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Glassman on Wall Street has advice on investing in stocks and markets.

Managing Your Money features Jane Bryant Quinn's personal finance columns.

Investing Live:
Discussion with James K. Glassman

Wednesday, March 3, 1999

James K. Glassman Glassman, whose investing column appears in The Post on Wednesdays and Sundays and is distributed to newspapers throughout the United States, was online for an hour on March 3, 1999.

In addition to writing three weekly columns for The Post, Glassman is a fellow at the American Enterprise Institute and hosts "TechnoPolitics," a weekly PBS program on science and public policy. He also writes columns for U.S. News & World Report and other publications, and appears on the PBS show "Nightly Business Report".

Glassman hosted CNN's "Capital Gang Sunday" for three years. He was editor and part-owner of Roll Call, publisher of The New Republic, president of the Atlantic Monthly Co., executive vice president of U.S. News & World Report and executive editor of The Washingtonian.

For background, read Glassman's investing columns from Wednesday and Sunday and visit Glassman on Wall Street for a database of his investing columns dating back to 1995.

Note: Glassman cannot offer personal financial advice or answer many questions regarding specific stocks and funds.

Text of Discussion

Bowling Green, OH: How does day trading work and is it a good way to make money in the market?

James K. Glassman: Good morning, this is my initial show. Should be exciting. Thanks for all the questions. I am going to try to keep my answers short.
On day trading: Day trading is buying and selling stocks online in a very short time period. It is, in short, gambling, and you should think of it that way. It is not investing. Most people will find, in short order, that they will lose a lot of money this way. I recommend it only to those who like the sport and can lose the dough. Otherwise, stay away.

Washington DC: Last year I bought a few hundred shares of Crimmi Mae. I incurred a tremendous loss when the company filed Chapter 11. I would like to know if I could claim a loss in my income tax return.

Is this a good time to buy into local and regional banking and finance? Do you have any info. about first liberty financial corporation in Georgia? Do you think it would be a good buy?

James K. Glassman: As for your investment in Crimmi Mae: I am no tax expert, but the rule is simple: You can only take a loss if you sell the stock, and there are limits on how much of a loss you can take beyond what you offset against gains. I can't comment on individual stocks unless I have written about them already. Don't know Liberty financial. I have written in the past, however, about regional bank stocks, which remain down after their problems of last summer. At the time, I mentioned SBTF (Southeastern Bank and Thrift), a closed-end fund. Financials remain generally depressed and could be good buys.

Paris FRANCE: Hi Mr. Glassman

I enjoy reading your column every Saturday in the Herald Tribune! My question is: Internet stocks are generally thought to be greatly overvalued at the present time, but don't you think this is overshadowed by the fact that the internet world is in a development boom that can only take stock prices higher during the next few years? Thank you.

James K. Glassman: Great to hear from France. Internet stocks present a conundrum, which you present well. On the one hand, there is no doubt that the Internet will change our lives and the way we do business. On the other, it is difficult to tell which companies will be big winners. So how to price the stocks? It is essentially impossible. My solution is definitely to expose my portfolio to Internet stocks, but not to go overboard. One way to play the Internet is through established companies that provide hardware, software or services, such as Lucent and Cisco. Another is to go with the big boys: AOL, Yahoo and Amazon. Readers will know that I have been high on Amazon for some time.

Washington, D.C.: A very general question from a reader of your columns. I plan to start an investment club with a couple of friends. The club is a necessity due to our limited incomes, and the current stock prices of stocks we are interested in. Is there any specific advice you can offer us concerning investing our money? We intend to be aggressive at first.

James K. Glassman: An investment club's purpose should be educational first and profit-making second. Use it to learn about stocks. Buy a variety of companies, hold on to them for a long time, learn the ins and outs. Also, make sure that you establish clear rules right from the start on how you are going to pick stocks (majority vote? 2/3?) and when you are going to sell them (even tougher). But have a great time.

Washington, D.C.: Is it a good time to invest in Japan? The Nikkei hasn't really moved in 7 or 8 years.

James K. Glassman: I am getting more and more interested in Japan and will definitely do a column on the subject soon. Grant's Asia Observer, an excellent newsletter that was early in pointing out the problems in Asia is now high on Japanese stocks. The main reason is that Japan seems finally to be addressing its problems--both at the government and the business level. Japan seems to be remonetizing (which is to say adding cash to the system), but, more important, businesses are beginning to be run for the benefit of shareholders rather than managers (a revolution we went thorough in this country in the 1980s). Grant's cites NEC as an example. Japan's big problem is that its companies go after market share rather than profits. Return on equity (that is, shareholder investment) in Japanese companies is terrible, but there are signs it will get better. So, yes, Japan is an interesting area for investment once more.

Sterling, VA: How and where does one buy U.S. Treasury Bonds?

James K. Glassman: You can buy Treasury bonds through your broker, through your bank or directly through the Treasury in Washington or through Federal Reserve banks around the country. Most banks and brokers charge very low fees, but a service of the Treasury, called Treasury Direct (I don't have the no. here) is free--but only for newly issued bonds. You have probably noticed that interest rates are rising for Treasuries. Intermediate maturities, such as five years, seem especially attractive. My practice is to hold bonds to maturity and not to gamble with whether the price will go up or down. Thanks for the question.

Anywhere, USA: Most of my "funds" are invested in the federal 401k (TSP) stock fund and Roth IRAs in S&P 500 funds. I know "patience" is the key word, but what is your prognosis for these programs over the next 5 - 10 years?

James K. Glassman: My prognosis for the stock market is excellent. Judge from history. Stocks have returned 11% annually since the past century. That's an average, but if you can keep your money at work for 10 to 15 years, chances are that you will hit the average. In 13 years, at 11% with dividends reinvested (and no tax bite), your money will quadruple. I am also at work on a book, to be published in October by Times Books. In it, my coauthor, economist Kevin Hassett (formerly of the Fed) and I argue that stocks are underpriced and could be two to four times as high and still be in a range of comfort.

Hunt Valley, MD.: Would you agree with my contention that we're within 3 months of a sizable (10-15%)correction? Technology seems to be forecasting this now....

James K. Glassman: No one can possibly tell what the stock market will do in the short term. I have no idea whether we will have a correction in three months. And so what if we did? It would simply create a buying opportunity. It is a mistake for long-term investors in stocks to worry about short-term corrections. In fact, paying attention to prices on a day-to-day or week-to-week basis is useless and misleading--unless you have money to invest and what to see, in Warren Buffett's words, whether anyone is doing anything foolish.

Bridgewater,VA: Value stock funds have not fared well in recent months. What will need to happen for them to turn around and are they still a suitable investment for long-term investors?

James K. Glassman: Important question about value stocks. We are clearly in a period in which investors value growth over value (value being bargain prices, as denoted by a stock's P/E ratio, price-book ratio, dividend yield, etc.). For the past five years in a row, growth has beaten value. But, as I said in my column today, things change. Large-caps beat small for a long time, then there's a shift. Same with growth and value. When will it happen? I don't know. Why? Perhaps when investors believe that P/Es have gotten too high. My advice to investors is to stay with both growth *and* value stocks. Don't give up on value, but remember that in the long term the growth rate of a company's earnings is more important than its price right now.

Baltimore, Maryland: Knowing the advantages of Index mutual funds (low turnover, low fees, performance), why not invest in SPDR's instead and pay zero management fees?

James K. Glassman: SPDRs are essentially closed-end funds that mimic the S&P 500 (and, now, other indexes) and trade on the American Stock Exchange as if they were stocks. SPDRs *do* have a management fee. For the next sector SPDRs, it is 0.65 percent, or roughly half the fee for a typical mutual fund. I don't know the number for the traditional S&P SPDRs (symbol: SPY), but I believe it is in line with mutual funds (about 0.2 percent). The problem with SPDRs is the brokerage commission to buy and sell. You might want to use an online broker to cut the cost, but you will then be tempted to *trade* SPDRs--a bad idea. IN most cases for long-term investors there is little difference in cost between SPDRs and index mutual funds--except with sector SPDRs, about which I have written in recent months and which I like a lot.

Annandale, VA: Please explain Spiders, Webs & Diamonds. Compare to indexes, mutual funds and each other.

James K. Glassman: This is a good follow-up to the last question. Spiders, or SPDRs (an acronym for Standard & Poor's Depositary Receipts) are baskets of stocks that reflect the composition of a market index. The most popular is the S&P 500, which is composed of the (roughly) 500 largest cos. on US exchanges and represents 78% of the market cap of the stock market. There are also SPDRs for such sectors as technology, consumer cyclicals, etc. Those baskets are made up of some of the stocks on the S&P; SPDRs trade just like individual stocks. The S&P500 Spider for example trades at about 10% of the S&P index. So if the index is 1200 you can buy a Spider for 120. Webs are the same thing but are for the stocks of individual countries (Japan, france, etc.). Diamonds are for the Dow Jones Industrial Average. If you want to buy the Dow, then Diamonds (symbol: DIA) are the best route.

Washington DC: Are you familiar with the Motley Fool web site and books?

If so, what is your opinion of their approach that individual investors should shun traditional stock brokerages and investment funds?

James K. Glassman: I am a big fan of the Motley Fool (available as a feature of AOL or directly at Tom and David Gardner and their team have performed a magnificent service in helping to democratize investing and to reinforce the notion that the "experts" don't know it all. In fact, they often do a good deal worse than the mass of investors.
Also, the Motley Fool gives damn good advice.
I believe, however, that traditional brokers can be helpful to many investors. They not only can give good advice, they can stop you from doing something stupid. Are they all good? Of course not. But I find that investors often make mistakes in a panic, and a good broker can earn her keep simply by saying, "Are you sure you want to sell?"
I also believe that mutual funds serve an important purpose for many investors. They provide quick, easy inexpensive diversification. But, again, the experts who run the funds are probably no better at stock-picking than the average Motley Fool reader. In general, I think investors should be clear-eyed and have lots of choices. The Motley Fool helps in both regards.

San Antonio, TX: The international situation is extremely shaky, both politically and financially. How long can the U.S. remain an island of prosperity, and our stock markets keep rising, before the international events also pull our markets down?

James K. Glassman: The US can be prosperous for a long time without being affected by what is happened abroad. That certainly was the lesson of 1998, when the pundits said that we would be hurt by Asia but instead GDP grew by nearly 4% and unemployment stayed very low.
I would turn the question around: How long can the rest of the world make the kinds of mistakes it is making (with unstable currencies, poor tax policy, over-regulation, restricted markets) before countries wake up and move in the direction of the U.S.? My guess is, not very long. I think we are on the brink of a worldwide prosperity, the likes of which we have never seen. If the US can do this well with Asia stagnating and Europe slowing, imagine what will happen when the world adopts free market practices.

Warrenton, VA: Hi Jim. Peter Hoagland here. Recently a Post reader here online lamented that they wish the Post had investment writers that "weren't so conservative". I consider myself fiscally conservative myself and appreciate the Post's columnists. How do you respond to that?

James K. Glassman: I am not sure what a "conservative" investment writer is. I myself consider my politics libertarian, or classical liberal, rather than conservative. But certainly most investment writers have respect and even admiration for market processes. As you probably know, I have written recently, in a positive fashion, about socially conscious mutual funds, most of which are of a leftish bent. Anyway, I hope my politics, such as they are, don't get in the way of giving advice to readers and trying to explain the investment world around them.

Portland, ME: I have a male friend, employed, age 27 who would like to start investing in the stock market. What would be your recommendation for him to get started in -No load Mutual Funds or what direction?

James K. Glassman: I did a column last year on Getting Started, which you can find in the Post archives. But to be brief: The most important things about getting started are, first, knowing what you investment aims are (building a retirement nest egg, saving for a house, etc.) and, then, doing it--meaning getting invested quickly. I see a lot of dithering over which stock to buy. That's a mistake. A good idea is simply to put the money you want to a lot to the stock market into an index fund (such as Vanguard Total Stock Market or Vanguard Index 500) and then slowing transferring it to individual stocks or to other funds. I have written in the past, as well, about "core" funds that can serve the same purpose as index funds. Some that I have cited in a positive way are Janus Twenty, Legg Mason Value and Torray. But there are many others. Again, I suggest you check the archives or what for my book in the fall.

Washington, DC: I understand the logic in today's column for diversifying. However, I don't understand the reason often promoted for shifting allocations as one nears retirement. If I expect to have more in my retirement fund than I will need (the balance going to my kids at some point), why should I move out of equities and into bonds? For their sake, it seems like the money should keep on growing rather than being merely safe for me.

James K. Glassman: The reason to shift toward bonds as you near retirement is to increase the certainty that your nest egg will stay intact--that it won't drop 40% in value in two years (as the market did in 73-74). But if you are well-fixed and intend to pass your investment holdings on to your kids, then, absolutely, stay in the stock market.

NY, NY: As someone in my mid-late 20's with plenty of student loans to pay off, any extra money I end up with has been going to paying off my loans early, rather than into stock, funds, etc. (although I have been putting into a 401k). Thing is, although I feel a lot better about cutting down on these huge loan obligations, I feel like I am missing out on 20%+ returns by paying off my loans (which incur interest at 8%). Does it just make sense to invest the money I make rather than pay off the loans?

James K. Glassman: Pay off the loans first, but try to open at least a small stock account to begin your investment education. It is true that the stock market has been returning 20%-plus, but the average returns are 11% (and closer to 8% after taxes). Most Americans have too much debt, and it is good to get in the habit of paring it down when you are young. You will still have plenty of time to make money in the markets.

Sterling, VA: Rebalance your portfolio every 5 years? Brokers would like you to do it quarterly. That may be too often. But 5 years is a long time.

James K. Glassman: Even with the high volatility in the markets over the past five years, the changes among asset classes has not been all that great. In the example I gave today, you'll notice, for example, that small-caps fell as a proportion of the portfolio from 10% to 7%. In my opinion, it is not worth rebalancing for one or two percentage points. You should, however, look closely at what is happening on an annual basis. I find it difficult to get investors to rebalance every *five* years, much less every one year. If you can take the time, then absolutely check out your allocations and if they are out of whack, rebalance more frequently. But not every *quarter.* Seems to me you are only generating commissions for your broker.

Boston, MA: It seems to me once you go beyond a small range of large companies, internet companies and technology stocks that the market is at best going sideways. Most of my friends who were purchasing the smaller companies lost money last year. What is your short term prognosis for the broader market?

James K. Glassman: I don't have a short-term prognosis, and I would be extremely dubious of anyone who does. You are right, however, about the market moving sideways for many stocks. But that's good. There are many, many values out there--companies that are growing but appear to be underpriced. I mentioned some in my Scoop box in today's Post.

Washington DC: You provide terrific advice and mega-analysis of issues important to individual investors, specifically about stocks or funds that merit close personal examination and possible investment. But you never write about getting out of anything, except to re-adjust proportions. I know your feelings about market timing, but does this suggest you would never sell, even over the long run?

James K. Glassman: The ideal holding period is forever. Yes, there are times to sell, but if you have done your homework in the first place, they shouldn't come up very often. When to sell? Well, first you have to know why you bought. If conditions have changed, then consider selling--such conditions would be an adverse change in management, the failure of a key product, new competition in a niche the company had all to itself. But do not sell because the price of a stock is too low or too high --unless, that is, you have a better use for the money. Say you own 10 good stocks, but find a fabulous prospect. Yes, sell the worst of the 10 and buy the 11th.
Think of it this way: It is tough enough to decide which stocks to buy. Making a second decision--when to sell--is even harder. And hardest of all is deciding when to buy back.

Washington, D.C.: Enjoyed this mornings column. WOuld appreciate a general recommendation on asset allocation for a 50 year old who will retire at 62 and not averse to some risk.

James K. Glassman: A good breakdown for someone in her fifties, retiring in 12 years, would be 70% stocks and 30% bonds, moving to a 50%-50% allocation in another seven years. But the decision is really a personal one. Much depends on your sources of income (if any) beyond your investment nest egg when you do retire, whether your own your house, etc.
The reason older people should own short an intermediate term bonds is that they are more reliable--again, in the short run--than stocks. With stocks, you are likely to be able to absorb a decline of 40% but only if you can hold them for 10 years or more.If you are close to retirement, you may not have that time.

Washington, DC: Does the real small investor who has invested $500 into a mutual fund, have held it for over 3 years have anything to smile about. Yes, the fund has done o.k. consecutively for the last 5 years. The 401K too, unmatched by employer, small investment of $100 per month vs. what other employees are doing of $1500 a paycheck unmatched. Once the fund accrue to there reason to diversify? Does the small investor get to smile, too? It seems so, but the smaller investor still can't run off the "porch" to play and run with the big dogs like buying Intel and Dell, Microsoft and the like.

James K. Glassman: Certainly, small investors can participate in the fortunes of Microsoft, Dell, etc., by owning growth-oriented mutual funds. I am not up on the minimums, but you can certainly consider such funds that I have written bout as Janus Twenty, Legg Mason Value and Transamerica Aggressive Growth. Also, you can buy a few shares (even one share!) of MSFT, Dell, etc. Don't despair. You're doing fine.

Cockeysville, Md.: My question concerns stock-splits. Would buying stocks that announce splits be a reasonable strategy, or is that too much of a shortcut to fundamental analysis of a company?

James K. Glassman: Did you see Warren Buffett last night on Nightline? He disparaged the idea of stock splits, and he is right. They are utterly meaningless. Buffett's image was a pizza. Whether you cut it into four slices or eight, it is still the same size pizza. Splits do make a company's stock more attractive to investors, but not much. What's the difference whether you own 100 shares at $200/sh. or 200 shares at $100/sh.
While stocks sometimes go up in anticipation (or just after) splits, you might want to see splits as a sign that a stock is particularly expensive. After all, splits occur when a stock has recently zoomed upward, not when it has moved into bargain territory. Best idea, though, is to ignore splits entirely.

Salem Oregon: I'm 51 and plan to retire at 55. I have approx $250k in a company pension and another $55k in a deferred comp plan with my employer. I am buying but don't own my home. We have a second property for weekend getaways and part-time rental. Should I pay bills off, or keep investing in my retirement?

James K. Glassman: I am a great fan of paying off bills, especially if you are paying high interest rates. Low-rate mortgages are another question entirely. At 7%, with tax benefits, it may make sense to use your mortgage, in effect, as a low-rate loan to buy stock. Even in that case, my own inclination is to pay off the mortgage. But the choice is strictly personal.

Out in Left Field, USA: Regarding re-balancing your portfolio--not how often, but when: if you re-balance when you've lost money in say an agressive stock fund, aren't you kissing that loss goodbye with no hope of recouping the money should the fund take off again?

James K. Glassman: You're right. My column did not address tax considerations. If you have a big loss and want to offset a big gain, then certainly take that into account. But don't get carried away. Tax matters should not drive investment matters.

Thanks to you all. This was my first time answering questions online, and I really enjoyed it. I'll be back soon. Meanwhile, keep reading the column every Wed. and Sun.!

© Copyright 1999 The Washington Post Company

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