Miss Fortune

Nate Orenstam
Sunday, August 18, 2002

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Stocks & Bondage

With the financial markets in more turmoil and sending 401K retirement plans falling faster than an Iridium satellite, it's time to get back to basics. We're providing some good old fashioned financial advice from our "Miss Fortune" guest columnist, Internet stock guru, Mary Meager from Wall Street brokerage Morgan Stanley.

Q. How much of my portfolio should I have in stocks?

A. There is always an inherent risk when making financial investments. Therefore you should never invest more money in stocks than you are comfortable handing over to your cousin Louie when he goes to Las Vegas to test his new blackjack system. Also, keep in mind that "speculative" strategies where you try to beat the system are never a winning proposition for anyone except the house. Nonetheless, there are plenty of advantages to buying stocks and I'll try to come up with some later on. Also, when you place bets in Las Vegas, they try to keep you from looking to carefully at your losses by giving you perks like free drinks, comp rooms, theatre tickets and limos. On Wall Street, we keep these to ourselves so you can stay objective.

Q. What's the difference between stocks and bonds?

Stocks represent ownership in a company whereas bonds represent money you've loaned to the company. So it's kind of like having your cousin Louie drive your car to Las Vegas versus lending him money to buy a car.  When there's a crash, you definitely don't want it to be your car.  Bonds generally don't crash all the way to zero since a company can usually sell their equipment, facilities or employees to pay off their debts.

You should always re-evaluate your portfolio whenever there's a fundamental change in a company's strategy, such as when the CFO is taken away in handcuffs. This is what's known as a "buying opportunity." Also, if you have friends who work for the company, if they observe executives buying cans of kerosene and booking flights to the Bahamas then you should definitely consider it as a short term asset.

Q. What is the difference between preferred stocks and common stocks.

A. Preferred stocks are those that increase in value. I definitely prefer those. Haven't seen a lot of them lately though. If you know of any, give me a call.

Q. My wife and I followed your stock recommendations and bought stock in WebVan, Scient, Pets.com and other recommendations. We were high flying in 1999 and then we quit our jobs and invested everything in dot com stocks. Now we're broke and living out on the streets.

A. Dollar cost averaging is a great way to balance out on share prices so you're always "in" the market. We used to call it throwing good money after bad, but the marketing guys came up with this idea of dollar cost averaging and it sounds much better. Keep up the good work!

Q. When is the best time to buy stocks?

A. Right before they fall by 95%. Oh wait a sec-- I mean that's when you should sell.

Q. What is a bond?

A. In it's simplest form, a bond represents an obligation from a company or government to repay a debt. So when you buy bonds in a company, you are in fact lending them money. In return, they are giving you some pieces of paper which will often be worth up to 50% or more of the amount that you've lent them, unless the bonds are from the telecommunications industry like WorldCom or AT&T. In those cases, the bonds tend to be worth slightly less than the price of a first class stamp. However, that's still better than the price of their stock.

Q. How are bond values calculated?

A. Bonds are issued at specified interest and payment rates. So for example, a bond may pay 6% yield at maturity as issued from WorldCom. However, since WorldCom is technically (and morally) bankrupt, the bonds are worth much less. Heck, most pan handlers on skid row won't even take WorldCom bonds anymore. So they are about as likely to repay you as Nixon is likely to get re-elected. Therefore, bond values are determined on the secondary market (Frank's New and Used House of Bonds, Low-Low-Prices). For example, many financial institutions actively trade bonds after they have been issued, much the same way that school kids buy and trade baseball cards. Of course, we are not suggesting that trading bonds is like trading baseball cards. Baseball cards sometimes go up in value.

Bond rates are determined inversely proportional to the prevailing interest rates, adjusted for a Net Present Value (NPV) based on a betting pool on the winners of the annual Heisman Trophy (MVP). As interest rates rise, bond rates decline. So if stocks go up, bonds go down, unless the opposite happens. Use this simple pneumatic memory aid to understand the relation between stocks and bonds:

Bonds go up, stocks come down
Spinnin' wheel got to go round
Talk about your troubles it's a crying sin
Shoulda sold in April let the spinning wheels spin
You don't need a stock broker
To know which way the bond goes

Q. What are tax-free bonds?

A. These are investments which you will forget to record in your 1040 tax return. These are favored by CEOs of major corporations and heads of state.

Q. What are savings bonds?

United States Series EE Savings Bonds are among the safest investments since they are backed by the US Government which can simply print more money whenever they want. This makes them virtually risk free even though government debt is measured in the trillions. Plus I'm sure they'll put your money to some special use like building a new bomb shelter for Congress or something. Savings bonds have two maturity dates; one at 17 years (original maturity) and one at 30 years (male maturity). While savings bonds don't pay out interest, they do have the added flexibility that you can use cash them in any time you need to leave the country in exile.

Q. How do you make money off bonds?

A. If you're a large company with a lot of expensive facilities, you make money by issuing bonds in your company with the idea that you never have to pay them back because you'll be out of business soon enough.

Q. What about individual investors?

A. Individual investors can make money off bonds the same way that companies do; by buying bonds on borrowed money and then declaring bankruptcy. Also, be sure to buy a really big house in Florida since the government won't be able take it away from you even if it's bigger than the average luxury hotel.

Q. What is a tranche?

A. A tranche (sounds like "franche") is French term which literally means "slice." Bonds are often sold in alottments representing different time periods, each one a different tranche. This term is often used by bond traders, as in "If dese bonds don't sell, I'm gonna tranche you up like a salami."

Q. How are bonds rated?

A. Bonds are considered rather uneven in temper and therefore they have a Moody rating indicating just how cranky you will probably be after buying them. These range from AAA to C. Triple A bonds are considered the highest quality, purest of government inspected bonds aged to perfection and perfect for summer barbecues. Bonds rated C are considered riskier inasmuch as no one expects the issuing company or government to pay anything on them. If your broker tries to sell you Double D "Pam Anderson" bonds, you may want to look into things.

Q. What are convertible debentures?

A. These are a type of orthodontial treatment used by seniors. My grandmother has these and they've increased in value steadily over the years.

Q. With the financial market the way it is, will I ever be able to retire?

A. Sure. Just continue to allocate some of your investment portfolio to the Super Lotto.

About the author
Nate Orenstam is a world class Java programmer specializing in J2EE transaction benchmarks.