Hey, Kids — Free Smokes!

INDEX FUNDS ARE NO WAY TO MAKE BIG BUCKS

Kirk: ‘Many financial writers suggest index funds and large diversified mutual funds. However, these investments only return ‘average’ results while still exposing the investor to overall market risk. If one wants to get rich, wouldn’t a portfolio of 5 or 6 well-chosen and researched undervalued growth stocks (using a strategy similar to David Dreman) work much better? Then when the stock returns to full value, sell and move on to another selection. I just don’t see how a small investor is ever going to make big bucks buying mediocre mutual funds. Also, isn’t this the strategy of Warren Buffett, not to diversify?’

☞ Sure – just buy a few stocks that will go up faster than the market. How can you lose? (Actually, they have to go up much faster than the market in order to compensate for the tax you’ll have to pay as you sell one to buy another).

The only problem with this strategy: What if you’re no better at finding undervalued growth stocks than, say, professional money managers are? In that case, you will have put in a lot of effort, and exposed yourself to more taxes and risk, than if you had just accepted the returns of an index fund.

If you look at the rich folks around town – both the famous ones and the “millionaires next door” – you will find very few who got rich trading stocks. Most started their own businesses and/or relentlessly spent less each year than they earned, putting the difference to work for them in stocks and/or real estate.

I don’t mean to belittle your sentiment. Believe me, I know that slow-but-steady is frustrating. But ‘trying harder’ – while much more interesting (and great fun when you’re riding a winner) – is often a formula for doing worse.

So I would suggest you try your strategy with some of your money, because life is not a business (see yesterday‘s column) and because it sounds like it will eat away at you if you don’t. But with most of your stock market money, stick with index funds.

And now . . .

WHO SAYS WE DON’T GIVE THIRD WORLD KIDS FREE STUFF?

One of the great things the Bush administration has done, trade-wise, is adopt a more tobacco-friendly stance, aiding American cigarette makers in their efforts to compete abroad. As cigarettes are addictive, this could have beneficial effects on our chronic balance-of-trade deficit long after the current administration is history. (Well, it may sound callous, but it makes better sense than encouraging fuel-efficient cars that would cut our oil imports in half. Trent Lott was on the floor of the Senate not two weeks ago making fun of that.)

According to a Daytona, Florida, editorial yesterday, ‘Teen-age ‘Marlboro girls’ distribute free packs on streets all over the globe. In Hong Kong, empty packs of American cigarettes can be exchanged for free movie tickets. In Nigeria, teen-agers win concert tickets sponsored by Philip Morris, then find Philip Morris brands distributed with other freebies there.’

The editorial cites a World Health Organization study last year: Free cigarettes are given to schoolchildren in at least 68 countries.

Cigarette sales in the U.S. have stalled, but abroad they’ve been booming. Philip Morris has seen them rise 80% since 1990. Makes you proud Philip Morris is an American company, doesn’t it?

(For the political-giving scorecard, click here.)