldn’t count Kohichi, et al out for a minute. In the global high-tech economy of the next century, there should be room for virtually every patient, prudent investor to profit.

Now if we could only figure out how to get the non-computer-owning, unskilled, nonsavers of the world a ticket to the party.

I realize I have strayed from Kohichi’s question deep into the stratosphere. Tomorrow I’ll tell you what I told him (proving yet again, no doubt, that free advice is worth exactly what it costs).

I heard/read two very smart things recently, and I felt you should hear them, too:

“FDR and his crowd were great actuaries. When they instituted Social Security, average male life expectancy was 62 and the retirement age was 65.”

— Sam Nunn, speaking informally to a group of progressives

“A good hairdresser is worth 10 psychiatrists.”

— Laura Pedersen’s mother, as quoted in Ms. Pederson’s New York Times column

Yesterday (if you want something only a little weightier): Can You Beat an Index Fund?

I read your column on mutual funds, and your penchant for the Vanguard Index 500. I agree, that is the only one I would recommend myself.

However, you also mentioned that it is very difficult to beat the market. On that note, a method was developed by Michael O’Higgins and refined by the people at AOL’s Motley Fool that seems to do just that. It involves investing in the five lowest priced stocks of the 10 highest yielding DOW 30 industrials (well, actually the second thru fifth lowest priced, the lowest is omitted). The portfolio is reallocated once a year.

That’s it. I just described the entire process. This process has produced returns at a compound rate of 17% since 1961. I believe the market has been about 10% during that time period. [Actually, according to the kind folks at Ibbotson, it was a just over 11%.]

Alan Levit
CAShuttler@aol.com

I’m a little familiar with this system. The problem with this sort of thing is that they didn’t develop it in 1961 and predict what would happen, they looked back to 1961, ran a lot of computer analyses, and found what would have worked had you started in 1961.

Whether it will work as well for the next 35 years is doubtful, for two reasons.

First, it may be that there is no great underlying logic to why it worked in the past, any more than there is great underlying logic to why one guy out of 256 might have flipped heads eight times in a row. (The odds are one guy would — but not because his coin-flipping method is better.)

(I guess the logic would be that these stocks are out of favor, yet have high yields to boost your return and cushion any further falls. It’s certainly not the most dangerous system you could play, that’s for sure. But it also entails lots of taxable dividends and taxable gains if you readjust your portfolio each year rather than buy and hold. If you did it, you might want to do it within the shelter of your Keogh Plan or something.)

Second, as this becomes more and more popular, with the Fool already suggesting you consider doing it in December, to beat the January crowd, the people who do it in January will find their performance a little worse (because prices were bid up in December) — and so forth.

Not to say you might not do reasonably well with this system. But it’s not quite the miracle it appears. Looking back, there will always be strategies you can identify that would have worked. Looking forward, it’s harder.

All comments welcome.

So we’re all watching the O-lympics — which is a lot healthier, if you ask me, than when we were all watching the O-J show — and all anyone can think of are “the thrill of victory and the agony of defeat” (as one TV network used to put it). Certainly a lot nobler sounding than “greed and fear,” or “bull and bear,” or “bid and asked,” which may be the rough equivalents from Wall Street. On the other hand, show me an economy that was ever built on the speed of its runners.

I tried to think what I could say about the thrill of victory and the agony of defeat and quickly remembered: I don’t know the first thing about sports. Nothing! I was the only left halfback on my high school varsity soccer team to be right-footed (though I did have heart), and it went downhill from there.

But business is a sport itself, no? A competition? Coke versus Pepsi? Kodak versus Fuji? Gimbel’s versus Macy’s?

So here’s the story I wanted to tell all you aspiring Gold Medalists (and even just those of you going for the gold):

R.H. Macy started a small thread-and-needle shop in Boston in 1842 that closed within a year. A second, also in Boston, was shuttered in 1845. You can just feel his frustration as he made his last entry in the account book:

“I have worked Two Years for Nothing.
“Damn.
“Damn
“damn
“damn”

(And, as I’m fond of reminding slow-starters, Tolstoy was 50 before he wrote his first book.)

The lessons: don’t give up, of course. But also: in considering whether to back some entrepreneur, don’t necessarily count him out for having failed in the past. Indeed, just the opposite may sometimes be true. That failure can be just the education an entrepreneur needs.

Note: When it comes to Internet companies, there are no failures. Any 20-year-old with an idea can be reliably expected to go public at a $200-million-plus valuation, so give him whatever he asks for.

(Or so I thought until a couple of weeks ago. Lately, at least a little sanity has reappeared.)

Tomorrow:  Can You Beat an Index Fund?

No, this is not a comment about the new anti-matter mutual fund group. It’s just that yesterday I made a passing reference to a handwritten Albert Einstein letter I had acquired — the smartest man in the world (fight promoter Don King, I am guessing, is second smartest, judging from the hair) writing on the subject of infidelity.

He was replying to a distraught colleague who had apparently written to solicit his advice: her husband was cheating on her.

A couple of you — I won’t name names — were curious just what his advice was.

For what it’s worth (and without naming the lady, even though it was 43 years ago):

Dear Dr. ————–:

I can empathize with you well, that the situation you describe is very painful for you. But as a mature, knowledgeable person you should attempt with all your strength to overcome this situation from within yourself, rather than feeling deceived or mistreated.

I am sure you know that most men (as well as quite a number of women) are not monogamously endowed by nature. Enforced faithfulness, however, is a bitter fruit for everyone involved. Instead of letting anger towards your husband arise within you, you should pity him, since fate has forced him to balance between two women that are very likely hostile towards each other because of him. This is not an enviable situation and for a well-meaning person there is no satisfactory solution to this problem.

If he is a benevolent and just person and his general conduct is decent towards you, you should be able to respond to this with a smile and not make a case of war out of it. Anyway, you should not take the view that your honor has been violated by his behavior. When you get angry, tell yourself that you are still in the simpler and less incriminating position that he.

With friendly greetings,

A. Einstein

Now, when I said up above “for what it’s worth,” I naturally meant his advice. But what is the letter itself worth — handwritten in German. I’m not selling it, but I thought it would be fun to try an experiment.

If this intrigues you at all, just tell me what you think a letter like this is worth. What would/should go for at auction?