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A friend wants me to go partners with him on something called TED spreads. The deal is that we each put up a few thousand bucks and then pray for triple-digit inflation and the overthrow of Congress by right-wing seminarians. This will supposedly increase the difference between the prices of T-bill and Eurodollar futures, which will in turn guarantee that we might make a little money but probably won’t lose a lot. Then we do it again with corn and sugar spreads, conservatively nibbling at two-month contracts and pyramiding our position when Brazil defaults on its loans to the Money Store. Once we’ve mastered the going long/selling short strategy, he says, we’ll either be out our original investment or else filming get-rich-quick infomercials from our South Seas lagoons.
It’s tempting. After all, any jerk can lose money in mutual funds, but you have to be really savvy to burn your life savings on something that’s tied to the whims of Bundesbank governors. But even if I were guaranteed a big payout, there’s a problem with this deal: It would require me to root for my friend’s financial success in addition to my own.
Everyone knows that we’re in the midst of a historic bull market, and that the average investor is now richer than the Sultan of Brunei, but the chart on my portfolio is nonetheless a straight north-to-south line. As a result, I’ve given up trying to pick winners and instead track friends’ and relatives’ stock picks in hopes of learning that I’m not making a solo charge for financial ruin. I pray for reverse splits, disappointing earnings, cuts in dividends, shareholder lawsuits, and anything else that will send their net worth on the same downward spiral as mine. Happily, it appears as if we’ll all soon be selling pencils on city street corners.
And we probably won’t be alone. While everyone talks about nothing but the stock market, authoritatively reciting P/E ratios and betas the way they once ticked off home-team batting averages, I can’t find anyone who’s actually made more than a dime on his investments. The stock market, it turns out, is nothing but a high-stakes, government-sanctioned game of three-card monte.
Like other con games, the stock market has its own set of rules: Employment is only good for the economy if six of every 100 able-bodied adults can’t find work. If that 6 percent includes large numbers of laid-off brokers, lawyers, and other white-collar professionals, then the rate is too high. On the other hand, when unemployment dips near 5 percent and poor people stand a chance of buying nondurable goods like clothing and food, that means the economy is overheating and the Federal Reserve Board might adjust monetary policy at its next meeting.
Speculation about such a financial debacle sends the market into a free fall until trading is halted. This gives brokers a chance to swoop in and buy all the stock that they just convinced their panicked clients to unload at a huge loss. Six months later, when enough poor people have been laid off to again stabilize the economy, brokers resell their clients the stocks they stole from them when the prices were 30 percent lower.
This new round of buying drives the stock market to record levels, spurring Money magazine to issue yet another list of mutual funds that will double in value in the time it takes to cook turkey tetrazzini. Every TV news program shows the closing-bell ceremony at the New York Stock Exchange, ending with old white guys throwing confetti onto cheering floor traders in waist-length sport coats that make them look like cabana boys. The economy that just days earlier was either too weak or too strong has now been declared robust, although there’s always that festering concern that earnings surprises could rouse the long-hibernating bears.
Wall Street hates surprises, so investment houses pay analysts millions to give them advance warning about things they could learn for free a few days later. If an analyst predicts a profit of 50 cents per share and earnings come in at a dollar, the surprise will compel the Street to sell off the stock, sending the share price into a nose dive and decimating the book value of the company until it’s in line with the analyst’s inaccurate, dire predictions. But if an analyst accurately forecasts that a company will lose enough money to be forced into bankruptcy, the no-surprise scenario sends the worthless stock soaring until the brokerage houses realize huge paper gains. Then brokers call their retail clients and let them in on the secret.
These small investors then rush to buy this and other speculative issues, which will at once drop in value until they’re cheap enough for the brokers to buy back. Such market exuberance spurs the Fed to raise short-term interest rates a quarter point, prompting banks to charge an extra dollar on a $1,000 overnight loan they make to other banks. No one will explain why banks need more money at 3 a.m., but by morning this dollar will nonetheless be passed along to consumers in the form of a $75-a-month mortgage increase. Congress will call for Alan Greenspan’s resignation. CBS News’ Ray Brady will interview a woman at a New Jersey Pay Less who has decided not to buy fake-suede pumps for fear of the extra 50-cent finance charge on her MasterCard bill. Mail-room clerks who have never balanced their checkbooks will debate the likelihood of additional Fed tightening and the consequences for yen-dollar straddles should there be a backup in the long bond.
CNBC then interviews a parade of mutual fund managers about how they’re preparing for the coming bear market. Each displays a chart showing that the stock market can be volatile, but if you had invested $500 in their fund in 1974 and reinvested all dividends, you’d now own Manhattan. They also remind viewers that past performance is no guarantee that next time around they won’t own Staten Island. After that they all say: “Risk is your friend. We’re not market timers. We like to kick a company’s tires.”
Louis Rukeyser then announces that all of his elves have turned bullish, triggering a 50-percent plunge in the market. This used to be called a depression, but now it’s called a correction, because after 10 or 20 years investors may get back some of their money. Ray Brady goes to a Boca Raton delicatessen to see how this is affecting senior citizens, one of whom says she’s so worried that she won’t order cole slaw with her tuna fish platter. Brady declares that the elderly are particularly vulnerable because they’re on fixed incomesa concept foreign to nonretirees, who each week wonder just how big their paycheck will be.
Panic sets in. The novices frantically bail out of the market, choosing to earn a paltry 5 percent in bonds and passbook savings accounts when they could lose three or four times that in aggressive investments designed to keep pace with inflation. The Beardstown Ladies write another book of money-saving strategies, this time recommending that used dental floss be stripped of decaying food particles and woven into job-interview slacks. Brady finds a guy redeeming a few mutual fund shares and concludes that the decimation of 401(k) accounts will force 40 million Baby Boomers onto sofabeds in their parents’ guest rooms.
At the same time, experienced investors like me see this as a chance to take cash off the sidelines, an opportunity to retool my asset allocation and load up on undervalued financial instruments and vehicles, maybe even some stocks and bonds.
I learned this the hard way, but now I’m a patient long-term investor who follows the advice of sages like Warren Buffett and Peter Lynch. For example, they counsel investors to only take a position in companies and industries they’re knowledgeable about, so when a friend tipped me off to an Alberta palladium mine a few years ago, I naturally invested a grand.
At the time, the only way to follow the stock was to search out two- and three-day-old copies of the Vancouver or Toronto newspapers. That meant the possibility of learning too late that the share price had catapulted to record highs or a government audit revealed that the mining company had a lone employee named Pappy whose assets included nothing but a pickax and a burro. But the beauty of investing in Alberta stocks is that the favorable exchange rate lets you get a lot more shares for the money than your Canadian counterpart. And if I’m going to end up with worthless stock, I’d much rather have a certificate for a thousand shares than one for 700.
Although I took a beating on this deal, I ended up with a valuable tax loss that would have offset any capital gains I might have realized on other investments. But these sorts of speculative plays comprise only part of my well-balanced portfolio, which also includes a hearing-aid retailer that hasn’t yet shown a profit and a quality mutual fund that I accumulate on dips, which seem to occur daily.
I’m counting on these investments to get me through retirement, which Brady warns will require about $2 million. I’m not sure why I’ll need that much in savings when I can get along now with about $60 that I keep in a Band-Aid box. You don’t really need a lot of money when you’re retired, because Medicare pays your doctor bills and Meals on Wheels volunteers come by every day with apple cobbler and one of those oval breaded-veal patties usually only found in junior-high cafeterias. The only other expense is your annual AARP dues, for which you get a $3 discount at Motel 6 and a complimentary dinner roll at Midwestern restaurant chains with place mats printed with quizzes about the middle names of U.S. presidents.
But since everyone keeps harping on the $2-million figure, I continually calculate my chances of getting there. I stare at the CNBC stock ticker until it feels as if my eyes have been coated with deck sealant. I refresh the stock-price page on my Internet browser every 30 seconds, then rerun the numbers when my company has moved up or down a 16th of a point. And yet, even in the midst of this incredible bull market, the numbers always tell the same tale: I’ll need about a 600-percent annual return on my retirement account in order to one day have enough cash to pay for my burial.
So I’ve begun more closely monitoring my financial situation as it relates to global economic trends. I strike up warm conversations with old men wearing hearing aids and quiz them on performance. I study the food-buying habits of poor people at my neighborhood Safeway as a means of gauging whether Greenspan will again halve my life savings. I ply strangers for stock tips the way racetrack railbirds hang around the $50 window in hopes of scoring some inside dope. Because my mutual fund holds positions in tobacco companies, I encourage teenagers to disregard the silly health warnings about cigarettes.
This gives me at least some hope of reaching the $2-million mark, but my enthusiasm is inevitably tempered by the Internet death clock, which has me long gone before I see six figures, let alone seven. Even the magic of compounding isn’t going to bail me out.
That leaves only one option: the TED spread. It’s a long shot, but if things go really well and the government topples along with the entire international monetary system, there could be multimillion-dollar payouts. The problem, of course, is that I’d have to participate in an investment that earns a friend money, and I’m not about to violate one of my guiding principles. I mean, there’s more to life than just money.CP
Art accompanying story in the printed newspaper is not available in this archive: Robert Meganck.