Q: Is this a good time to invest in tech stocks? -- S.P., Charlotte, N.C.
A: We're wary of the term "tech stocks." People often use it to refer to computer-related companies and software companies. But when you think about it, it's hard to think of many companies these days that don't employ a fair amount of technology.
Think of automobile companies, for instance. Cars are big metal-and-plastic heaps of technology. The retail giant Wal-Mart uses a lot of technology in its operations, from inventory control to restocking and payments. Pretty much any airplane-related enterprise uses technology -- from building jets to booking flights. Likewise, United Parcel Service, FedEx and other delivery specialists rely heavily on technology. Of course, some companies do so more than others. Intel, for example, is much more of a technology company than Tootsie Roll.
That said, before you act on high hopes for any dynamic industry that's heavy on technology, it can be helpful to glance back at history. Industries such as aircraft and automobiles were once the new, exciting thing. They changed our lives and society and became necessities. Yet in the long run, they haven't proven to be the best places for investors' money. Don't think in terms of "tech stocks." Instead, evaluate each company and industry on its own merits.
Q: How are stockbrokers paid? -- C.I., Reading, Pa.
A: They're generally paid by salary, commissions on sales or a mix of both. It depends on the brokerage they work for. Many brokers depend heavily on commissions, which can lead them to actively and needlessly generate trades in your account. That's called "churning." We'd rather see brokers paid flat salaries, with bonuses for results that outperform the market averages.
THE FOOL SCHOOL
A Different National Debt
Americans owe more than half a trillion dollars on their credit cards. The average American household with credit cards, according to CardWeb.com, carries more than $7,000 in credit card debt. Making just minimum payments on that every month, it would take decades to pay off -- and you'd have paid many thousands of dollars in interest. Ouch.
Once you've fallen prey to the easy-money attraction of credit cards, it's hard to dig yourself out. The high interest rates most cards charge tend to get you entrenched deeper and deeper. (Imagine quicksand.)
Building up credit card debt is a lot like investing -- but in reverse. Whereas with investing your money grows, mired in plastic it shrinks. With plastic, you're paying out perhaps 15 percent to 20 percent annually on your debt. With investing, the stock market has historically paid you an average of 11 percent per year. (If you find and stick with some top-notch companies, you might even do better than that over the long haul.) Which scenario is more appealing?
Here are some credit card tips: Aim to pay off all your credit card charges in full each month. Charge only what you know you'll be able to pay off. If you're carrying a balance from month to month and are being charged high interest rates, renegotiate. You read that right. You can call up your card company and ask the folks there to drop your rate a few percentage points (perhaps to a more reasonable 9 percent to 12 percent). Tell them truthfully that you'll take your debt elsewhere if they don't cooperate. (They're certainly aware that most of us get credit card offers in the mail on a regular basis.)
If you're in too deep, you might exchange your high-interest credit card debt for lower-interest debt. Perhaps take out a home equity loan to pay off your card debt. Beware, though, of for-profit debt counselors (stick with nonprofits), and avoid credit-repair clinics.
For more information and guidance, check out the Surviving Debt section at www.nclc.org, and visit www.ftc.gov (clicking on Consumer Protection and then Credit). You can also pop into the Fool at www.fool.com/pf.htm to learn more about your options.
MY DUMBEST INVESTMENT
Popcorn and Handcuffs
Back in the '80s, a friend I was in a band with used to watch financial news. I knew nothing about that stuff, but soon I was borrowing his penny stock newsletter. I then opened an account at a boiler room whose brokers were later featured on the 6 o'clock news in handcuffs (no kidding!). Over the span of a year, I bought about four of those penny-stock Chihuahuas and lost about $750. The second-worst company in that rag was a company (I think it was called AmericaPop) that planned to blanket the nation with its popcorn stands. Of course, it failed and I was left with $50. Can anyone find a more apt metaphor for air-headed investing? -- S.A., Penny Stocks Anonymous
The Fool Responds: Yikes! You made a series of classic mistakes. Boiler rooms (small firms that typically feature young brokers aggressively selling risky stocks over the phone) are bad news, as are most penny stocks (stocks trading for less than $5 per share).
I was launched in 1963 with $5,000. Today I'm the largest direct seller of skin-care products in the United States, with annual sales topping $1 billion. My independent sales force is composed of more than 750,000 people in some 35 nations. My founder used the Golden Rule as her guiding philosophy, and encouraged employees and sales-force members to prioritize their lives: God first, family second, career third. (She's written several best sellers, too.) Today, I hold a 17 percent share of the men's skin-care market. Some of my top salespeople travel in something that Bruce Springsteen has sung about. Who am I?
Last Week's Trivia Answer: Based in Dallas and 26 years old, I'm one of the world's top restaurateurs, with more than 1,100 units. My annual revenues approach $3 billion. Under my roofs you'll find Chili's, Romano's Macaroni Grill, On The Border Mexican Cafe, Maggiano's Little Italy, Cozymel's Coastal Mexican Grill and Corner Bakery. My stock has advanced more than 500 percent in the last 12 years. Fortune magazine selected me as one of "America's Most Admired Companies." Who am I? (Answer: Brinker International)
THE FOOL TAKE
Circuit City and CarMax
Consumer electronics retailer Circuit City (NYSE: CC) is bullish on its future, due partly to its majority ownership stake in CarMax (NYSE: KMX). CarMax President W. Austin Ligon noted that "the CarMax used-car concept will continue to ... generate steady sales growth during an economic down cycle." For fiscal 2002, CarMax is expected to deliver about a quarter of Circuit City's earnings. That's an increasing slice of the net income pie.
CarMax has come under fire because its business isn't as attractive as the personal electronics industry. Growth has been slower and margins lower, while the operation has required significant debt financing. CarMax shoppers have come out of the woodwork lately, though, even as electronics retailers are reporting difficult times. CarMax is selling more used cars (it also sells new ones), propping up margins. Improved inventory management, especially during the most recent model-year changeover, has helped keep the choicest cars in front of customers.
Meanwhile, Circuit City is retooling its electronics operations, ditching its unsuccessful Divx initiative, getting out of appliances, and remodeling stores to provide a better shopping experience. These changes won't be done for a few years and will cost the company significantly in terms of both near-term results and actual expenses, but they were long overdue and should bode well for the company. In the meantime, CarMax seems to be pulling its weight admirably.