Discovering Ancient Cost Bases

You back again? Glad you could make it. The Sunday Fundy club is growing by leaps and bounds thanks to loyal readers like you keeping us primed with tasty and thoughtful questions to chew on. While not every query is a feast worthy of the public buffet (I end up answering a batch every week under the table if they don't seem to have general appeal), the overall quality of e-mails has increased dramatically over the last few months.

So keep them coming! Fundamental Questions is your forum, offering hard answers to your most pressing investment issues. We're just here to serve. And, as my flight instructor used to remind me after I narrowly avoided converting the plane into a crumpled ball of aluminum, "There's no such thing as a stupid question." Now, on to today's questions.

Looking for Ancient Information

My siblings and I are trying to understand the cost basis for 20+ stocks that our mother inherited at the beginning of 1987. Is there an online source that would tell us about stock splits and spinouts/acquisitions for companies like AT&T (T), Sears (S), going back that far?

Thanks -- Bob Weber

Bob,

Well, 'tis the season. Tax time. Every year starting in March brokers across the country get pelted with calls from impatient clients and CPA's looking for the cost on Grandma's mildewed Anaconda Steel certificates that she bought back in '53 and promptly stuck under a mattress. Thankfully, the Internet does offer some relief for the intrepid cost sleuth, but nothing I've found takes the place of good solid client record keeping.

For starters, I'd suggest checking out BigCharts.com. Enter your symbol and click "Interactive Chart." Next set the Time Frame to "All Data," and Upper Indicator to "Show Splits." The resulting graphic gives you a visual depiction of all the adjustments the stock has undergone in recent history (data on AT&T goes back to '85 and shows no splits during the intervening 14 years).

Another method is to use the site's "Historical Stock Quote" function accessible from the home page. Just enter your symbol and the date in question and it'll return the price of the stock in today's dollars (i.e. already split adjusted). Unfortunately, neither approach will alert you to any spinoffs that might have occurred like AT&T's recent Lucent deal.

From where I sit, your bigger challenge is going to be accounting for all the dividends you've collected and paid taxes on each quarter for the last decade. If you've been holding the stocks in a brokerage account, their computer system can probably compile that for you. If you've been holding the stocks in a coffee can buried in the backyard for all these years, the task is going to be a nightmare.

Unfortunately, I don't know of any sites that give a concise historical dividend record. So if any of you readers have any tips for Bob on finding that info online, e-mail me here and I'll post it next time around.

Crazy About Convertibles

Dear Andrew (Greta),

I am a really big fan of TSC and enjoyed your recent article on converts. Congratulations on bringing the Street jargon down to a level we peons can understand. Anyway, I am very interested in understanding more about how to hedge a convertible portfolio. You used the Amazon.com (AMZN) bond as an example of a recent issue.

I was looking at the calls on this stock and noticed that the March 140 calls are 4 3/8. Now, am I just crazy (or missing something) or what? If I'm correct, you could buy this bond (I think it's currently in the mid-90s) and write the March 140 calls for 4 3/8 (almost a 5% premium for 1 month!). You still have very little downside in your bond investment (if you're planning to hold until maturity and they don't default), and even if Amazon ran up tremendously after March expiration (say to $165), you could still convert and get the upside potential of the stock. Can you please explain the downside to me? I know it must be more complicated and risky than what I am perceiving, but I don't know enough about this to understand what I'm missing.

Thanks a lot for your help, and keep up the great work. -- R. Gainor, San Diego, CA

R. (Gainor),

Yes. You're definitely either crazy or missing something (OK, probably just missing something since TSC readers are undoubtedly the sanest, most rational bunch of people walking God's green earth).

Since convertibles have a sort of built in hedge already (see the previous piece on the subject), writing a call on them is totally pointless. Remember that a convertible is like owning a straight bond with a call option attached. Sell another call and the options cancel each other out leaving you with a straight bond. In essence, what you're doing is capping the upside on the convertible, which is the whole reason you bought the thing to begin with. Why go through the hassle? Just buy a straight bond and be done with it.

The Bottom Line on Margin

Dear Mr. Greta:

"This is a Fed Call," says the Schwab guy on the phone. I say, "whu?"...I think I say it two or three times. He says "it's not intelligent to use margin if you don't understand margin." "The nerve...," I bristle, deep-down sensing he's right. I ask him for educational material. He whines "Schwab doesn't have any, we're too busy most of the time, go away, go to a public library." Twenty-somethings find arrogance empowering, I tell myself. But that's not the point of this letter. My question to you is, do you know where I can find helpful reading material on the topic of margin loans? Our public library is sadly (and I'm being kind) underfunded. Anything on the Web? Any good books specifically? Thanks...(my 50 minutes up already?) - Alberto Fernandez

Alberto,

The short of it is that the young buck over at Schwab is right. You shouldn't be trading on margin if you can't tell your Reg T from your Fed Call (I've still got exactly 6 months until the big three-oh, so I personally intend to milk as much empowerment from my twenty-something arrogance as I can 'till I turn mellow and contemplative). I AM surprised however, that such a seemingly investor focused firm as Schwab couldn't manage to fire off a shiny brochure or direct you to a place on their Web site for more info. Maybe they ought to stick to the trade execution and let the specialists like TSC handle the educational issues.

Anyway, the bottom line on margin is that you're borrowing money from the brokerage firm (up to 50% of your assets) to buy securities. The benefits are that when your positions go up, you win big because of the power of leverage. On the downside, not only do you have to pay interest on that loan, but if the value of your positions fall below a certain level, you may have to pony up more cash (the dreaded Fed Call) or risk having the firm liquidate your stocks in accordance with the federal government's Regulation T.

A quick search turned up a few free sites with more information on the topic:

• E-Analytics description of margin trading;

• Ohio State Investor FAQ;

• I'd suggest you become intimately familiar with margin nuances before continuing to leverage yourself to the hilt. I only found one book that's still in print called Margin Power by Sheldon Zerden (4-6 week turnaround from Amazon.com). Who knows? It might be worth a look.

If you still need more info, let me know and I'll think about devoting an article to the topic. Good luck.

I'm off next week to coordinate my big move from the Midwest corn flats to the concrete canyons of New York City, where I'll be joining the TSC team full-time. Hopefully I won't get too jaded in the process. Keep those questions coming and we'll hit 'em on the 14th.

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