Author: A.T.

Welcome to my “daily comment.” The ground rules Ceres and I have agreed to are simple. I can write whatever I want, ranging from a sentence to an epic. I can even say things like, “Don’t trade stocks yourself — no matter how cheap the commissions. For most people, it’s smarter to invest through no-load mutual funds.” Which it is (though it may be less fun).

So you’ve heard about the Internet, right? I guess so, or you wouldn’t be reading this. Well, I figure that one of the reasons many real estate investment trusts — REITs — are selling so cheap, and yielding 6% or 8% or 10% or even 12% dividends, is that a lot of investors think real estate is headed for trouble.

Think about it. Who needs all that office space if people can work at home and telecommute? Maybe not all people, to be sure, but even a 10% drop in the demand for office space would have a huge impact on rents, which in turn would have a huge impact on landlord operating profits and property values. Bye, bye office-tower REITs.

And who needs all those stores? Why schlep all the way down to the story and wait in line at the cash register when you can click your mouse a few times, comparison shop, save all that money by cutting out the middleman, and have your items delivered the next morning Federal Express? Bye, bye shopping-mall REITs.

And who needs all those hotels? Videoconferencing! Bye-bye all-but-resort hotel REITs.

So here’s my idea. If you do own REITs like these (as opposed, say, to apartment-house REITs or nursing-home REITs), and if you do you worry the Internet’s going to sock it to ‘em — yet you don’t want to sell your REITs because, like me, you can’t really quite believe the Internet is really going to hit them that hard, you could hedge your bet by buying Federal Express.

Because if people do wind up doing most of their shopping by computer, Federal Express is going to have a field day delivering it all. (UPS, too, but they’re not a public company.)

I’m not suggesting you actually do this — I think you should do your investing through no-load, low-expense mutual funds. And if you do think REITs are going to take a hit, then the sensible course of action is simply to sell those REITs (and maybe buy Federal Express anyway).

I just think it’s kind of fun playing the “investment implications” game. You know — where someone names an event or a trend and you have to come up with the right stock play to profit from it. Wall Street pros love to do this, the more gruesome and cynical, the better. Most famous example (from “Adam Smith’s” The Money Game if I remember right): someone was talking about the explosion in heroin addiction, to which the the Wall Street pro immediately shot back, “I wonder who makes the syringes?”

Tomorrow: Berkshire Hathaway

Welcome to my “daily comment.” The ground rules Ceres and I have agreed to are simple. I can write whatever I want, ranging from a sentence to an epic. I can even say things like, “Don’t trade stocks yourself — no matter how cheap the commissions. For most people, it’s smarter to invest through no-load mutual funds.” Which it is (though it may be less fun).

Yesterday I described Prop 200, an almost “pure” no-fault initiative (you could only sue a driver if he’d been convicted of driving drunk when he hurt you) that will be on the March 26 California ballot. Prop 200 would save California drivers a fortune, at the same time as it greatly increased protection to those who are worst hurt, and automatically covered every child under 18, no matter what.

We turned in the requisite 2.2 million signatures to put Prop 200 and two other initiatives on the ballot. Here they are in three nutshells:

• PROP 200 – A pure no-fault auto insurance system that RAND estimates would save the average California driver 48% on the bodily injury coverages (all, that is, but theft and collision) . . . and yet would greatly increase the pay-out to those worst hurt. (Better protection at lower cost is possible because the current system spends more on lawyers than on medical care, and is driven by an incentive to pad and invent claims. No-fault eliminates that incentive.)

• PROP 201 – A “loser pays” provision in securities class-action “strike suits” of the type that have been plaguing Silicon Valley in particular. This gives a wrong-doer more incentive to settle (rather than rack up two sets of legal fees) and discourages extortionate nuisance suits. But there are safeguards. First, the judge can waive “loser pays” when he believes the plaintiff had legitimate grounds to bring suit even though he lost. Second, no one need join in the suit, and thus bear any risk, in order to collect his full share of any winnings. In other words, a couple of big institutions could be the “class” and bear the risk (that to a Fidelity, or a pension fund, would be minimal) . . . but if they won, all the little guys who’d been wronged would get their share of the proceeds.

• (This measure is aimed at the same problem that was just successfully addressed at the Federal level. Even Ted Kennedy voted to override the President’s last-minute veto — a veto that could have been avoided if just a little of the language had been changed. Our approach has no such language, and I like to think the President would approve, although of course he’d be nuts to get involved in California battle like this one.)

• PROP 202 – A cap of 15% on what a lawyer could take in situations where his initial demand letter resulted in a settlement offer within 60 days. A sort of usury law to protect the little guy against lawyers just as we have usury laws with lenders. If the client chose not to accept the early offer, then the lawyer could take 33% or more — whatever they agreed to — of whatever extra he was able to win. This actually gives the lawyer MORE incentive to pursue a claim aggressively, rather than just sit back and collect 33% of an inadequate settlement offer, as he might now . . . but allows the client to pocket at least 85% of any early settlement if they do decide to accept it. This initiative measure grew out of a proposal last year backed by Derek Bok and the late Erwin Griswold, both former Harvard Law School deans, Morris Abram, former president of Brandeis, and Norman Dorsen, former president of the ACLU, among others.

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The group backing these three initiatives is called THE ALLIANCE TO REVITALIZE CALIFORNIA. I co-founded it and sit on the five-person board.
I’m a Democrat who made his money with a software program called Managing Your Money. The guy I recruited to be our chairman, Tom Proulx, is a Republican who made his money with my former competitor, Quicken, and who is now devoting his full time to winning these three initiatives.

Our supporters are widely bipartisan and include everyone from former Secretary of State George Shultz, Peter Ueberroth, and Governor Wilson to Roberta Achtenberg, Amfar Co-Chair Tom Stoddard, and Medical Education for South African Blacks co-founders Joy and Herb Kaiser. And on and on — Intel chairman Gordon Moore, software entrepreneur and liberal philanthropist Peter Norton, former Democratic congressman Chet Atkins (whom we’re hoping people will confuse for the singer) — about 80 in all so far.

We haven’t reached him yet, but because legal reform is often thought of as a Republican issue, we are fond of quoting George McGovern (September 8, 1995):

“America is in the midst of a new civil war, a war that threatens to undercut the civil basis of our society. The weapons of choice are not bullets and bayonets, but abusive lawsuits brought by an army of trial lawyers subverting our system of civil justice while enriching themselves.”

George McGovern!

(If you have friends in California, could you cut and paste these comments into your e-mailer and broadcast them far and wide? The bottom line: Vote YES on Props 200, 201 and 202 on March 26!)

Tomorrow: The REIT/FedEx Hedge

Welcome to my “daily comment.” The ground rules Ceres and I have agreed to are simple. I can write whatever I want, ranging from a sentence to an epic. I can even say things like, “Don’t trade stocks yourself — no matter how cheap the commissions. For most people, it’s smarter to invest through no-load mutual funds.” Which it is (though it may be less fun).

California’s auto insurance system is a mess. Rates are sky-high, yet badly-hurt crash victims get almost nothing. Why? Because to collect they have to win the the “lawsuit lottery.” But that’s hard because there’s often no one to sue.

There’s no one to sue if it’s a hit and run (there were 18,317 hit-and-runs in Los Angeles county alone in 1992 according to the LA Times) . . . or if it’s a one-car accident (about 16% of the total, according to the National Highway Traffic Safety people) . . . or if the other driver wasn’t at fault (it happens!) . . . or if he was but you can’t prove it.

And there’s no one to sue if the other driver had no insurance — as 28% of California drivers do not (about 5 million of them, including many of those most likely to cause accidents).

Even if you can prove the other guy was at fault, and he did buy insurance, he may well have bought only the statutory minimum coverage — $15,000 — leaving you perhaps $9,000 after legal fees and expenses to cover your $400,000 in medical costs, rehabilitation and lost wages (not to mention anything for your pain and suffering).

So I’ve helped to put three propositions on the March 26 California ballot, the first of which — Prop 200 — would fix this mess. A pure no-fault system (only drunk drivers could be sued), it would save drivers a fortune in the legal costs, fraud and uninsured motorist subsidies that drive up prices, and drive down benefits, today.

Needless to say, the personal injury lawyers — who would lose some of the billions consumers would save each year — are going to do whatever it takes to keep the current system. Even if it means being a little sneaky.

For example, on January 9 the San Francisco Chronicle published a letter from one Jeff Reuvekamp of Orinda, California, that asked why non-Californians like me were “trying to force no-fault insurance [on the people of California].”

The answer he seemed to be hoping for — because his letter was almost word for word from the pamphlets of the California personal injury lawyers — was that we are contributing to this effort because we are heartless, greedy S.O.B.s who hope to profit in some way.

In fact, there’s no way for me to profit from the passage of Prop 200. (At least none I’ve been able to figure out.) But that’s clearly the impression he intended to convey. He ended his letter with a question: “could it be the money?”

What he didn’t disclose in the letter — and here comes what I’d call the sneaky part — is that while he himself is not a personal injury lawyer, his wife, Mylene is. So if Prop 200 passes, it’s actually not my finances that will be affected, as he implied — it’s his. He’s the one with the undisclosed stake in this. But the Chronicle either didn’t bother to check that out, or didn’t think it was worth readers’ knowing.

If Prop 200 passes, RAND estimates that the standard $1 million-per-person policy it provides would cost California drivers 39% LESS, on average, than the minimum $15,000 policy costs today.

What’s more, every child under 18 would automatically be covered for at least $50,000. And every elderly person crossing the street or kid on a bike or skateboard would AUTOMATICALLY be covered for up to $1 million in actual costs, plus up to $250,000 more in pain and suffering. And that would be true even if they couldn’t prove fault . . . even if it were a hit-and-run . . . and even if they had purchased no insurance.

All this for far LESS than auto insurance costs Californians today.

How is this possible? It certainly sounds too good to be true. But it =is/= true, because Prop 200 would:

• Eliminate most of the $2.5 billion in legal costs built into today’s auto insurance system (today, more auto insurance dollars actually go to lawyers than to doctors, hospitals, nurses, and chiropractors combined);

• Remove the incentive for most fraud (which costs Californians billions more);

• And largely end the subsidy of uninsured motorists (another billion a year).

Jeff Reuvekamp is against all this. Could it be the money?

(If you have friends in California, could you cut and paste these comments into your e-mailer and broadcast them far and wide? The bottom line: Vote YES on Props 200, 201 and 202 on March 26.)

Tomorrow: The Other Two Propositions

Welcome to my “daily comment.” The ground rules Ceres and I have agreed to are simple. I can write whatever I want, ranging from a sentence to an epic. I can even say things like, “Don’t trade stocks yourself — no matter how cheap the commissions. For most people, it’s smarter to invest through no-load mutual funds.” Which it is. (Not that this has ever stopped me from testing my hand against the pros.)

Got a kid in high school? If so, as college approaches you may receive direct mail “opportunities” from firms offering to help you or your child search for student loans. The information they offer for charges usually ranging from $30 to $150 but is available free from the Internet and/or your college or high school counselor.

Http://www.cs.cmu.edu/~FinAid/finaid.html is your gateway to everything having to do with student aid. (Aren’t these “addresses” awful? That squiggle after “edu/” is just to the left of the exclamation mark on your keyboard. It’s on the same key as what appears to be a dust fleck.)

Tomorrow: Jeff and Mylene

Welcome to my “daily comment.” The ground rules Ceres and I have agreed to are simple. I can write whatever I want, ranging from a sentence to an epic. I can even say things like, “Don’t trade stocks yourself — no matter how cheap the commissions. For most people, it’s smarter to invest through no-load mutual funds.” Which it is (though it may be less fun).

I spoke with my broker about buying puts on Ascend Communications, one of the many Internet companies I know nothing about — except that it has something like 110 million shares outstanding, each of which, when I called, was selling for $38 each, up from $5 last year. That gives the company a nearly $5 billion valuation ($38 times 110 million shares), which may be cheap for all I know — maybe a fair price would really be $15 billion, or $30 billion, in which case the stock has a lot of room to climb. But $30 billion is the approximate value of all the publicly traded companies in the entire country of Russia, including some pretty hefty oil companies, and as between owning all of Russia or all of Ascend Communications, I guess I’d go for Russia. It’s risky, but then so are emerging technology stocks.

The point of all this is not to knock Ascend — believe me, I’ve lost a lot of money shorting stocks I knew nothing about, and Ascend may well be another that just keeps rising. Rather, the point is to tell you what my broker said when asked him his thoughts on the stock.

“I don’t want you to think I’m stupid,” he said — we’ve been friends for 20-odd years by now, so, no, I don’t think he’s stupid — “but I don’t look at the kind of stuff you do.” Like earnings and valuations and fundamentals. “I like to buy stocks when they’re going up and short them when they’re going down.” Ascend was obviously going up, so it wasn’t the sort of stock he’d consider shorting. Indeed, I suspect that now that I had brought this craziness to his attention, he was silently contemplating purchase. What kind of nut would buy Ascend at prices like these? Well, my broker, for one.

And do you know what? I fear he has done at least as well with his method as I have with mine. I have the self-righteous satisfaction of being “right” about some of these things — for example, I was “right” to short US Surgical at 60, because it was overpriced (only to watch it hit $134 before dropping back to $18). But he made a lot more money than I did. It was going up, so he bought some.

Tomorrow: College Loans

Welcome to my “daily comment.” The ground rules Ceres and I have agreed to are simple. I can write whatever I want, ranging from a sentence to an epic, and nothing is off limits. I can even say things like, “Don’t trade stocks yourself — for most people, it’s smarter to invest through no-load mutual funds.” Which it is.

According to a recent article in Fortune, banks held 54% of of the financial assets in U.S. institutions in 1980 — versus just 32% or so today. And banks now hold just 17% of consumer cash (in checking and savings accounts). Wow! Where’s the rest? Much of it is in money market mutual funds, and money market funds tied to brokerage accounts.

Will much of the rest of it soon be in “digicash” balances held for you by such trusty souls as Microsoft and Intuit?

I remember sitting next to Walter Wriston, then Chairman of Citicorp, just before the Apple II made its debut, and his saying banks weren’t really in the banking business, they were in the information business — the business of moving bits of electronic information around the world.

This is doubtless one of the reasons he turned over the reins to the youngest and most computer savvy of his potential successors — John Reed. At the time, I didn’t really grasp what he was saying (which is why he was chairman of Citicorp and I was just one of several dozen dinner guests, but lucky enough to be seated to his left). But here we are, just a moment later (from the perspective of human finance), and guess what: banks as we long knew them, those most permanent of granite edifices, may just sort of merge into the cyber landscape.

This is good, of course. It’s “financial power to the people” and no more teller lines or having to rush to the bank before it closes. (Many of you are too young to remember, but ATMs are really only about 20 years old. Before that, any time you wanted $100 in cash you had to get to the bank before three o’clock and stand in line.)

It’s the prospect of being able to shop for mortgages “on-line.” (The Automatic Loan Machines I mentioned in an earlier comment are definitely coming to a bank branch — and perhaps a supermarket — near you, but will eventually be eclipsed, I should imagine, by cyber-loans applied for in “real time” over the Internet.) It’s the prospect of no longer leaving idle balances you earn no interest on, or bouncing checks because you’d lost track of your checkbook.

As for the bank buildings themselves, what are they to become? Discos? Perhaps. Or maybe high-end storage vaults. You know: like those “Shurgard” deals you can rent for your old books and records? They’d just expand the vaults and safe-deposit box department. A good place to store your valuable back-up computer disks.

Tomorrow: Ascend Communications

Welcome to my “daily comment.” The ground rules Ceres and I have agreed to are simple. I can write whatever I want, ranging from a sentence to an epic, and nothing is off limits. I can even say things like, “Don’t trade stocks yourself — for most people, it’s smarter to invest through no-load mutual funds.” Which it is.

Steve Forbes is a good guy. The Forbes family and Forbes magazine have added a lot of zest and enthusiasm to the American scene. Though I generally favor Democrats (exceptions: Giuliani, Weld), I even sent Steve $500 for his campaign. Figured the poor guy needed the money; knew he would add a welcome voice to the Republican debate; and wanted to thank him for the support he’s given my own efforts to fix the auto insurance mess in California. (Californians: Vote YES on Props 200, 201 and 202 March 26th!)

But c’mon. This flat tax thing, as currently proposed, is not a good idea. Are we to believe that without lowering tax rates on the rich, they won’t work hard or invest? Look how hard Steve and his wonderful dad Malcolm worked building Forbes back in the years when the top Federal bracket was 70% — as it was all the way up to 1980 — and 50% — as it was all the way up to 1986. High tax rates didn’t stop them from working, investing and building America.

Those old marginal rates, I admit, were pretty crazy. Thank heavens they’re gone. And Steve is absolutely right: ideally, we would have a far simpler tax code. I’m for that. Filing on a postcard for most people is fine.

But the complexity of the zillion-page tax code stems not from its five brackets (15%, 28%, 31%, 36% and, with the 10% “millionaire’s” tax on income above $250,000, 39.6%). Rather, the complexity is in things like depreciation (the accounting for which can keep dozens of people busy in a large company), or the rules on how much you can deduct for driving your car for business or charitable purposes.

It would be great to wipe away the complexity of the tax code (although, in a complex world, you would be surprised at how much would have to remain, no matter what). But how much extra complexity would there be if “the postcard” had a separate line for people who made more than $100,000 a year? And one more for people who make above a million?

There wouldn’t even have to be extra lines! It could all be one line: “Enter here 15% of all income from $36,000 to $99,999, 30% from $100,000 to $999,999, and 45% above $1 million.” With small print (or a big postcard), that’s one line. Anyone who makes more than $1 million a year ought to be able to figure it out.

Of course, the real way to fix the tax code is to gradually move away from taxing the things we want to encourage — like working and investing — toward further taxing the things we want to discourage or conserve, like smoking or energy consumption. If we want to encourage people to spend a little less so they can save a little more, and we do, then why not lower the tax on saving and raise the tax on spending? Lower the income tax and replace that revenue with taxes on things like tobacco products and gasoline? The idea wouldn’t be too raise more tax, just to raise it in ways that lead to a healthier economy — one a little less dragged down by health care costs (were it not for tobacco, it’s been estimated, a third of the nation’s hospital beds could be emptied) and by our tremendous dependence on foreign oil (which sends our wealth abroad and weakens the buying power of the dollar).

But the practical problem with any major change to the tax code is that to sell it, it must be accompanied by a massive tax cut , so that virtually everyone saves money. Otherwise, it will never pass. If even just 20% of the voters would see their taxes rise under some new system, whatever it was, can you imagine how loud those 20% would howl? A lot louder than the remaining 80% would purr.

And the problem with that — a massive tax cut — is that it would unbalance the budget again. (Pat Buchanan would say we could just “carve it out of the money we waste on foreign aid,” but foreign aid accounts for less than 1% of the budget, not the 15% that the average American, perhaps listening to people like Buchanan, imagines.)

So don’t rush to place bets on a flat tax just yet. My guess is that it will be a long, long time coming.

Tomorrow: Remember Banks?

Welcome to my “daily comment.” The ground rules Ceres and I have agreed to are simple. I can write whatever I want, ranging from a sentence to an epic, and nothing is off limits. I can even say things like, “Don’t trade stocks yourself — for most people, it’s smarter to invest through no-load mutual funds.” Which it is.

Sometimes, I will simply share some of my favorite quotes, in hope they may become some of yours. Here are three:

“There they go. I must follow them. I am their leader.” — Gandhi

“Stop smoking for three years and save enough money to buy an ox.” — The slogan of China’s new anti-smoking campaign (as reported in The Globe And Mail, Canada’s National Newspaper, in November)

“There is a debt of service due from every man to his country, proportioned to the bounties which nature and fortune have measured to him.” — Thomas Jefferson (as quoted by Colin Powell in his book). Seems a short jump to “Ask not what you can do for your country . . .” — and not a completely impossible leap to “from each according to his ability, to each according to his needs,” but that’s clearly going to a discredited extreme.

Tomorrow: Steve Forbes and the Flat Tax

Welcome to my “daily comment.” The ground rules Ceres and I have agreed to are simple. I can write whatever I want, ranging from a sentence to an epic, and nothing is off limits. I can even say things like, “Don’t trade stocks yourself — for most people, it’s smarter to invest through no-load mutual funds.” Which it is.

Yesterday I did my ode to Automated Teller Machines — old friends to most of us by now. Today, I want to tell you what I’ve learned about Automated Loan Machines, which are just beginning to be deployed. You’re likely to be hearing a lot more about them in the next year, and may even be sidling up to one at your bank or car dealership or supermarket.

Instead of having to wait in line to see a bank officer and then sit there like a child, hat in hand, baring your innermost secrets — as if he’s so perfect — and then waiting a day or two to hear whether you qualified . . . and certainly not wanting to go through all this again with some different bank, if your loan was approved, so you pretty much accept whatever terms you’re offered . . . and feeling embarrassed if your loan was turned down, and having to wonder whether it was because of your skin color or the way you dressed or because the guy just didn’t trust you . . . with an ALM the whole thing is magnificently impersonal — and takes just 10 minutes!

You go up to the machine, just as you would an ATM. You touch the screen to answer a lot of questions. While you do, it’s checking you out with credit-bureau computers and probably getting your SAT scores, for all I know. By the time you’ve answered everything, and reviewed the possible loan options — all this within about 10 minutes — it is ready either to reject you (which it does most of the time, so don’t feel bad), or else print out a loan agreement and a check, then and there, with your picture on it, no less. (The ALM has a built-in camera.)

This makes applying for a loan faster, less humiliating, and a lot cheaper for the banks.

The two downsides:

First, privacy. Having given the machine all this information, you may wonder who else might gain access to it. But that could be true of handwritten applications as well.

Second, even more debt. By making borrowing easier — indeed, fun for those of us who like gadgets and whiz-bang technology, let alone the self-affirmation of being able to punch in some keys and get $10,000 just on the strength of our records — ALMs will tilt society even a little more toward borrowing. Not a big tilt, probably. But to the extent the banks can get you ratcheted up with even more debt, so long as it’s debt you can pay off, they’re thrilled. That’s good for them; not necessarily good for you or the country.

Still, that’s just quibbling. Automatic Loan Machines are the future, just as Automatic Teller Machines were the future 20 years ago. (They’re already in place in several hundred locations.) Let’s just hope they don’t get used quite as much.

And no, the company that makes them is not yet public, so don’t even think about trying to get in on the ground floor.

Tomorrow: Potpourri