Friday, February 13, 1998
by Phil Weiss (email@example.com)
TOWACO, NJ (Feb. 13, 1998) -- The Cash-King Portfolio purchased Intel Corporation (Nasdaq: INTC) this afternoon, plinking down $1,862.83 for our 22 shares. Intel becomes the fourth stock in our Cash-King portfolio, an ownership position that we plan to hold for a minimum of 10 years -- without guarantee of that, of course. We feel pretty comfortable laying down money on Intel's financial model and on their ongoing responsibility for speeding up our computers and their connections. When do we get to turn on our personal computer and flip to The Fool (tap-tap) with the same speed we click our televisions on and glide from Regis & Kathie Lee to last night's college hoops highlights on ESPN?
When... when... when!?
For those of you haven't read our Intel buy report, voila -- (click here: Intel Buy Report).
Ok, it's hard to believe that this week has already come and gone, my week in February to write the Cash-King reports! Of course, it's always nice to know that the weekend has arrived -- and a three-day weekend thanks to our Presidents! But before the week is out, we do have some business to cover here. A few days ago, I told you that we'd be offering some regular features in our daily reports. On Mondays, we'll discuss any news about our stocks for the prior week. On Wednesdays, we'll have a Question-&-Answer session based on notes posted on our message boards. And on Fridays, we plan to feature one financial lesson framed Foolishly.
Let's start in on the lesson...
One of the criteria that we look for when deciding if a company is a Cash-King is whether or not it has a Flow Ratio of less than 1.0. We can measure this by looking at the balance sheet. We start with current assets, hoping that the accounts receivable (uncollected bills) are being collected quickly and that inventory doesn't sit on the shelves for months at a time. On the current liabilities side, we want our companies to take as long to settle short-term liabilities as they can without incurring any additional interest expense or late charges. (For clarification about Flow Ratios see Steps 6 and 7 of the 11 Steps to Cash-King Investing.)
For many people, studying corporate financial statements makes for a total disconnect from their daily lives and their personal finances. But it shouldn't. As Fools, we do stand strongly behind mastering your personal finances before you begin to invest -- but we see numerous intellectual links between the two. We start by concentrating a good deal of attention on credit-card debts hitting Americans with an over-high average interest rate of 18%. But after we've driven a stake in the heart of that high-rate debt, never letting it rise again, what then? Let's consider some of the options facing us after we've paid our debts and started a plan of regular savings. I'm talking about managing our personal Flow Ratio, how to keep it low, and how one of the credit card companies may actually help us do so.
Unfortunately, only 1/3rd of credit-card users pay off their balances in full each month, incurring no interest charges. Naturally, this 33% could care less about what interest rate their credit-card company charges. They just want to use cards that charge no annual fee, that provide a grace period which protects them for 31 days, and that don't send too many unsolicited promotional mailings each week (you may not be a tree-hugging environmentalist... but this junk mail really is out of control, no?). For the 1 out of 3 Americans that nail down their bill each month -- and we hope that's you -- credit cards are a major convenience.
But they can also provide opportunity.
For that 33%, what about the other side of the coin -- saving? Currently the interest rates paid by banks on cash balances are low (3-5% in your savings account). But you can still get a small interest income benefit if you buy with your credit cards, then pay the balance off on time and in full. You can buy something today, and depending upon your credit-card billing cycle, you may not have to pay for the purchase for 1-2 months. In the meantime, you can earn some interest income on the cash in a savings account until you pay off your bill.
And, if you use your credit card and pay the balances off in full each month, there are a few more benefits. For example, you won't have to go to the bank to get cash from your ATM machine as frequently, avoiding their $1.50 fees. You'll also probably find that if you carry less cash, you won't make as many impulse purchases of small items. In addition, it'll also be much easier to track where your money goes, as you'll be reminded of it when you receive your bill each month. Finally, if you have a card with some type of affinity to a frequent-flyer program or other rebate program, using your card for many of your purchases can provide you with some pretty attractive benefits.
The two biggest downsides that I see (and I do personally put this strategy into play each month) are that 1) if you miss a payment, the interest can bite you; 2) you might obsess too much over your financial condition. We haven't run into either of these problems in the Weiss household. We only have to be on top of the payments once each month, so we don't miss them, and we really don't obsess over them. It's a once-a-month decision.
As you probably know, there are three primary issuers of credit cards - Visa, MasterCard and American Express. The first two are issued by a wide variety of financial institutions; the last is only available through American Express. This Fool actually uses all three of these while carrying no outstanding balances on any from month-to-month. American Express loves me for this... the other two call me a "deadbeat"! In truth, my recent experiences have convinced me of the additional benefits of using my American Express Card. It does wonders for my personal Flow Ratio.
I apologize if this starts to sound like an AMEX commercial, but here are some of my findings. Let's say that you buy something and later have a dispute with the vendor about the product. With American Express all you have to do is pick up the phone, call them, and they'll remove the item from your bill so that you don't have to pay for it that month. It will only be reinstated to your account if the matter is not resolved in your favor.
With Visa or MasterCard, you have to write a letter explaining the situation in order to get them to even consider investigating it. And, if you don't pay the amount in advance (alongside that letter), and the dispute is not ultimately resolved in your favor, they charge you interest starting with the month in which the dispute arose. Visa and MasterCard take the position that your balance was not paid in full in the month that the dispute arose.
Via the AMEX card, no payments are made and no interest charged until the dispute is resolved. You may ask how American Express can do this. From calls to their customer service department (these days, I'm very much enjoying making calls like this, since we can talk about them in Fooldom!), I learned that they can delay for you because they don't pay the vendor until they've received the money from the cardholder.
This confirms other experiences that I've had which have convinced me that American Express is more an ally of the consumer, while Visa & Mastercard typically stand as allies to the retailer. The interesting thing is that for Amex, the above scenario means that they're able to manage their exceptional Flow Ratio by collecting on their receivables before settling their payables (they collect from the cardholder, have the cash, then pay the retailer). MasterCard and Visa can't do this because they pay the vendor when the store takes the charge slip to the bank. So, they have to settle their payables well in advance of collecting their receivables from customers.
Someday I may just have one credit card... but for now, American Express cards aren't welcome everywhere I shop! So I have to invest time into the management of my Visa & Mastercard strategies, but for the Weiss family, it's proven time well spent. Our Flow Ratio has improved dramatically; we have a method which is easy to follow from one month to the next; I daresay we're beginning to look like a Cash-King family. We just have to improve on the growth rate!
I've very much enjoyed talking to you this week. I believe that Al Levit (one of the CK managers) is up next week with a look into the technology side of our portfolio -- Intel and Microsoft. Should make for some good reads. Until then, hey, I hope that you have an extremely Foolish three-day weekend. Turn off that laptop and make it count!
Phil Weiss (firstname.lastname@example.org)
Stock Change Bid ---------------- INTC - 15/16 83.81 MSFT -1 3/16 157.50 PFE - 3/4 83.63 TROW -3 66.13
Day Month Year History C-K -0.66% -0.06% -0.06% -0.06% S&P: -0.40% 1.88% 1.88% 1.88% NASDAQ: -0.23% 3.48% 3.48% 3.48% Rec'd # Security In At Now Change 2/3/98 22 Pfizer 82.30 83.63 1.61% 2/3/98 12 Microsoft 156.54 157.50 0.61% 2/13/98 22 Intel 84.67 83.81 -1.02% 2/6/98 28 T. Rowe Pr 67.35 66.13 -1.81% Rec'd # Security In At Value Change 2/3/98 22 Pfizer 1810.58 1839.75 $29.17 2/3/98 12 Microsoft 1878.45 1890.00 $11.55 2/13/98 22 Intel 1862.83 1843.88 -$18.95 2/6/98 28 T. Rowe Pr 1885.70 1851.50 -$34.20 CASH $12562.83 TOTAL $19987.96 *The year for the S&P and Nasdaq will be as of 02/03/98