Archive for Sunday, January 27, 2002

Investors no longer should buy and forget individual stocks

January 27, 2002


Time was, an ordinary working American with a little money set aside could buy a blue-chip stock Ma Bell, for instance stick the certificate in a safe deposit box and forget it. Except when those nice dividend checks arrived every few months.

At least, that's how we like to remember it. But regardless of whether that really was a smart investing strategy 30, 40 or 50 years ago, it certainly doesn't seem to make sense these days.

Consider Ma Bell, or AT&T;: Last month it agreed to merge its cable TV operation, AT&T; Broadband, with Comcast Corp. Assuming the merger is completed as planned, which could take a year, AT&T; shareholders will receive 0.34 shares in the new company, AT&T; Comcast Corp., for every AT&T; share they own. (Comcast shareholders will get one share in the new company in exchange for each Comcast share.)

In other words, if you own 100 shares of AT&T; and keep them, you'll end up with both those shares and 34 shares of AT&T; Comcast. It's too soon to know exact numbers, but a big chunk of your old AT&T; investment more than half its value, perhaps will be tied to the fortunes of this new company, which will be run by Comcast executives you may know nothing about.

That's not necessarily bad, of course, but it's not something you could have considered if you bought AT&T; years ago.

And this is just the latest radical change at a company long thought of as a bedrock U.S. corporation.

In 1984, the old AT&T; was broken up, leaving each shareholder with holdings in eight different stocks, ranging from the AT&T; long-distance carrier to Bell Atlantic, Southwestern Bell and five other local phone companies.

Whatever judgment one had made in purchasing the old AT&T;, it was out the window with the breakup. The investor's fortunes now were tied to a gaggle of companies, each free to pursue its own strategy, each in a radically different marketplace.

Then in 1996, AT&T; spun off Lucent Technologies, its research arm and equipment maker. Suddenly, nearly a fifth of one's AT&T; holdings were tied to the fates of another new entity. (The company's NCR unit also was spun off that year.)

The Lucent deal didn't work out very well. Since the spinoff, Lucent has given shareholders losses of about 40 percent, while AT&T; has lost about 5 percent.

Meanwhile, the average U.S. stock has soared. The Standard & Poor's 500 is up about 72 percent since late 1996, despite all the troubles of the last couple years. What about those old-fashioned investors who wanted to collect dividends? Well, those are going the way of the dodo. Lucent's dividend was discontinued in July. AT&T; now pays less than 1 percent a year. The average dividend yield for S&P; 500 companies is a paltry 1.3 percent. You'd do better in a savings account.

Today, buying a stock is no longer done just to share in profits paid out as dividends; buying a stock is a bet its price will rise, and this is a much riskier game, since prices swing more wildly than dividends do.

Financial advisers are in the habit of touting the benefits of the buy-and-hold strategy. It minimizes commissions and other trading costs, and it allows investors to control the timing of capital gains taxes, which are triggered only when a holding is sold.

That all makes sense on paper, but in real life events can intervene. The AT&T; shareholder of the early '80s who never evaluated his holdings might be pretty unhappy today. Had he been on top of things, he might have unloaded those Lucent shares late in 1999, when they peaked at nearly $80, rather than sticking by them until they fell to today's level of about $6. He might have dumped AT&T; when it was near $50, rather than ride it to today's price of about $18.

Of course, selling at the top would have meant triggering a big tax bill, perhaps at an inconvenient time. And then the investor would have had to find someplace new to put his money to work. But only a fool would deliberately ride a downturn just to postpone taxes.

So forget the idea of controlling tax bills by holding for the long term. Events may intervene.

Owning AT&T; for the long haul also would have created a record-keeping nightmare. To calculate the tax on profits, the shares' original purchase price would have to be adjusted to account for a 3-for-1 stock split in 1959, a 2-for-1 split in 1964, the 1984 breakup and the 1996 spinoffs of Lucent and NCR.

To further complicate things, one who bought his initial shares long ago might have bought additional shares at various prices over the years with reinvested dividends.

(The only easy way to avoid the tax-calculation nightmare is to die. That way, your beneficiaries only would have to know the share prices on the day you departed, since that's the tax basis for inherited assets.)

So, does the AT&T; case prove it's foolish to own individual stocks? Not at all. If you spot a promising stock, go for it.

But AT&T; does illustrate the hazards of buying and "forgetting." Owning an individual stock, even a famous blue-chip issue, means taking on a research and management chore that will continue until the day you sell.

If that sounds like too much of a headache ... well, that's why they make mutual funds.

P.S. If you are a long-suffering AT&T; shareholder and need to do all those nightmarish cost calculations, the company has a set of calculators and tables at its Web site, I won't promise it makes the work easy, but it makes it possible. Cheers.

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