Gold Fever

I received a call the other day from a client, a widow in her seventies. “My friends are making a fortune,” the woman screamed at me over the phone.

“I want dot-coms; I want wireless; I want gene mapping.”

“What's gene mapping?” I asked her.

“Who cares? I want it.”

The nature of this call is symptomatic not only of the times we're in, but of the frenzy that grips investors when a fad is firmly in place. This is the same woman who, not too long ago, insisted on a low-risk investment strategy. “CDs and tax-free bonds,” she had told me. “I'm not a risk taker. This money is all I have.

Remember, I can't take any chances. Who'll take care of me?”

A good question, since certain sectors of the current stock market have become unhinged from reality. At some point, it will end badly for the people who can least afford it, like my client.

These days, the stock market should be reported in the sports pages, not in the financial pages. The market has truly become the national pastime over the last few years, supplanting baseball and football.

I buzzed my friend Leo the Lion to get some perspective. Leo has been making people money for years, taking large positions in stocks that he has researched well. His strategy is to keep buying them even if they go against him; in fact, he'll buy them on margin if he believes the situation is right. Leo the Lion also understands mania better than almost anyone I know.

“Hey,” says Leo, “for my money, the stupidest people have made the most dough the past few years. It's like 15 percent of the stocks out there have been spectacular, while the rest look like we're in a bear market. A year ago, one of my friends sold his business to a regional bank for stock, not cash. It's one of the biggest banks in the country. Well, a year ago it was approximately $60 per share. Now it's around $30 per share. And it didn't split. It dropped. This represents a true picture of the market. But this greedy market is driving everyone nuts: Our clients have to be in it. Everyone in the financial business over the age of 50 is losing customers and ripping their hair out because they know it's crazy, but they can't do a goddamn thing about it. The investment business is not a business you can force. You have to wait for true value to re-emerge.”

I've been preaching for years that stock markets are driven by fear and greed. For some time now, I've also been fretting about the manic state investors are in. Let me tell you two stories that perfectly illustrate these points. The first tale will make you appreciate the frenzy we're in; the other will play to your greed.

A few weeks ago, I ran into an old friend—an oldfashioned stockbroker on State Street. “You won't believe it,” he said. A conservative, long-time client of his had called with a tip—an Internet stock, naturally. My friend reminded his client how close to the vest he had always played it. “Never mind,” the client said. “I've got a good story on this. Buy me 200 shares.”

My friend bought his client 200 shares at $160 each. Two weeks later, the client called him back. “My source spoke to me and apologized for the lousy tip,” he told my friend. “I paid $160; now it's $115, and I'm out 45 points. What can you do?”

“Wait a minute,” my friend said. “Let me check it out.”

So he checked it out and got back to his client. “You're not out 45 points,” my friend told him. “The damn thing split 2 for 1. You've got twice the amount of stock you started with. Now you've got 400 shares, and you're really up 70 points on your original stake.”

“Great,” his client said. “I better call my source and tell him.”

Here's another true story, one that also illustrates my theory that happiness in America is 1,000 shares of a $2 stock. For many years, I've been on the board of the Boys & Girls Clubs of Boston. This past year the featured speaker at our annual meeting was one of the true pioneers of the Web, David Wetherell, CEO of CMGI, the Internet investment company based in Andover. The house was packed. Wetherell went on about the future of the Internet and how it will continue to transform the world.

“By 2005, there will be more people in China using the Internet than people from the rest of the world combined using the Internet,” he said. Pretty heady stuff. Then he talked about a man in Hong Kong named Richard Li who, Wetherell predicted, “will be the next Bill Gates.”

Whoa. You could almost hear the click of spines straightening. “Richard Li will help bring the Internet to China,” Wetherell went on, “through his company, Pacific Century CyberWorks.”

The man sitting next to me nudged me in the side. “Do you think it's public?” he whispered.

“Never heard of it,” I said. “But it's the first thing I'm going to check out tomorrow morning.”

China. The Internet. Bill Gates. Put them all together and you spell greed. The next morning I found that the stock traded in Hong Kong but could be bought in U.S. dollars here. The price then was approximately 92 cents. Well, I said to myself, if happiness is 1,000 shares of a $2 stock, then a 92-cent stock is paradise. So I bought the stock for my own account. But in dealing with my own avaricious nature, I put just enough money to have some fun, but not so much that if I lost it all, I would end up in an almshouse.

And wouldn't you know it, last month Pacific Century CyberWorks' stock shot up to better than $3 per share on news that it was buying Hong Kong's flagship telephone company for about $38 billion. True, the stock settled back to $2.63 per share the next day, but Wetherell and Li were making more news, announcing a partnership (along with a Dallas firm) to invest $1.5 billion in Internet companies outside the United States.

I'm betting on the oft repeated clichi that the 21st century will belong to China. Think of a billion people becoming a consumer nation. That's a lot of Big Macs, of course, and a lot of wireless phones. But this prediction may not kick in until 2056, at which point most of us will be dead. Or it may not kick in at all. In any event, my story tickles the greed button of everyone I tell it to. And it probably will tickle yours.

Not to end on a sour note, but it's tax time again. One way to take the sting out of the tax bite is to contribute to your IRAs, both regular and the Roth variety. The basic rules here: You can shunt $2,000 a year to an individual retirement plan for yourself, plus another $2,000 for your spouse.

Many people tell me they've stopped contributing to their IRA accounts because they have 401(k) plans and can't deduct it anymore. Big mistake. We have fewer and fewer places to hide our dough from the greedy mitts of Uncle Sam. Even if you can't deduct the $2,000 to your IRA, the appreciation and/or the income you earn on IRA investments are all tax deferred. Gains taken in the account are tax free. It's a no-brainer.

The Roth IRA, established in 1998, allows contributors to make up to a $2,000 investment annually; when monies are withdrawn, they come out tax free. The only catch is that you have to earn less than $95,000 a year (adjusted gross income) to qualify for a Roth, or less than $150,000 annually for a couple filing jointly. It's the perfect vehicle for all you hip, young Web investors, a hedge against the day the Internet market finally cools.