Author: A.T.

There’s a movement to have the Social Security Trust Fund partially invested in stocks.

Wow.

This was the recommendation of a Clinton-appointed federal advisory commission, and we will all be hearing more about it in the months to come.

The idea is not to have Uncle Sam picking stocks and trying to outsmart, say, well, you or me. The idea (at least so far) is to have perhaps three-eighths of these funds invested in a broad, broad index of the market as a whole.

Granted, the Trust Fund is not as large as you might imagine. It’s largely a “pay as you go” kind of retirement system, where all our contributions used to go right back out to our grandparents, with nothing put away for our own retirements.

In the past decade or so, however, we’ve begun collecting more than we need to pay out right now, hoping to build a cushion for when the baby boomers are retired, with too few workers to support them all.

That cushion has been growing fatter and fatter (although not so much as to solve the long-term problem), and it’s all invested in U.S. government bonds. After inflation, the Treasury bonds can be expected to earn barely more than 2%, while stocks have historically earned more like 6%. So, the thinking goes, why not juice up the return on this money?

Clearly, the injection of tens of billions of new capital in the market, if it happens, will have effects. One obvious one: raising stock prices higher than they otherwise would have been (more demand, same supply, equals higher prices). But nearly as obvious: higher borrowing costs to the Treasury (less demand for Treasury bonds, same supply, equals lower prices for bonds, which means higher interest rates).

I’m not saying it’s a bad idea, just intriguing. I like to think if it’s done at all it will be done prudently. With a Treasury Secretary like Robert Rubin, that’s likely.

You don’t want to get the government into the business of trying to manage the stock market. Still, the market might be even less prone to unreasoning panic than it is today if people knew that on steep sell-offs the Trust Fund might take the opportunity to scoop up an extra $50 billion or $100 billion of securities.

And it might even help keep the market from reaching dangerous over-valuations if people knew that the Trust Fund would occasionally “take profits,” since it has, after all, no capital gains tax to worry about.

One can see all sorts of potential for abuse and mismanagement. One can also see off to the distant future when a lot of the surplus might have to be sold off to support those Baby Boomers. What kind of long-term drag would that be on the U.S. stock market?

(And Heaven help us if we start awarding contracts to high-priced money managers. You can see the potential for cronyism and boondoggle in that. No, the “transaction costs” on these investments should be just a hair above zero.)

And then there’s the question of why we should even limit this to the U.S. stock market? Overseas markets, in countries growing faster than we are, may do even better than our own. To the extent the Trust Fund could profit by stepping in to soften some other market’s panic — buying when prices have plunged — it could be a potent force in global economic foreign policy at the same time as it aided the world economy and piled up more loot for retirees. So perhaps a small portion of the investible funds should have the flexibility to go abroad, odd as that may sound at first.

In trying to scope out something so new and potentially impactful (is that a word? well, it should be), it’s good to keep perspective. Here’s mine: this money isn’t going to come from nowhere, it’s going to mean a shift from demand for Treasuries to a demand for stocks. Who will buy the Treasuries we no longer do? How high will interest rates have to climb to attract other purchasers? One potentially benign answer — conceivably — is “no one.” If we’re really lucky, budget deficits will shrink and the Treasury’s need to borrow will moderate. Indeed, the shift of some Social Security money from debt to equity could even encourage a bit more economic growth (which could shrink the deficit further).

I think I’m getting a little carried away. But this thing is pregnant with possibilities. Stay tuned.

Tomorrow: Business Anecdotes

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 described how your teenage son or daughter who developed a savings habit instead of a nicotine addiction could have, at age 65, $814,000 instead of cancer.

Today, let me continue on this theme (I promise: no more than two tobacco comments a month, max). I’m prompted to do so by the arrival of A PRIMER ON TOBACCO: A Collection of Facts, Figures and Quotations about Tobacco compiled for the Navy by my college classmate Dr. David Moyer, Captain in the US Navy Medical Corps.

Did you know, for example, that world cigarette consumption in 1994 hit 5.34 trillion — up 1% from the 1993 — which works out to 946 cigarettes for every man, woman, child and two-week-old infant on the planet?

Or that “44% of all Americans have a family member or close friend who died from smoking-related disease” (Washington Post National Weekly — 11/20/95, p. 15)?

Or that 52% of American doctors smoked in 1951? Here’s some good news: that number had by 1990 dropped to just 3%! Compare that with what’s going on in Russia, where I’ve been trying to annoy the tobacco companies with anti-smoking TV commercials. I went to Moscow’s giant and preeminent (for Russia) cancer institute — and was told that 70% of the doctors there smoke. Oncologists!

Did you know that from 1992 to 1993, per capita cigarette consumption in the U.S. dropped 9%, from 506 billion to 461 billion?

Or that smoking is much more prevalent among the less well educated? Only about 14% of college grads smoke, compared with 37% of those with neither a college or high school diploma.

Or that among men 31 to 49 years old, smokers are 1.8 times as likely as nonsmokers to be impotent? (American Journal of Epidemiology, 140:1003, 1994.) Or that it takes 39 weeks for a smoker’s bone fracture to heal versus 21 weeks for a nonsmoker? (Health, 9/95, p. 16.) Or that “infants and children of parents who smoke inhale the same amount of nicotine as if they themselves smoked up to 150 cigarettes yearly?” (Journal of Pediatrics, 9/95, p. 435.) Or that “in a study from Greece, children exposed to [second-hand smoke] had a 3.5-fold increased risk of increased “respiratory morbidity” (three or more episodes of upper or lower respiratory infection in the preceding year) compared to children not exposed to [second-hand smoke]?” (Lancet, 7/29/95, p. 280.)

Well, don’t get me started.

(Now if we could only get Jesse Helms to smoke more.)

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.

Everybody knows nicotine is addictive, smoking causes cancer and heart disease (among other things), and that tobacco executives lied under oath to Congress. But when there’s so much money at stake, nothing’s easy. We spend something on the order of $5 billion a year in this country alone promoting the leading cause of preventable death in America.

And so there’s actually been an uptick in teenage smoking. Kids think they’re immortal, and it’s certainly true that no teenager is going to die from smoking until he or she is at least in his or her thirties or forties, and more likely fifties or sixties, which seems preposterously old to a teenager anyway, so there’s little point lecturing your son or daughter about the health toll of tobacco.

Forget health. Tell ‘em about the money.

Because the fact is, once you’re hooked on a pack a day, that’s $700 a year, give or take (plus having to pay double for life insurance and more for cold remedies and the like), which could otherwise be invested in a mutual fund. With a bit of luck, that mutual fund might over a lifetime appreciate at 10% a year. So, tell your son or daughter, one way at 65 you have cancer, the other way you have — are you ready? — $814,000!

Tomorrow: More tobacco facts

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.

So there I was getting ready to address the Golden Gate Business Association in San Francisco, the gay business group, but awards had to be awarded first (to some truly outstanding business people, I might add), and the mayor had to read a proclamation.

Another mayor might just have sent a messenger, or come up to accept some applause, read the thing proclaiming it Golden Gate Business Association Day, and bolt. Not Willie Brown.

Willia Brown, who for many years had all but controlled the California legislature until term limits required him to find something new to do, accepted his standing ovation and proceeded to deliver a rollicking, side-splitting and eventually serious speech (the proclamation itself, he said, was — and this is a direct quote, though I can’t begin to do justice to the mastery of his delivery, “bullshit”). It was great in parts, and slick throughout.

His main comic theme was how much of a pay cut he’d had to take with this new job. Being from Miami, I hadn’t any idea just how low that might be, but remembering that the governor of Arkansas used to earn just $35,000 a year, I formed the appropriate mental picture.

The mayor described how, when it first came, he looked at his paycheck uncomprehendingly. “What could it be?” he asked a staffer. “Your paycheck.” So he took it home — holding it at arm’s length, as it were, it was such a dirty little amount (this is a mayor known for enjoying the finer things in life) — and just laid it on the kitchen counter and forgot about it. The next day, he told us, he came home from work to have the doorman tell him, “Your maid left you a message. She wanted you to know she saw what you were proposing to pay her and she quit.”

And it went on from there. Very funny. But I will admit I was surprised to learn what the Mayor’s salary actually is in San Francisco: $139,000.

Tomorrow: Tobacco Bucks

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.

You may have noticed that Warren Buffett announced for the first time ever he’d be selling Berkshire Hathaway stock. Not his own, $100 million of new stock — but since he controls half the existing stock, it’s at least half like selling shares of his own.

He had a lot of good reasons — for example, at $32,000 a share, giving a child even one share exceeds the annual gift tax exemption — and so he wanted to issue a new class of shares in piddly little $1,000 chunks, 30 of which would equal a “real” share.

Still, the smartest investor in the world was selling Berkshire Hathaway stock (another reason: “it’s not exactly selling at a bargain price,” he said, or words to that effect). So what did the market do? It immediately bid the price of BRK up another $2,000 a share. If Buffett was selling, the market figured, it must be yet another brilliant move for Berkshire Hathaway, and so yet another reason to buy.

And, given my track record on BRK — consistently recommending it from $300 a share right on up to its current $34,000, except consistently advising people to “wait until it falls back a little, however,” and thus never once snagging even a single share my sorry old self — I will admit the irony I find in this is probably misplaced. The market is probably right. Whatever Buffett does, whatever press release is issued, is always reason to bid the stock up. Even if the news is that he’s selling a little. (And again, to be clear, he’s selling just a very little, and only indirectly.)

I have no doubt that the extra $100 million BRK raises this way will be put to good use, and that I will again have missed a good opportunity to jump on board. But, as usual, I think the stock is a little ahead of itself.

Tomorrow: The Mayor of San Francisco

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