Fribble

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Thursday, April 1, 1999

Plastic. Meringue. Magic.
(An April Fool's Day Fribble)

by Dayana Yochim (TMF School)

[Disclaimer: Has this Fool lost her mind? No, this Fribble ran on the Fool's official holiday -- April 1. Only a fool (note the lower-case "f") would buy stock using an advance from her credit card. In fact, only a fool would invest in a company that sells meringue via the Internet, but that's another story. True Fools pay down their credit card (and other high-interest) debt before they begin investing and don't jump blindly in on "hot" IPOs.]

It's become an old saw around Fooldom: "Pay down your plastic before you invest." The rule bears out nearly every time you run the numbers. For example, take an investor, let's call her "Dianna," who comes into a sudden $3,000 windfall. Although she has $3,000 in credit card debt, she decides to try her hand in the stock market. If an average year on the stock market pushes holdings up 12%, can she beat the 18% growth rate on her debt (that's just the interest, folks)? Let's take a look:

12.00%/Year                 18.00%
Growth                      Growth
in Stocks             in Card Debt

At Launch     $3000         $3000
Year 1        $3360         $3540
Year 5        $5287         $6863
Year 10       $9317        $15701

A decade later, "Dianna's" debt has grown to over $15,000, her investments have grown to over $9,000. Though she started with enough money to eliminate the debt, she's now in the hole over $6,000. Until she sells those stocks. Then she'll have to pay 20% of the profit back to the government in capital-gains taxes. So she's actually out more than $7000.

But let's say our lovely and vivacious heroine Dianna has the opportunity to get in on an investment that defies all the rules. Let's say, as an employee of a company that is underwriting a hot Internet company's initial public offering -- something like eMeringue, the nation's #1 meringue-delivery service on the Internet -- she is handed the chance to invest in the IPO. What about that nagging credit card debt then? Let's do the math:

E-meringue IPO: $22
Visa interest rate: 17.3%
No. of shares to purchase: 136

Forget it... I think that's enough math. Plenty of number crunchers believe eMeringue is going to laugh as it soars by the 17.3% return mark in the first three minutes it is available on the public market. I mean, look at the business: frothy meringue delivered to your door less than a week after you order it! It's got Rule Breaker written all over it. How could a stock like this go anywhere but up?

Fools take advantage of guaranteed Internet IPO winners -- even if it means taking a cash advance on one's credit card. A toddler can see that triple-digit returns far outweigh any cash advance fees and pesky interest rates you might find on your average Visa or Mastercard. Heck, our parking garage at HQ is filling up with Miatas -- dream cars now affordable to Fool staffers, who, like our mythological Dianna, are taking advantage of this amazingly high-yielding modern "savings account" we call the stock market.

All sorts of lines of credit are available to Fools who want to jump-start their investing careers with clear winners -- home equity loans, margin accounts, Mom and Dad, tots with trust funds. (Unfortunately the discount brokerage industry hasn't caught up with our contrarian ways -- have you ever tried to buy shares online using your credit card? C'mon discount brokers! Get modern!)

A new car (or cars -- I can't decide between an SUV or a convertible, and may not have to!)? A VCR whose "record" button doesn't pop out every time a truck rumbles down the street? A better nose? It's all possible -- with plastic, eMeringue, and a little stock market magic dust.

 

 

 

 



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