Friday, March 13, 1998
by Phil Weiss
TOWACO, NJ (March 13, 1998) Ah, its finally Friday. The weekend is here. I have time to spend with my family and to catch up on a few things at home. Oh, and a good deal of time for my spot on the couch in front of the TV. March Madness is in gear. Duke plays Radford tonight at 10 PM. I'm expecting a 30-point victory.
Today we also near the end for applications to our Stock Madness Game which pits you against other Fools in a humorous stock-picking contest over the next month. Final entries are due by 9 am Monday. After taking a look at it myself (though I can't win), it takes about ten minutes to play, looks like the winner could be anyone, and the two grand prizes are $2,000 in a discount brokerage account at National Discount Broker and a full set of Prince golf irons. Click here to play: Stock Madness.
Finally, and most importantly, today is also the day of the week that we present a Foolish financial lesson. I thought Id revisit Step 2 of the 11 Steps to Cash-King Investing where we talk about paying down your credit-card debt before you start investing.
On Monday I read an article in the Wall Street Journal about an individual who has gotten into serious credit-card debt in his pursuit of several new business ventures. The person in the article currently owes close to $25,000 on his credit cards. First he loaded up $5,000 in debt on his American Express card. After they cut him off, he was lured by a two-month interest-free grace period offer from Diners Club. He incurred an additional $15,000 of debt on that card. Finally, he tagged on a final load on a new MasterCard account, running off another $5,000 of obligations. At an average interest rate of 18%, this gentleman will make interest payments of $4,500 this year, if he can't pay down any of the principal loan (and he doesn't look like he'll be able to).
As a result of all this debt, he has a car that's been sitting in his driveway for over a year that he can't afford to fix; he lives in a dimly-lit, sparsely-furnished basement apartment in his mothers home. And he makes a point of skipping meals, when he can. In his office, he doesnt have a desk for his 486 computer, so he sits on an end table, balancing his keyboard on his lap. To make matters worse, his mother, who previously had avoided all forms of debt, has now incurred an additional $40,000 in debts related to her sons start-up costs and present circumstance.
Now, I dont know how the rest of you feel, but this is both a potentially Foolish life gone awry and a wobbling world heading back to Folly. Here's my take. Huzzah for his enterprising aims, initially. But you can only buy so much with another man's money in this world. Just as companies can expand too rapidly, rely too much on funding, run out of cash, lose access to new capital, and wither on the vine, so too with an individual. Both in professional and personal finances, the purest forms of growth take time to develop. It's a marathon, not a fast lap. It's an endurance game, where patience and method is twice more important than speed.
And how exactly is this story representative of "a wobbling world heading back to Folly"? Well, this gentleman is being forced back to a limited position of integrity -- as Tom defined in his Cash-King Report on the book Piloting Through Chaos, by Julian Gresser. I don't mean to be harsh here. I just believe it's true that the world forces us back into positions of integrity. If we've tried to grow too quickly, we'll end up much smaller in time. If we grow methodically, though, the various returns to "integrity" are only half-steps back. Not a return to the nineteenth century, in a basement, with little light. That doesn't mean that one can't climb back. They can. This guy can. By cutting costs, understanding the value of a dollar, and disciplining our naturally enterprising nature, any of us can get back from there.
Now, from keeping my ears open in America, I'm pretty certain that this individuals predicament is not unique. It is a grim example of what can happen when we let our debts run away from us. And I firmly believe that debts get away from many because they weren't educated about the great value of building slowly. That's an extremely valuable approach when compared to the great danger of borrowing quickly.
I was surprised to learn from the article that one-third of businesses with 19 or fewer employees use credit-card debt as a means of funding their operations. This number has nearly doubled since 1993. Since 1993! I was also surprised to learn from the article that at least one-third of personal bankruptcies are borne out of failed small business start-ups. 33%! Even though this particular debt isn't incurred in the public markets -- in the form of equity investments -- it is another example of what can happen if you put all your money (and more than that) in any investment.
A question many are asking today is: Who is really to blame for all this foolishness? Why has all this debt happened? Clearly, the individuals that are incurring it by the heap have to take some of the blame. And I think our school systems (broadly defined) missed a few great opportunities to create financially secure alums. And, a lot does come back to the family and communication. But, I also believe that the credit-card companies bear some responsibility, too.
One of the primary reasons for our nation's consumer indebtedness is the abundance of credit-card offers that have helped make high-rate debt such a readily available option. Another is the flood of card offers that financial institutions send out regularly offering 3-6 month teaser rates as low as 4.9%. Those rates then rocket up to between 18-24%. Then there are all the offers that homeowners receive promoting home-equity loans regardless of the amount of equity they have in their residence. Uh-oh.
I dont know about you, but it seems that not a week goes by that either my wife or I don't receive one of the following offers in the mail: A new credit card account application, or an application for a no-collateral consumer or home-equity loan. Then there are all the times that one of our existing credit card accounts extends our credit line without even asking us if we wanted it to be. Or they mail us a few checks that we can use to consolidate our debts. In our house all of these items are automatically torn in two (usually unopened) and placed in our recycle bin for junk mail. With every rip, I hear that proverbial tree falling in the forest, though no one seems to be there to hear it!
But these silly promotions are not limited to print. Ive even heard an advertisement on the radio by a local car dealer that offers the following: "You can have the worst credit in the world and we'll still give you a loan or lease you a new car!"
The next time Congress is thinking about businesses to regulate in the interest of protecting consumers, they should consider some basic regulations prohibiting companies from preying on consumers in this manner. They should limit paper promotions, to secure a half-dozen different benefits. And they should begin investing in building personal finance instruction for every high-schooler in the country. I don't mean to sound political here. It just makes sense to me.
Have a great weekend, Fools. Next week Al Levit (CashKingAl) takes center stage. Ill bet that hell have some interesting things to say about our technology companies Intel and Microsoft. Ill be back here again in early April by which time a new National Collegiate Champion will have been crowned, another baseball season will have started, spring will have already sprung. Until then Ill see you in the Cash-King Message Boards.
Thanks for tuning in all week.
Phil Weiss (firstname.lastname@example.org)
FoolWatch -- It's what's going on at the Fool today.
Stock Change Bid ---------------- CHV - 1/16 82.88 KO -1 1/16 70.56 EK -2 3/16 60.63 XON + 7/16 64.31 GM + 1/16 72.00 INTC + 1/4 76.63 MSFT + 1/2 82.38 PFE - 1/8 86.00 TROW - 3/8 69.50
Day Month Year History C-K -0.30% -1.54% 0.19% 0.19% S&P: -0.13% 1.83% 6.72% 6.72% NASDAQ: +0.43% 0.07% 7.19% 7.19% Rec'd # Security In At Now Change 2/3/98 24 Microsoft 78.27 82.38 5.25% 2/3/98 22 Pfizer 82.30 86.00 4.50% 2/6/98 28 T. Rowe Pr 67.35 69.50 3.20% 2/27/98 27 Coca-Cola 69.11 70.56 2.11% 3/12/98 20 Exxon 64.34 64.31 -0.03% 3/12/98 17 General Mo 72.41 72.00 -0.56% 3/12/98 15 Chevron 83.34 82.88 -0.56% 3/12/98 20 Eastman Ko 63.15 60.63 -3.99% 2/13/98 22 Intel 84.67 76.63 -9.51% Rec'd # Security In At Value Change 2/3/98 24 Microsoft 1878.45 1977.00 $98.55 2/3/98 22 Pfizer 1810.58 1892.00 $81.42 2/6/98 28 T. Rowe Pr 1885.70 1946.00 $60.30 2/27/98 27 Coca-Cola 1865.89 1905.19 $39.30 3/12/98 20 Exxon 1286.70 1286.25 -$0.45 3/12/98 17 General Mo 1230.89 1224.00 -$6.89 3/12/98 15 Chevron 1250.14 1243.13 -$7.02 3/12/98 20 Eastman Ko 1262.95 1212.50 -$50.45 2/13/98 22 Intel 1862.83 1685.75 -$177.08 CASH $5666.26 TOTAL $20038.07 *The year for the S&P and Nasdaq will be as of 02/03/98