Author: A.T.

From AASLCS@aol.com: “What about an IRA for a kid less than 14? After I saw a story in The Wall Street Journal, I asked my accountant and he said it does not make sense for an eight-year-old because the IRA is not a deduction for him.”

I don’t agree with that.

It’s hard to imagine what an eight-year-old could do to earn any money that would qualify for an IRA. (I once bounced up and down on Rayco seatcovers to demonstrate their ruggedness for a TV commercial, but that was long before IRAs, and I only got $10.) But assuming he or she has actually earned some money at arm’s length — getting paid by you for chores around the house won’t cut it — an IRA is a great idea.

No, your child probably doesn’t need the tax deduction. Indeed, she would not claim it. She would file Form 8606 for nondeductible IRA contributions. But look at the advantages. As per my July 19 comment:

1. Your child gets into a working/saving habit. This alone is priceless.

2. Maybe she learns a little about investing and capitalism. This can’t hurt, since it’s the foundation of our prosperity.

3. If your child puts $1,000 a year into an IRA from age 12 through 21 and then stops, and if the mutual fund grows at 10% a year, then the income from those ten summer jobs — $10,000 — will grow by age 70 (when withdrawals must begin) to $1.7 million. Net of 3% inflation that would really be only about $300,000 in today’s dollars. But how many 70-year-olds do you know today who wouldn’t be glad to have an extra $300,000 sitting in an IRA to boost their annual income?

Not all brokers and mutual funds will set up an IRA for a minor, but if yours won’t, I’m told Merrill Lynch and the Vanguard group of funds, among many others, will.

Tomorrow: The Janus Fund versus Lindner Dividend

“Last year my wife asked a cab driver in Amsterdam about his country’s politics. ‘We don’t have any,’ he said, ‘everything’s been decided.’” — New Yorker cartoonist Charley Barsotti, telling me why he was thinking of moving to Holland

Here, of course, everything’s not been decided.

A few weeks ago I wrote some comments suggesting that Bob Dole — though a fine man — had abandoned his life-long fiscal prudence in favor of a tax-cut plan he didn’t believe in that, if passed, would spook the bond market (rightly), explode the deficit, raise mortgage rates, lower stock and bond prices, and eventually overheat the economy and throw us into recession.

It would also provide a much bigger benefit to the well-to-do than to the average working family — not just in absolute dollars but proportionally.

I got a lot of good mail from you, both pro and con, almost all of it civil and intelligent. (Hey: this is a great country!) Here’s one example. I don’t know whether the “equal time” doctrine applies to this web site (well, I do know: it doesn’t), but in that spirit:

Mr. Tobias,

I’m sure that after your comments of the past few days, you’ve gotten pounded by lots of angry Republicans. I’m one (Republican) and I’m not (angry). But I hope you take the time to read this, because I felt the need to join the howling and reply.

Your comments truly disturbed me, but by doing so they made me think. I guess in a way I need to thank you for that. I’ll say up front I’ve been a strong Dole supporter, even going back to when Bush was President. On the other hand, I agree with much of what you said.

Let me try to present my position:

a) The government creates neither jobs nor prosperity. All the government can do is create an ENVIRONMENT conducive to them.

I give credit for the current state of the economy to the technology boom, for dramatically increasing productivity by providing businesses with the most dramatically productivity-enhancing tools in 100 years. And to Alan Greenspan for keeping the economy on keel, and skillfully keeping us out of recession. Bill Clinton has been lucky enough to be in the right place at the right time.¹

b) You imply simple choices where they do not exist. The strengths of your books is that they simplify complex subjects, and they do it for subjects (personal finance) where it is POSSIBLE to simplify. There is no arguing with the fact that you should not borrow at 5% to lend at 3%. But I argue that in this (or any) election, things are not so simple.²

Please re-read your book “Auto Insurance Alert” and then look at Mr. Clinton’s campaign contributions and voting record. I believe you might find yourself with a bit of cognitive dissonance (if not, let me give you a hint — LAWYERS). Weren’t you yourself involved with Tom Proulx and the anti-lawyer initiatives in California?³

Do I choose the NRA over the NEA? The Christian Coalition over the Rainbow Coalition? The tobacco lobby over the trial lawyers? No. I won’t side with ANY of them. I hate the fact that our political system forces our candidates to do so. My point is that you are doing a disservice to society by using your influence and pulpit to forward the stance that the choice in November is a simple choice of a tax cut vs. fiscal responsibility. It is anything but.

And last, but to me, the most important point of all…

c) You take Bob Dole to task for embracing a tax cut in which he does not believe. I think that you’re correct on both counts – the tax cut is not well thought-out (although I do support tax reduction and spending cuts) and Mr. Dole does not truly believe in it.

But Bill Clinton FORCED this, by adopting a pseudo-Republican stance to get re-elected. The man who embraced socialized health care two years ago suddenly is signing the recent Welfare Reform Bill? And that’s NOT hypocritical? Bill Clinton the moderate is a crock.⁴ Mr. Clinton showed his true stripes during his first two years in office, and was spanked for it in ’94. Mr. Dole’s track record, on the other hand, is imperfect (aren’t we all) but consistent, admirable, and MODERATE!

Let me be direct. My opinion of Bill Clinton is lower than whale poop. In my opinion, he will do ANYTHING to get elected. Whitewater, TravelGate, and all the other garbage he, his wife and his cronies are involved in show a complete lack of character. He’s been “getting away with it” for years and people (including you, I believe) know it, but allow his behavior to continue because he’s a charming speaker.⁵

Bob Dole, on the other hand, is a principled, decent man who lacks Mr. Clinton’s smooth delivery but outclasses him by miles in terms of possessing true character. He has devoted his life to government service, and has served this country tremendously well for many, many years.

I invite your response, and I hope it makes you think a little before you suggest that this November’s choice is a simple one.

Regards,

Chris

¹Chris is right that the technology boom and Mr. Greenspan are both big plusses. But both were also big plusses throughout Mr. Bush’s four years. (Greenspan became chairman in 1987.) Clinton didn’t just stick with the status quo and get lucky; he changed course. He raised taxes on the top 1% (while lowering taxes on the working poor) to shrink the deficit, lower interest rates, and get the economy moving. Since then, 10 million new jobs have been added, the federal payroll has been trimmed by more than 200,000, and the deficit has been cut by more than half. A reasonable start has been made at “reinventing government” and cutting red tape. I don’t agree he was just “in the right place at the right time.”

²Chris is also right that many of the issues we face are not simple. But the November choice is simply: Dole or Clinton. And in several key areas, they and their parties espouse very different views. I guess if you buy my economic arguments but hate Clinton’s social policies (or vice versa), it’s a tough choice. But I was addressing mainly the economic stuff.

³Yes, I was involved in the California ballot initiatives (though I saw them more as “pro-consumer” than “anti-lawyer”). Indeed, the current WORTH Magazine has my account of that effort (titled — despite my admiration for much that he’s done — “Ralph Nader Is a Big Fat Idiot”). Plug, plug. But while there’s little question that Democrats are predisposed to trial-lawyer positions, some of which I think are terrible, the President recently came out against lawyer Bill Lerach’s current California ballot measure, Prop 211 — which is exactly what I believe he should have done. But, yes, if the only issue being decided in November were tort reform, I’d be torn. I think on that issue Dole might go too far and Clinton not far enough.

⁴Actually, Clinton was chairman of the Democratic Leadership Council before running for President. The DLC is assailed by liberal Democrats as being all but Republican. I think Clinton’s moderate, practical, progressive approach long predates 1994. And the Clinton health plan bent over backwards (rightly or wrongly) not to be socialist, unless by that you mean that everyone would have been covered (as they are, I believe, in every other major industrialized nation).

⁵My own view is that the Clintons have gotten a terrible bum rap on this. Not that they’re perfect, or there haven’t been times when they’ve been too defensive. But I think history will conclude that “Whitewater” and “Travelgate” were nothing, or next to nothing, and that on issues that go to the well-being of the nation and the world — education, free trade, employment, health care, crime, human rights, world peace, and so on — they have worked incredibly hard and honorably.

I agree Bob Dole is a fine man and a moderate.

Tomorrow: Your Child’s IRA

“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)

Have you checked your life insurance needs lately? Click here and work through the new estimator it’s added, then get some competitive quotes for term life insurance.

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.