Author: A.T.

“Those who can, do,” a friend once told me; “those who can’t, write about it.” I thought it was insensitive to say the least — I was still at Harvard Business School, getting ready to take a job writing. But he went on to earn $40 million a few years later — his earnings for that single year, mind you — so I guess a certain arrogance was perhaps justified (and here I am writing about it, so I guess he was right).

This was brought to mind by a message from one of you — Jeff Schatz — who wrote in mid-April:

Am I nuts?

Ever since I discovered the amount of information, news, tips, etc. available online I’ve become a short term trading junkie — mostly momentum plays. I’m up over $53,000 since January and I’m waiting for the bubble to burst. In your experience is getting in and out of stocks quickly (1 day to 2 weeks) a valid investment approach?

[No! You get killed by transaction costs and taxes.]

I have about $250,000 in a high-yield moneymarket fund and $100,000 in four growth Mutual Funds w/Schwab that I use as margin or as trading capital.

My trades are typically 1000-5000 shares in stocks like Iomega (IOMG), America On Line (AMER), Cisco Systems (CSCO) and some smaller issues ($5 and under) like AMTX, AERN, etc. I’ve made 25 trades with a record of 18 winners, 4 losers and 3 breakevens. I look at charts and it seems possible to ride trends successfully.

I have access to real time quotes and use both a discount broker (Ceres $18 a trade) and Schwab (StreetSmart software, excellent service, quick fills, $66-150 per trade).

I use stop limits and follow trades very closely and can almost always “bail out.”

The answer I most wanted to give Jeff was, yes, you are nuts. In the long run, the odds are against you (because of the transaction costs and taxes). You’re not investing; you’re just playing trends which, in an amazing up market of the kind we’ve had from the time you started with this in January, has made anything seem possible.

But — smug — I figured I’d wait a few weeks and let him find out for himself.

A few weeks later I asked Jeff for an update, and on June 10 he wrote back:

I have continued my short-term trading activities and have been devoting more time to it, about 5 hours a day. My profits, since Feb. now stand at $190,000 or so, with commissions subtracted. My account at Ceres alone has grown from $20,000 to $68,000.

I now have Signal (an FM real-time quote feed), TickerWatcher (Mac charting and quote software). A lot of my information is gained online — Investors Business Daily and Wall Street Journal electronic editions and America On Line investment forums.

I’ve expanded my stock list to include lower-priced stocks and have been following the hot pennies, as well as my consistent winners like Iomega and America On Line. My strategy is to catch rising stocks — forget the top or bottom — ride them for a few points and get out. I set tight stop limits on the downside and try to let winners run, although I tend to be very fast on the trigger. I average over 3 trades a day and Ceres’ low commissions and web site are a godsend vs. Schwab, etc.

It’s very exciting and not as risky as I thought when I wrote to you — if you have the discipline to cut losers fast. I use 8% as my guideline on losses and 20% as a sell signal on gains.

I don’t worry too much about taxes. I’m already in the 30-40% range anyway. I view my gains just like salary.

If you have the fortitude, there appears to be a lot of money to be made.

Hmmm. It’s hard to argue with a $190,000 profit, even if it does take 5 hours a day to earn. So I guess the first thing to say is that some people do seem to have a knack for trading — for sensing the rhythm of the market, “reading the tape” and so forth. But clearly, over long periods this has to be a less-than-zero sum game. Unlike long-term investing, where everyone could theoretically come out ahead (from dividends and general growth in the economy), with quick trading, over the long-run, the odds will more than catch up to most people (though not all — Jeff may really have a knack for this).

The three most obvious pitfalls:

1. Transaction costs. It’s not just the commission, it’s the spread. Iomega sells for one price if you’re buying, an eighth or a quarter more if you’re selling.

2. Discontinuities. It’s fine to put in stop-loss orders designed to get you out of a position when you’ve lost 8%. But what if a stock gaps open down 30% as sometimes happens? Then you’ve lost more than you planned — and in case you’ve been juicing up your return with margin, more still.

3. A downtrend. What if they forget to sound the bell that signals the end of this bull market and the market as a whole drops 30% over the next year or two? If you know in advance that’s what it’s going to do, no problem — you can keep on making a fortune trading as you have been, only with puts or short sales. But it’s only easy (at least for me) to know these things with hindsight. So there’s the market “correcting” more than it’s rebounding — more bad days than good — and lots and lots of 8% losses with almost no 20% gains. So you switch to the short side, but now the market begins recovering, so you’re still racking up 8% losses before being stopped out of your short positions. (And on the short side you might even have occasional dividends to pay, although not, I expect, with stocks like Iomega.)

Having said all this, you should presumably keep on doing what you’re doing as long as it works for you. The only important suggestions I’d make, and I suspect you’re way ahead of me, are, first, to avoid margin and, second, to set, in your mind, an “overall stop loss.” That is, promise yourself you’ll quit this game altogether if you ever lose a third (say) of your accumulated peak profit. (And then keep that promise!) In other words, if you’re up $600,000 at some point, but that ever shrinks to $400,000, fold your tent. In this example, you’d get to keep $400,000 (before tax), save 5 hours a day, and avoid the possibility of losing the remaining $400,000 — and then some.

(Remember: if you make $600,000 this year and lose $600,000 next year,
you have not broken even, you’ve lost $230,000 or so. Why? Because in the 40% tax bracket you had to pay $240,000 in tax on the short-term gain, but get to deduct only $3,000 a year of the loss, which saves you only about $1,200 a year.)

Good luck! (And as you hit each new million, could I it you up for one of my charities?)

Tomorrow: The Other Side of This Story

Yesterday I rattled on about John MacArthur, so cheap he used to run his insurance company in his skivvies on broiling Chicago afternoons rather than spend money on air conditioning.

Today the heat wave continues as I quote a page from The Earth Pledge Book (Cronkhite Beach, Building 1055, Sausalito, CA 94965). Each page has a quote at the top and a pledge at the bottom.

The quote:

“The United States consumes more energy for air conditioning than the total energy consumption of the one billion people in China.” — Robert O. Anderson (oil company CEO)

The pledge:

“I pledge to plant trees for shade, which can reduce air conditioner needs by 50%.”

In the meantime, pledge to me you will find a beach somewhere tomorrow, or some other cool and wonderful place (a movie theater?) to enjoy the day. We’ve got our problems in this country, certainly, but boy are we ever lucky to live here. (My favorite thing about tomorrow is the way the New York Times always prints the Declaration of Independence on its back page. Well worth re-reading.)

You think you’re hot today? (Someplace on the Internet it’s hot today. Apologies to our friends in Cape Town and Santiago who are freezing their butts off.) You think you’re careful when it comes to blasting the air conditioner (and thus your electric bill and “the environment”)?

Well, what about John D. MacArthur? MacArthur was the grade-school graduate who paid $2,500 to buy a bankrupt insurance company in 1935 and died a billionaire in 1978 — one of only two American billionaires at the time, as far as I know (the other: reclusive shipping magnate D.K. Ludwig).

He is remembered particularly for the “genius grants” that the MacArthur Foundation awards each year.

How’d he get so rich? Well, for one thing, he refused to spend any money on air conditioning. Reportedly, he was often seen conducting business at the executive offices of Bankers Life & Casualty in the heat of summer wearing just his underwear.

Not a pretty picture.

Of course, frugality alone does not a billionaire make. MacArthur’s own explanation, once: “I’ve been in the right place at the right time . . . It was kind of like the Braille system. I’d stumble around, bump something and make money.”

Meanness and dishonesty played a role, too. Once the company was going to host a Palm Beach week-end extravaganza for its 300 top-performing salesmen of 1961 — all expenses paid. All through the year notices went out to the sales force getting them to compete for this prize. What they were not told is that they’d be staying at MacArthur’s own hotel, the Colonnades, to keep the cost down. In November, when the rooms would have gone empty anyway. But the real surprise came when, after they’d competed all year for the prize and the winners had long since been selected — he just canceled the whole thing. Spend all that money just to reward his 300 top salesmen? (He owned 100% of the company, so it was his money.) No way!

To keep them from quitting, word went out that the cancellation had been made out of a concern for safety — it was around the time of the Cuban missile crisis.

But this was just a trifle. Where the bucks really piled up wasn’t in short-changing his employees, but in shortchanging his customers: collecting premiums against all manner of mishaps but then not paying off.

My favorite story concerned some truly atrocious escape clause he had inserted into the middle of a dense insurance policy. The only way anyone would ever become aware of this needle in a haystack of fine print was when the company pointed to it to decline a claim. The Illinois Insurance Department, alerted to these callous dealings, insisted that, at the least, this egregious clause be printed in 10-point type, to stand out. MacArthur complied by printing the entire policy in 10-point type.

“The darkest day in insurance history,” said his brother Charles, president of a more respectable insurance company, “was when my brother entered the business.”

Not a pretty picture, either — though no reason, I should think, if you happen to be awarded a MacArthur grant yourself, to turn it down.

Have a happy and not too hot July 4th weekend!

“I would be interested in your thoughts on selling a losing stock. One where you don’t expect the loss to turn around for, say, at least a year. Is it best to sell and write off the loss or hang on and keep the paper loss from becoming real? I am assuming here that you don’t need the money for the near term.”

Gosh. I didn’t think anybody but me had any losers these days.

Well, one thing you can do is sell it now, for a tax loss; then wait 31 days and buy it back. (You have to wait 31 days or the I.R.S. will deem your sale-and-repurchase a “wash sale” and disallow the loss.)

At a deep discounter, the cost of selling-and-buying-back would be negligible, though the “spread” between bid and asked could cost much more, especially if the stock is illiquid. Not to mention that the stock just might zoom in those intervening 31 days, to spite you, making it expensive to buy back. (So another tack is to buy the extra shares first, doubling up, wait 31 days and then sell your original shares for the loss. The risk with that, of course, is that the stock could keep falling and you’ll now lose twice as much as it does.)

The presumption in either case is that you think this stock represents a really good value at today’s price. Otherwise, why not just sell it and buy one that you think does? (Or, if you can’t find a really good value, just sit on the sidelines for a while?)

One other alternative: Stop trying to beat the averages by doing this yourself and buy shares, instead, in low-expense no-load mutual funds. Most of them won’t beat the averages, either; but at least they’ll save you time.

This is my 100th “daily comment.” Part of the fun has been your feedback.

From one of you frustrated by the timbre of some of today’s youth . . .

“Suggest that your readers take their kids to the park for a ride on the swing this weekend. Need a financial angle? It’s free; will bring down their future healthcare costs by promoting exercise; will save tax dollars by keeping their otherwise attention-deprived kids from becoming park-equipment vandals; and saves the cost of renting some canned entertainment from Blockbuster. Man, this idea is full of money saving tips. Perhaps parents will be able to give up the 70-hour work weeks and spend some time with the kids for a change. And while we’re at it, maybe you can suggest that tax-deductible contributions be made to an organization that can benefit the youth of this country. Prevention is cheaper than incarceration. Perhaps you could encourage them to avoid capital gains taxes by donating appreciated stock to Big Brothers…I dunno, you’re the financial guy . . . think of something . . . society needs your help.”

I dunno either. But it sounds as if you’re on the right track.

“I read your comment on Earned Income Credit. The only problem I have with this credit is that of the two people I know who claimed it, both did so fraudulently. I know that fraud is going to occur one way or another, but my personal experience on this issue has been that fraud was involved 100% of the time. Seems to me like it’s only a good idea if the tax payers don’t bleed to death from unchecked fraud!”

Good point. I suppose if someone earns some money “on the books” and some off, or if one spouse gets a W2 and the other’s income is not reported, you’d have a double tax fraud: the fraud not reporting off-the-books income, as is already common today; plus the additional fraud of actually getting a government check you were not entitled to.

The purpose of the Earned Income Credit, of course, was to help low-income families. If someone with kids worked full-time and were still below the poverty level, the government would chip in a little more. This is a better scheme than lifting the minimum wage, it is argued, because it’s targeted. More than half the minimum-wage workers are not supporting a family, but in many cases are just teenagers flipping burgers to supplement the family income. Why force the marketplace (including poor people who eat at McDonald’s) to pay more to a kid whose dad might earn $60,000 a year?

So the Earned Income Credit is more targeted, but the minimum-wage is essentially fraud-proof (at least on the part of the worker). It looks as if we’ll have a combination of the two — a modest hike in the minimum wage and a continuation of the Earned Income Credit. And I say: good. To someone like me who makes considerably more than $8,500 a year (the current $4.25-an-hour minimum for 50 forty-hour work weeks), these two boosts, even in combination, seem anything but extreme.

As for its costing lots of jobs, I’m not sure I buy that. Most minimum-wage jobs are not in manufacturing, which can be shifted off-shore, but rather in service industries where the work has to be done here. Yes, raising the minimum wage will cause some employers to cut staff. But maybe not as much as they say, because with staff cuts come service cuts. People will complain — or patronize the restaurant where the service =wasn’t/= cut back. So perhaps instead of cutting jobs, employers will raise prices a nickel or a dime, which redistributes a tiny bit from “everyone” to the lowest-paid. “Everyone” can’t afford to buy quite so much, but the lowest-paid can afford to buy more. I have a hunch the lowest-paid may deserve it.

Monday: Sell Your Losers?

Well, the last word you’ll hear from me, anyway. The true “last word” will apparently be rendered by the Florida Supreme Court at some point, and then, if the Court lets the company proceed with its offshore drilling, the last word will be rendered by the success of the wells — if any do get drilled (it ain’t cheap to drill offshore, and Coastal has little more than the $6.7 million raised in the “rights” offering I described yesterday).

But here’s what I alluded to yesterday about Coastal Caribbean and the S.E.C.

A few years ago, I remember reading that Coastal Caribbean had raised some cash by selling a good chunk of its offshore drilling interest to Lykes somebody-or-other (a steel company?). Part of me was pleased by this news, since it showed I wasn’t entirely crazy — a big company had decided to take a flier on this gamble, too. It also suggested that Coastal might now have the backing to “stay the course” and realize its value (if any).

But another part of me was ticked. I don’t remember the exact terms, but what a sweetheart deal this seemed to be. How come they didn’t offer it to us poor lowly existing shareholders?

Well, the answer I was told last week, when I called the company for the first time ever to find out a little about it (“buy first, research 20 years later” has all too often been my motto) is that apparently the S.E.C. wouldn’t let them issue any more securities. The company’s situation seemed so precarious (and that article in The Wall Street Journal making fun of it may not have helped) that the S.E.C. wouldn’t approve any offerings. This despite the fact that the S.E.C. isn’t supposed to pass on the value or safety of securities offerings, merely on full disclosure of the risks.

I am not an S.E.C. basher, and wish they had more staff, not less. But here was one case where it seems to have hurt, not helped, the little guy. Lykes was able to get shares and options in a private, unregulated transaction that may well turn out to be a small bonanza. (Or may not, but so far so good.)

Anyway, please forget Coastal Caribbean. But don’t forget yesterday’s lessons about “rights offerings” should you ever encounter one. Real money could be involved.

Tomorrow: Bagels

Yesterday I went on endlessly about a ridiculous speculation I’ve long owned called Coastal Caribbean — CCO on the Boston Exchange (CCO BF is the symbol some quote systems use). I didn’t do so to recommend the stock, which is now a good deal higher than I paid for it. (I’ve been selling, not buying, recently, myself.) And I didn’t do it to brag that it had gone up. (Sure it had jumped from three-eighths to over two bucks a share. But I had first bought it 20 years ago, whereas you kids have gotten used to stocks jumping that much in the first three hours of their going public.)

No, I made you wade through all that so as to have a real life example to describe the joys of oversubscription. But first I have to explain “rights.”

Sometimes, a company you own will issue rights. You will get a notice that, say, for each six shares of Safeguard Scientific you own, you have been issued the right to buy one share of some new company it is spinning off for $5. (That’s an actual example. The rights were perceived as valuable, because Safeguard has a history of spinning off companies at $5 that quickly rise to $20.) Or you’ll get a notice that for each ten shares in a closed-end mutual fund that you own, you are getting the right to buy an additional one for a 5% discount. (That, too, is an actual example — and far less appealing.)

Rights offerings vary greatly. Some are irresistible, some not. And this is reflected in the market value of the rights themselves. If they are perceived as valuable, there will often — not always — be a market for them in the several weeks between the time they’re issued and the deadline for exercising them. You can either sell your rights to someone else, or exercise them. What you should not do, if they have any value, is just let them lapse. But inevitably some people will, either because they didn’t know about the rights offering or understand it, or because it wasn’t worth the effort. (There are those of us who’d spend 20 minutes haggling about a disputed $35 phone bill, but wouldn’t think twice about letting 1,000 rights expire if they were only worth three cents each.)

I’d guess rights often sell for less than their worth, because exercising them requires capital that not everyone can come up with. So some will just let them expire, while others will sell them but not care too much about the price — whatever they get is just a nice little bonus, like a dividend.

On the other side of the transaction, if the stock isn’t widely followed, there may not be a huge demand for the rights, whatever their theoretical value. Say a closed-end fund is selling for $10 and one right allows you to buy a share at $9.50. You might say that right is “worth” 50 cents and 100,000 of them should be worth $50,000 — except that the buyer is going to have to pay commissions to buy the rights, and then is going to have to come up with $950,000 to buy the shares, and then is going to have to pay another commission if he wants to sell those shares and realize his profit — and may have a heck of a time selling 100,000 shares without driving the price down. All of which would explain why a large institution wouldn’t want to scoop up everybody’s rights for 50 cents, even if they’re “worth” that in this example . . . and why, if you go to sell yours, you might get just a few pennies.

Anyway, that’s a little about rights. I guess they fall into two categories, for the most part: those that are really pretty trivial, like the closed-end fund offering I just described (meant mainly to expand the assets of the fund and the management fee of the fund manager); and the ones that are clearly valuable, like the Safeguard Scientific rights for which people have paid upwards of ten bucks each.

Clearly, when you receive rights, it pays to determine just what they’re worth, and — if they do have some value — not allow them to expire without selling or exercising them.

So now you know about rights. Let me tell you specifically about the recent Coastal Caribbean rights offering, because it’s a way to explain “oversubscription.”

Periodically, in order to finance its preposterous lawsuits and the president’s canoe trip, Coastal Caribbean needs to raise some money. Most recently, with the stock trading around 2-1/2 (and its main lawsuit, for the right to drill on its leaseholding actually going pretty well), it issued each of us holders one right for every 5 shares outstanding — so if you owned 1,000 shares, you received 200 rights — and these rights entitled you to buy an additional share for just $1.

On its face, you might conclude that each right was therefore worth $1.50. Certainly the right to “buy” 10 quarters for a dollar bill would fetch pretty close to $1.50 on almost any street corner (especially because we so frequently need quarters for the parking meter or the pay phone — but I digress).

But the first thing to note with Coastal Caribbean is that if the stock was worth $2.50 before the rights were exercised, it should be worth only $2.25 afterwards. Why? Well, look at it this way. Say the entire company had been divided into only 5 shares. (Actually, there were many millions.) Each was worth $2.50, for a total market valuation of $12.50. Now this rights offering, that allows you to buy another share of stock for $1 instead of $2.50, is completed and the only thing about the company’s value that has changed is that it has an extra $1 in cash — the money you paid to buy the new share. So now instead of being worth $12.50 divided among five shares, the company is worth $13.50 divided among six — $2.25 each.

So in that sense the rights were worth $1.25. They let you buy for $1 a share that would be worth $2.25 after you did.

But a right is worth only what someone’s willing to pay for it, and in any event, the stock had begun to fall sharply after the rights offering was announced, to around 1-5/8 — in part, perhaps, because people were telling their brokers, “Well, listen. I’m sure as heck not going to come up with $2,000 to exercise my 2,000 rights. So why don’t you just sell $2,000 worth of the stock now, and then use that money to exercise the rights. In fact, while you’re at it, why not sell $3,000 of the stock now. That’ll give me enough extra to pay tax on my gain and take the kids to Red Lobster.”

That would create selling pressure on the stock, and may be one reason it fell back from $2.50 to $1.625. Which made the rights far less valuable still.

Note that anyone who “just did nothing” would lose out because of “dilution.” When a company issues new shares, all the old shares are diluted. Each one now represents a slightly slimmer slice of the pie. Maybe this should be called “slimming” but it’s called dilution.

Anyway, I didn’t pay any attention to what the rights were trading for, because I knew no one would be dumb enough to pay me enough to make them worth selling (and paying tax on the sale). In fact, far from selling my rights to buy Coastal Caribbean at $1, I should probably have considered buying them — except that, as it turned out, these particular rights were “nontransferable.” Use ‘em or lose ‘em.

What I did do was to instruct my broker to “oversubscribe” for the maximum number of shares allowable. Here’s what that means. Each right allowed you to buy one additional share for $1, for sure, but also to “oversubscribe” for additional shares in case not all the rights were exercised.

In other words, the company wanted to be sure to raise the amount of money they had targeted, at $1 a share. If everybody exercised her rights, they would. But in the real world, some people are inevitably asleep at the switch. They will just let them expire. So in this particular deal, each right-holder could oversubscribe for up to 3 more shares per right. That is, if you had 1,000 rights, you could put in to buy your guaranteed allotment of 1,000 shares at $1 each, plus ask to buy up to 3,000 more. Chances are you wouldn’t get anything remotely like 3,000. But any leftover shares would be parceled out to people like you on a pro-rata basis.

This is a clear case of the rich getting richer, because not everyone can afford to come up with the full oversubscription price (which your broker will require, against the theoretical possibility that you would actually get the full number of shares you oversubscribed for). So lots of people don’t oversubscribe at all, or else oversubscribe for relatively few shares. You, who oversubscribed for the maximum, will get a disproportionate allotment of any such “left over” shares.

Am I making any sense?

It was possible, of course, that by the time the dust settled the stock would be down to 1, or even below. But at $2.50 or so when the rights offering was first announced, and even at $1.625, which is the lowest point it reached, it was unlikely it would plummet all the way to $1 and beyond. So the “oversubscription” aspect of this particular rights offering was about as close to free money as I can recall. I oversubscribed for the maximum and got, to my amazement, 42% of what I asked for. In other words, for each right, I got not just 1 share at $1 each but 1.42 shares at $1 each.

The rights offering expired in early June; the stock bounced back up to 2 5/8 almost immediately; and I was able to sell 10,000 shares for $2.625 that I had gotten for $1. (I just sold some more a few days ago at $2.25.)

Lessons:

• Not all rights offerings are this dramatic by any means, but whenever you get rights you should at least take the time to discover whether the deal is trivial or one you’d be a fool to ignore. Many of the Coastal Caribbean owners, judging from my success with the oversubscription, just didn’t bother to do this.

• When it’s a rights offering designed to be irresistible (either to reward shareholders and/or to be sure people exercise so the company raises the money it needs), consider oversubscribing to the max!

• Remember that if you don’t at least exercise your rights, you will be “diluted” — you’ll own the same number of shares, but a slimmer piece of the pie.

• Remember that if the rights have value and you don’t want to (or can’t afford to) exercise them, you may be able to sell them — but will likely get for them less than they’re worth (and have taxes to pay).

• And remember, finally, that in order to come up with the cash needed to exercise the rights, you can always sell some of your existing shares first (although that may expose you to capital gains tax).

Tomorrow I’ll tell you one more thing about Coast Caribbean I learned in checking out this comment. It shows that the S.E.C., in its efforts to protect us (which I applaud) is not infallible.

A long, long time ago, when you were very young, I began buying shares of Coastal Caribbean Corp., traded — no less — on the Boston Stock Exchange. (I know. You didn’t realize Boston had a stock exchange. Well it does. And unlike the Cincinnati exchange, which is in Chicago, the Boston exchange is in Boston.)

These purchases fell under the rubric of “do as I say, not as I do,” since the last thing any sane person would have done then (or would be doing now) is to buy shares of Coastal Caribbean. It is a company that doesn’t do anything. All it has is leases to drill for oil and gas under about a billion acres of land off the West Coast of Florida, where you’re not allowed to drill, and under things like the Everglades, where you’re not allowed to drill, either. And it has a couple of big lawsuits, one against the State of Florida for not allowing it to drill, another against some giant companies for an ancient dispute over something or other I vaguely recall relates to fertilizer. (Oops—I just checked. They lost that one.)

So this is basically me violating all my rules of sensible investing. It’s a pure speculation, a gamble that one day . . . one day . . . ONE GLORIOUS DAY! . . . my ship will come in. It’s kind of like a rich man’s lottery ticket, except I’m not so rich (and certainly wasn’t when I started buying this junk), and the odds aren’t necessarily bad, as they are in the lottery. They may be bad, but that’s not a clear mathematical fact.

The stock does have two things going for it. First, no one follows it, and the only story I remember seeing about it was an A-head a few years back in The Wall Street Journal making fun of it. (The A-head is what the Journal calls that middle column reserved for stories about animals and people who can twist their noses into funny shapes.) I forget how long ago this story was, maybe five years, but it featured the company’s president (one of a total of two employees, if I remember right, the other being his secretary) canoeing down some nearly-dry mosquito-plagued Florida “river” trying to establish, for the purposes of one of its lawsuits, that it was “navigable.” Because if it was, then that would prove . . . something. And the Journal sent a guy to record the folly. I just remember that it was a funny story, the basic slant of which was that, even at whatever lofty price it had by then climbed to — possibly even a dollar — the stock was a joke.

I had begun buying it at 37.5 cents about 20 years ago. Sure, it wasn’t General Electric. But with the money I had 20 years ago, I could only buy 7 shares of General Electric. I could buy 1,000 shares of Coastal Caribbean. At some point Coastal Caribbean got up to 75 cents and I cashed out.

Then in 1991 I noticed it back around 37.5 cents and, now a little less poor, bought 10,000 shares. And then 25,000 more in 1992 at fifty cents. And 20,000 more in 1993 at 43.75 cents (“seven-sixteenths”). I know you’re not supposed to fall in love with your stock (“because it doesn’t know you love it,” as Adam Smith long ago explained). But imagine being able to say you own 55,000 shares of something! Picture Treat Williams in The Phantom when he gets to hold that third magic skull. “I LOVE THIS,” he roars with exultation.

And the thing was, while I knew it was a wild speculation, there was a second thing Coastal had going for it. The first, as I say, was that no one paid any attention to it (or else laughed). The second was impatience. Most people are impatient. If you tell them that there’s some stock that’s 50 cents now and has almost no prospect of going anywhere soon . . . but that in ten years a lawsuit might finally be resolved that could make the stock $8 . . . they will (perhaps quite sensibly) roll their eyes and buy something else. “Remind me in nine years,” they will say. Never mind that if the stock actually were $8 a share ten years later, that would have represented a 32% compounded annual rate of return.

So where logic or math might ascribe a higher value, the demand for stocks that require great patience falls short of their supply. Hence, it might be argued, those stocks are sometimes cheap.

Not for a minute, of course, am I suggesting this stock is headed for $8, let alone in 10 years. Sure, the Alaskan Indians got their billion-dollar settlement, or whatever it was; but wasn’t it like 100 years in the making? It’s been 20 years since I first bought Coastal Caribbean, and after the first 17 of those 20, as I say, it was about the same three-eighths or seven-sixteenths of a dollar as when I first stumbled onto it.

In a sense, the market was valuing the stock higher and higher, because over those years the company would periodically sell more shares to raise the money to pay the president and buy him that canoe and, mainly, to pay the lawyers. So the company was divided into more and more shares (currently 40 million or so) each of which was still commanding nearly half a buck apiece.

Now may be a great time to sell, because it’s over two bucks a share. Indeed, last year for a minute it got up over three, and on the way up (or was it down?) I unloaded some at 2-5/8.

But this long, long story is just a set-up to tell you about “rights” and “rights offerings.” Come back tomorrow and I’ll tell you how they work and describe the joys of oversubscription.

Yesterday I described a $5,000 life insurance policy from Mutual of Omaha that might appeal to an ailing senior citizen of limited financial means. It was hardly the “great news” the letter proclaimed had befallen me (I had been pre-approved!), but neither was it the worst mail-order insurance deal I’ve seen.

(Flight insurance offers, for example, are geared to pay out something under a dime in benefits for each dollar of premium collected. And flight insurance is normally superfluous anyway. You’ve got your regular life insurance, I hope; you may have additional insurance from the credit card with which you purchased the ticket; and you’ve got a big lawsuit against the airline or aircraft manufacturer for allowing the unscheduled landing. Why buy even more coverage, especially when it costs a dollar for each nickel’s-worth of expected benefits?)

Anyway, that was yesterday. Today I want to describe the other Mutual of Omaha offer I received. This one, which arrived the same day, was billed merely as “good news,” not great — namely, that I’d been pre-approved for a policy guaranteeing my heirs of $60,000 if I should die as the result of a “covered accident.”

Heck. Sounded pretty great to me!

Granted, it wasn’t really $60,000. It was $25,000 at death plus $500 a month for five years plus a final $5,000. To Mutual of Omaha, if they can earn 10% a year on their investments, that makes their true pay-out more like $52,000. But what do you want for $4.95 a month?

(And that rate is GUARANTEED not to rise. Unless it rises. They make a big deal out of the fact that they can’t single you out and raise YOUR rate. But they can raise EVERYBODY’S rates any time they need to.)

Granted, too, the policy excludes suicide and death in the military or a declared or undeclared war, or while piloting a plane or committing a felony — stuff like that.

But what impressed me, especially if it’s fairly calculated, is that right there in the fine print is a disclosure of “the odds.” According to the offer, they expect to pay out in benefits 59% of the money they collect in premiums. Well, 59.02% to be misleadingly precise.

My guess is that this does not take into account “the time value of money” — i.e., gives no weight to the important notion that they will have use of the premiums for quite a while, on average, before they have to pay the money out. I’d also guess they’re being conservative in the assumptions underlying this calculation (since they have no incentive not to). So maybe the true odds are for a pay-out more like 40% or 50% of collected premiums.

Still, their disclosure tells you more or less what you need to know, and they should be applauded for making it (or the regulators should be applauded for requiring it). First, it tells you that this policy is far better than those flight-insurance policies geared to pay out less than ten cents for every dollar in premiums. Second that the pay-out’s no worse than the lottery (except that to get your money you have to be dead). Third, that you’d be far better off putting your money in the bank, where the pay-out is more than $1 for every dollar you put in.

If you need life insurance, you’ll do better buying a policy that covers any kind of death, not just accidental death.

If you do buy a policy like this, be sure to let your heirs KNOW, so they can collect. And from then on, when they serve you food, have them taste it first.

Monday: Easy Money: The Right to Oversubscribe – Part I