Friday, October 2, 1998

Urban Legends
by George Runkle ([email protected])

We've all heard of half-truths. This Fribble is about half-facts -- urban legends, if you will. Half-facts are a cross between a half-truth and an urban legend. Somehow they become believed by many, and unlike urban legends, many important decisions are made from them. Sadly, many things people go by in personal finance are half-facts.

Think about the last time that you heard an urban legend. They usually are pretty gruesome, like the one about the guy who gets a "surprise" in his bucket of fried chicken. Sometimes they are frightening, like the sheet that was going around warning parents about somebody giving children free LSD. Chances are the teller of the urban legend was sure it was true. Heck, he "knew somebody" who saw it personally. You couldn't convince him or her it was just a story. No matter how incredible the tale, the teller sticks to it.

Ok, now let's look at half-facts. My favorite is the "Microsoft was a penny stock" half-fact. True, if you look at Microsoft's split adjusted IPO price, and it's less than what you pay for bubble gum. That's the half-fact. The whole fact is that the price is split adjusted. The actual IPO price of Microsoft was $21 a share. Don't take my word for it, check it out on the company's site.

I was arguing this with somebody once, and I even showed him this site. He would not give in. The $21 a share that they went public at is "what they want you to believe," he said. Oh, so Microsoft lies on its Web site? All any reporter has to do is check out a newspaper from 1986 to check. Of course someone insisting on this half-fact will insist the newspaper is lying, too. What's the reason for this? I'm not one to delve in the psychology of believing, but it probably is because that person wanted to believe Microsoft was a penny stock. It's a way to justify buying penny stocks, maybe that company claiming to have the 6 million baud modem will be another Microsoft.

The next half-fact is that buying gold is a good investment. Now, I'm not one for criticizing any kind of investment other than penny stocks. I talked to some jewelers when I was in Abu Dhabi that speculated heavily in gold futures and the actual commodities. It was risky, and required a lot of expertise. However, as a buy and hold investment, gold has always been a bad investment. AH! Here comes the half-fact. "What about the 80s?" our half-fact promoter will ask rhetorically. It was a good investment, the price went up to $800 an ounce. I know, I bought it back then, watched it go up, and down, down, down. It now is around $300 an ounce.

Gold went up in those years on the "greater idiot" theory. Like a Beanie Baby, it really wasn't gaining in value. You just hoped the next guy was dumb enough to pay a higher price than you did. I wasn't that fortunate, I came out as the biggest idiot. Why? I didn't know anything about gold. Why was there a demand? I guess it was worth a lot. How far would it go up? Oh, a lot, I'm sure. In the end, gold wasn't really worth that much. A couple of hundred years ago, tulip bulbs had a similar run in value. They've never really come back.

There is the half-fact about tax deductions. Usually losses are deducted from your income, not your taxes directly. Yet people make decisions like they come off their taxes, thus costing nothing. "I can afford that house, that interest on the mortgage comes right off my taxes." People believe this, and I've seen people take out home-equity loans to "get the tax deduction." We can go on, there are half-facts about financial aid at colleges, how to buy homes, and how to do just about anything. The more usual term for these little snippets of stupidity is "common Wisdom." Isn't that appropriate?

Unlike urban legends, you can verify half-facts. It's easy, before you make a decision, do your own research. With tax items, check out the IRS publications. You can even go to their Web site at www.irs.gov. Do some research on your investments, and invest in companies that increase in value. Understand what you are buying and the strategy you choose to follow. Listening to somebody "who knows" may not have the same frightening consequences teenagers face in "urban legends," but the results could be expensive. I suggest you be a bit Foolish, and avoid the common Wisdom.

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