Your Letters - June 2001

Editor,

Regarding "The Money Tree Grows Slowly - At First" by Bruce R. Faber in the March 2001 Working Money, I had my profligate sons (in their 20s) read the article, and they were truly impressed. They're both starting investment accounts. Thank you for simplifying how an average worker can become financially independent via a sensible plan early on.

Humberto Rivero, via Working-Money.com

COVERAGE OF COMMODITY TRADING?

Editor,

I read the last two issues of Working Money and I love it. I'm subscribing now.
I'm a commodity trader and I didn't find any articles about commodity trading. There are a lot of traders who would love to see some articles on commodity trading in Working Money.

Hope to be a subscriber for a long time.

Osman Vieira, Newark, NJ

For articles on commodity trading, we might suggest you also check out our companion publication, Technical Analysis of STOCKS & COMMODITIES, which has a stronger focus on trading commodities and futures than Working Money does. We try to keep Working Money accessible to all investors.

Thanks for writing!-Editor

HAPPY SUBSCRIBER

Editor,

I liked my first issue of Working Money so much that I subscribed. Unfortunately, I subscribed too late to receive the January/February 2001 issue. Would you please send me the Jan/Feb issue and backdate my subscription end date by one month? I'd really appreciate it.

Stefanie Baker, Madison, WI

You bet! And thanks.-Editor

IS A RECESSION LOOMING?

Editor,

I read your article, "Is A Recession Looming?" (March 2001 Working Money).

I'd like to ask: How does a fall in the value of the dollar hurt stock prices? And in turn, why - or does - a downturn in the stock market necessitate a downturn in the economy as a whole?

It's not clear to me what role the stock market has on macroeconomic issues such as corporation profits or general employment. (Other than stockbrokers.) Do stock owners really matter much in a nation's consumption or demand for goods?

Thanks for any explanation or light on the matter.

Ray Peterson, via e-mail

The most recent interest rate cut weakened the dollar against other major currencies, such as the euro. A slowing US economy will also weaken the dollar. A lower dollar value will bring down stock prices, because consumers will lose confidence.

Believe it or not, the consumer has a tremendous effect on the performance of the economy. In fact, the consumer confidence index makes up about two-thirds of the gross domestic product (GDP).-Editor

THE BILL THAT DIDN'T PASS

Editor,

Finally - an article about legislation ("The Bill That Didn't Pass," April 2001 Working Money). I have been unable to receive any update on this bill's progress since its introduction. I am the strongest advocate for increasing the IRA limit that I know, but sadly, the e-mails I have sent to Congress have gone unanswered. Our representatives have become unresponsive to the voter.

Your advice to communicate with Senator Chuck Grassley or any other congressman is dreaming. The country is focused only on spending to fuel our economy; saving is not in vogue. If you receive a response from our deaf politicians, please notify me; otherwise, after dozens of attempts to explain the need for an increase in Iras, I believe the US Congress has its own agenda - a ridiculous tax cut with few redeeming qualities.

Bruce Balzart, via e-mail

Bruce Faber replies:

Thanks for your comments. My luck in getting responses to e-mails was the same as yours: zilch. However, I found more success by telephone. Here are some websites where you can find the phone numbers for our 107th Congress:

http://www.senate.gov/general/contact_information/senators_cfm.cfm
http://www.house.gov/representatives/

Keep fighting the good fight!

MURPHY'S COROLLARIES

Editor,

I just finished reading Sharon Yamanaka's most interesting article, "A Tale Of Two Investors" (April 2001 Working Money).

However, I wonder when these interviews were given. Phyllis says she got information on stocks to research from Mike Murphy's newsletter, and he is quoted as saying "When the going gets tough, the tough go shopping." Anyone familiar with this newsletter would know that Murphy has done just that, and so the fund he manages is down about 70% from the March 2000 highs. If Phyllis used tight sell-stops, she should indeed have made a great deal of money a year ago with Intel, Microsoft, and so on, but not recently, of course. If she had followed Murphy's advice on any number of stocks (which was to ride them down and then sell them), she too could have lost more than the Nasdaq in general.

"Doubling up on recommended stocks" when the price is down has to be one of the greatest ways to lose a lot of money. Following that policy with a number of Murphy's recommendations, one might indeed have lost even more with stocks such as CSCO, down from Murphy's buy price of $70; INTC, recommended at $125; ORCL, recommended at $78; BMCS, recommended at $59 (this one is not down 70%); DELL at $55; LSI at $62, and so on.

The difficult investing decision is to double up when the price is increasing, but this is the way fortunes have been made.

Thanks for an interesting article.

Thomas de Lackner, via e-mail

Phyllis Mazo had the following response:

Mr. de Lackner is only partially right. Yes, before the tumble, I was making $40,000 to $50,000 annually. This past year, I covered my income with paper losses by buying an equal amount of those stocks that had substantial losses and then selling the "first in" blocks.

The other corollary - not necessarily Mike Murphy's - is that time is money. If you've got enough time, you're going to make money. I am never fully invested in the market. Funds that I may need are in much more conservative and liquid investments.

At the present depressed level of the market, I see my position as "poised to make a bundle on the upcoming recovery." I also have some super low-ball buy orders pending. The red ink is less than nothing unless I am forced to sell at an inopportune time.

RETURN ON STOCKS?

Editor,

I have a question about a recent article, which I very much enjoyed: "Turning 40? Toys Or Treasures? Why Not Both?" (May 2001 Working Money). The article is certainly strong - the importance of early saving is investment rule no. 1 and always needs to be stressed by the financial media.

I am, however, curious how you arrived at your choice of 10% as a rate of return that is "neither overly conservative nor overly optimistic." My own thoughts lead to a substantially different number, and so I'd like to find out where we diverge.

Although numbers in the range of 10% to 11% have for several years been tossed around as long-term averages for stocks, Jeremy Siegel's book, Stocks For The Long Run, paints a much bleaker picture. Taking inflation into account knocks down the compound annual growth rate of stocks to between 6.6% and 7.5% (see the table on page 13 of Siegel's book). Then, one must factor in taxes, fees, and transaction costs. These will take roughly 1% to 2.5% off the above numbers. The resulting range of expected real returns is from 4.1% to 6.5%. At 6.5% rather than 10%, the $2,000 you chart on page 52 would grow not to nearly $350,000 but instead to just under $60,000 - an enormous difference.

David Slifka, via e-mail

Bruce Faber replies:

Your question is a good one in many respects. In fact, the article I am currently writing is aimed at answering exactly what you have asked. Your letter points out some things that can't be emphasized enough.

However, you also mention in your letter several points that I do not consider factors. For example, I refer to funding an IRA, not a regular savings account, so the investor pays no taxes until the money is withdrawn. Next, you bring inflation into your equation. It's an excellent point, and one I addressed in my January/February 2001 Working Moneyarticle, "What You Don't Know Won't Hurt You - Will It?" But it doesn't change the manner in which the noninflation numbers are calculated. Even if you win the lottery, what you win is not what you get.

Finally, unless you are really good at selecting stocks, my idea of following the market is to follow the market. The Vanguard 500 Index has a 0.18% yearly management fee and an outstanding long-term return. There are other funds that return close to a flat 10% of NAV per year. The Zweig Total Return fund comes to mind (http://www.phoenixfunds.com/investor/funds/zweig/trfund.html).

Many other funds have long-term returns well above 10% on average. Morningstar.com provides a list: http://screen.morningstar.com/FundSearch/usstocktr10yr.html?fundCategory=usstock&screen=tr10yr).

Your concerns are valid. My article was aimed at the idea that it is much better in the long run to put some money away to work for you when you are ready to retire.

Editor,

I have read with great interest your Candlestick Quick Reference Chart in the January/February 2001 Working Money. A review of the article alerted me to a few profitable trades which I otherwise would have missed.

I am a daytrader and I only use bar charts, which can't compare to candlesticks as I see it. I would like to know if there are any in-depth educational tools or tutorials on the subject. I would greatly
appreciate any readings on the subject.

George Racioppi, via e-mail

Sharon Yamanaka replies:

Some classic books on candlestick charting include Japanese Candlestick Charting Techniques and Beyond Candlesticks, both by Steve Nison, and Candlestick Charting Explained: Timeless Techniques For Trading Stocks And Futures by Gregory L. Morris. These books offer many additional formations and in-depth explanations of why they work, as well as variations to the basic formations. That's a good starting point.

As for in-depth classes for candlesticks, I don't know of any, but Working Money Editor Jayanthi Gopalakrishnan has written a number of articles on candlestick trading. The latest appeared in the November 2000 issue of Technical Analysis of STOCKS & COMMODITIES magazine called "Candlestick Charts For Daytrading." In it, she explains her technique for applying candlestick formations and why they're particularly suited for daytrading. You can obtain a copy of the article through www.Traders.com.

INVESTMENT CLUBS

Editor,

I read with great interest Rachelle Waters's article on investment clubs in the March 2001 issue of Working Money. I have several related questions that I hope she can help answer.

A group consisting of between five and 10 people have decided to pool our resources and open an online brokerage account to invest in stocks and options. Each person will contribute between $50,000 to $100,000 and the account will be owned jointly. It is strictly a private group and there will be no public offerings. Any person may withdraw their interest of the account by providing a 20-day notice. The group will grant an outside individual (by limited power of attorney) full discretion over all investment decisions and execution of transactions. Each person in our group will have online access to review the account and monitor the transactions. The group will compensate the individual 2% of the account value each year (that also covers the individual's related miscellaneous expenses), with an additional incentive of 25% of all profits exceeding an 8% annual return. I want to ask these questions:

1. Is the group considered an "investment company" or "club" that requires registration with the Securities and Exchange Commission (SEC)? Please explain.

2. Would the individual managing the account require registration with the SEC (perhaps as an investment advisor) or be required to hold any special certifications or permits other than that required under Texas securities laws?

I would appreciate any light you may shed on these subjects, as well as any other areas with which I should be concerned. Thank you!

Debbie Helms, Rockwall, TX

Rachelle Waters replies:

Although I am by no means an expert on SEC regulations (which can be sticky when it comes to investment clubs/companies), I think you're right - this group definitely requires close inspection for compliance with regulations. And remember, SEC regulations exist to protect investors!

Based on the information you've sent, I see three major differences between the proposed investment group and the average investment club:

1. Members are contributing a large lump sum, rather than a small, monthly amount. Traditionally, investment clubs keep contributions small. They are intended to be a relatively safe place to learn the techniques that you will need to invest larger sums on your own, or with the advice of your financial planner or broker. With $50,000 to $100,000 on the line for each person, as in your case, such education will be very painful.

2. Funds in the group account will not be invested based on group consensus, but rather by an "outside individual" who will be compensated for this service and will have limited power of attorney. Although I am not familiar with the details of the contract, this does not seem prudent. Certainly, SEC regulations may come into play. Here's what the SEC's website says:

Investment Advisors Act of 1940
This law regulates investment advisors. With certain exceptions, this Act requires that firms or sole practitioners compensated for advising others about securities investments must register with the SEC and conform to regulations designed to protect investors. Since the Act was amended in 1996, generally only advisors who have at least $25 million of assets under management or advise a registered investment company must register with the Commission.The full text of this Act is available online at: http://www4.law.cornell.edu/uscode/15/ch2D.html. (The SEC does not control or maintain this site.)

http://www.sec.gov/about/laws.shtml

Please explore the above websites for detailed information about SEC regulations and about the legal definitions of "investment company" and other related terms. As you will no doubt find after reviewing these websites, the law is not simple. For this reason, you should consider hiring a lawyer who specializes in securities/finance to make sure all SEC regulations are complied with and to make sure that you are not forfeiting any legal recourse by granting this "outside individual" power of attorney.

Ordinarily, investment clubs do not compensate the individual who handles the brokerage account. That person is usually a member of the group with a shared interest in the success of the investment decisions, but no other incentive is provided. Keep in mind, 2% plus 25% of all profits exceeding 8% is a hefty premium that will eat into your returns over time. And that's in addition to the commissions you'll pay your online broker. (For more information on how fees compound over time, see our recent interview with John Bogle of Vanguard in the April 2001 issue of Working Money.)

3. The group will be investing in options. Please be aware, options investing is extremely risky and should only be attempted by those with a lot of experience (that is, professionals). Options investing is really not suitable for an investment club.

I hope this helps. Before you decide to join this group, please consult with a lawyer and carefully weigh the risks involved. Good luck!

SPOTLIGHT: MUTUAL FUND RETURNS

Editor,

It would really add to your magazine if, when you spotlight a mutual fund, you would give its year-to-day, one-year, and three-year return, as well as whether it's a load or no-load fund. In addition, any toll-free numbers, the minimum required investment, fund fees, and risk factors would be a plus.

For example, on page 39 of the May 2001 issue of Working Money, the Spotlight on Invesco Funds was a nice article but it didn't give anywhere to go to get information on Invesco's Blue Chip Growth fund.

Tom Vath, via e-mail

In our Spotlight section, we don't spotlight one specific fund; rather, we spotlight an entire company (or fund "family"). Thus, we don't list returns of individual funds. We do, however, provide the contact information (usually website address, telephone number, and/or physical address) for the fund company, where you can go to get returns and other information for all the funds in that family. Some companies have many funds, and the listing of returns and other information you mention can be very long.-Editor

Copyright © 2001 Technical Analysis, Inc. All rights reserved.