Wednesday, July 26, 2017

Should You use Bathfitters?

From rusty old cracked tub to shiny-new, all in an afternoon!  For such a low price!  Should you use this type of technology?  Maybe.  Maybe not.

A few months back I was in a hotel room and on the television were saturation ads for Bathfitters.  The premise was that you could call them, and for not a lot of money they would come out and redo your bathroom for very little money.  Note that there are many companies offering the same or similar systems, so I am not picking on one company here, but reviewing the underlying technology.

What they do is cover up your old tub and tile with a plastic (acrylic) enclosure and then install new fittings.  It makes it look shiny and new and contemporary, in a very short period of time (often within one day).    No hassle of sledgehammering up old tile and backer, removing rusty old tubs, struggling with old plumbing, dealing with dust and mess.   And it seems to much cheaper, too!

But while you are paying a lot less, you are getting a lot less, too.  Merely covering up old tile and tubs isn't the same thing as replacing them.   You are basically forestalling the inevitable, instead permanently fixing it.  And if not done right, you might be just wasting money.

I was in another hotel room where the hotelier had tried to use a similar technology (I have no way of knowing whether it was Bathfitters or a knock-off).   The tub was covered with a plastic layer, and the tile had a plastic enclosure put over it.   The problem was, somehow water got between the plastic tub liner and the original tub, forming a layer much like a waterbed.  It was kind of creepy to stand on, and the idea that there was stale old bathwater under there kind of creeped me out.

It got me to thinking as to what would happen if water got behind the plastic on the walls.  It might cause the whole thing to fail, over time.

This video shows how the tub "liner" is installed, with adhesive and butyl tape.

There are cheap ways to improve the look of an older bathroom.   A neighbor of mine had his tile epoxy-painted, which made it look new.   It was for the guest bathroom, so it would not be used often.   Our guest bath is original 50-year-old tile and tub, and still looks new - as it was rarely used.   Those old tile installations were done properly.  They would put up chicken wire on the walls, put on a layer of concrete, and then install the tile.   Today, they put up tileboard, which is like waterproof sheetrock, and then tile over that.  It works well, but since it is not a solid as concrete, it may be more prone to cracking over time.

The problem with the bathfitters type solution isn't that the technology is bad, although an improper installation can be problematic as I noted above.   The problem is, the pricing.   Since overhauling a bathroom can be so expensive, this "solution" seems so much cheaper, because it is less than half the price.   But even at half-price, it may be far more than it is worth.

The other problem is, after 30, 40, or 50 years, it isn't just the tub and tile that are wearing out.  Odds are you plumbing is shot as well.  The water lines, valves, drain lines, shower head, and whatnot are all ready to be replaced.  And some of these things can't be replaced without removing the tub.

Odds are, too, that the vanity and toilet are probably ready for an overhaul, and the tile on the floor is worn and cracked.   So yes, these bathfitter-type solutions may work for your tub and enclosure, but still leaves the rest of your bathroom to overhaul.

And while it may cost more money to do a complete overhaul rather than a cover-up, I think the additional "value" a bathfitter-type cover-up adds to your house is minimal.   In fact, if I was a home buyer and saw one of these cover-up type deals on a tub and enclosure, I would wonder, "Gee, what's underneath this?"

Remodeling, as I noted before, at best returns 50 cents on the dollar in terms of resale value.   But I suspect a cover-up job returns nothing.   It may, however, make the house look more presentable and salable, of course, unless like with me, it raises questions as to what else is being covered up.
Would I do a bathfitter-type remodel of a bathroom?  It is hard to say.  I would cross-shop with other, similar companies (if you watch the YouTube video above, you will see there are competing company's videos in the sidebar) and beat them up on price.   A new bathroom might cost $30,000 to install. That doesn't mean these types of cover-up jobs are a "bargain" at half the price.  I suppose it might be a good way to update a worn-out guest bath.

What really would deter me, however, was the fact that these systems are advertised on television using saturation advertising.   TV ad time costs a lot of money.  There are no bargains advertised on television.   And anything hyped on TV is no real bargain.

Tuesday, July 25, 2017

Why is Chipotle Stock So Overpriced?

Why do people only look at share price when investing and not fundamentals?

The press has been gleefully reporting more setbacks for Chipotle Mexican Grill.  The latest is a viral video showing mice dropping from the ceiling of one location.   Earlier this month, at least one or two people were sickened by the Norovirus, usually something you see on cruise ships.

Coming in the wake of the major E. coli outbreak they had a couple of years back, you wonder why anybody would want to eat there.  I remember when a Chipotle first opened in Old Town Alexandria.  I believe at that time they were owned at least in part by McDonald's.  We went once, and never went back.  It really isn't Mexican food in my opinion, but rather burritos the size of your head.  This is what Americans think Mexican food is like.

You get this burrito thing which is almost the size of a football and it's on a plate and you have to cut it apart with a knife and fork.  You can't pick it up and eat it like a real burrito.  When you try to eat it with a knife and fork, all the stuffing comes out, and you're basically just shoveling this goop in your face - and it's not very appealing or tasty.  It's not even eating.  It's just fueling your body with stuff. But Americans like that kind of crap, I guess, and they've never actually been to Mexico so they don't know what food is like there.

But for some reason Chipolte stock has been really popular, particularly with amateur investors.  I'm guessing here, but I believe that the sort of people who sit on the computer all day and trade stock tips are the same kind of people who eat at Chipotle Grill.  You know, severely overweight IT types we're going to "make it big in the stock market" by stock picking, but for some reason, that never quite works out.

That must be the explanation, because I can't figure out for the life of me why Chipotle Mexican Grill stock has a P/E ratio of over 100.  And yes this is even after the stock took a nosedive after the mouse and norovirus incidents.  This is also years after the E.coli nightmare was cleaned up.

In case you were wondering, a P/E ratio of 100 is staggeringly high for a restaurant chain.  It means you have to wait over a hundred years to make your money back on Chipotle stock.  A pretty standard rule of thumb is a P/E ratio should be around $20 for most traditional Industries, this represents about a 5% rate of return on your investment.

The few exceptions might be in industries which are expected to grow exponentially very quickly, in which case the market is buying ahead of itself, proceeding that the company question has potential for huge growth.  Maybe some "dot com" company can get away with a P/E ratio of 100 or more, if it looks like they will expand by a factor of 10 in a few years.   A restaurant chain?  Be serious.

Given the crowded nature of the fast food and fast-casual dining, there's a lot of competition in this marketplace.  There are many other restaurants like Chipotle, including local chains and Mom-and-Pop shops.   We have a local chain here that is a clone of Chipotle, right down to the head-sized burritos.  The barriers to entry are low, and there is no protectable IP.  Anyone can make a burrito, there is no Patent on it.

In order for Chipotle stock price to make any sense, would have to increase in size by a factor of five, and that doesn't seem likely even if we didn't have the ecoli norovirus in mice incidents.

Failing spectacular growth, they would have to increase the profitability by a factor of five.  Or maybe they could slash prices to the bone, pay their employees in burritos, and raise prices through the roof, to achieve a P/E ratio at least less than 50.  But it doesn't seem like the profitability of the company is going to increase anytime soon - certainly not by a factor of five.

Compare Chipotle's stock price that at Mcdonald's. Or more precisely their P/E ratios. McDonald's has a P/E ratio that is somewhat high at 28, meaning you have to wait 28 years to make your money back. It also means that it's earning about 4% every year, which is pretty respectable, particularly compared to Chipotle.

Then consider dividends, or the case of Chipotle the utter lack of them.   They think their stock price is such a great deal by itself, there is no need to pay back shareholders:
Dividend Policy
We are not required to pay any dividends and have not declared or paid any cash dividends on our common stock. We intend to continue to retain earnings for use in the operation and expansion of our business and therefore do not anticipate paying any cash dividends on our common stock in the foreseeable future.
That's right, Chipotle pay no dividends whatsoever, whereas McDonald's currently cranks out about 2.44% in dividends and has a long rich dividend-paying history.  This means McDonald's is paying out more than half its earnings and dividends, which means the shareholders are being rewarded for the profitability of the company.

Chipotle is acting like it is some sort of dot-com tech company, instead of one of the most traditional of industries around - the restaurant business.   Restaurants are businesses of thin margins, regular profits, and predictable performance.   Chipotle is acting like it is Uber and that growth alone will sustain it, and the need to make profits or pay dividends is secondary.  That strategy may be backfiring.

And you have to ask yourself, why would they do this, and why do articles appear hyping the stock price?   Well, one explanation might be that some of the key employees might be paid in stock options, and thus have a motivation to keep the stock price sky-high.

So ask yourself this, if you are a Chipotle shareholder.  Where are you going with this?  What do you think is going to be the payoff for Chipotle?  Are they so flush with cash that the company is worth what the stock says it is?  Or is somebody else going to buy out the company and pay this outrageous price for it, even though it's not very profitable?  Or do you really think it's going to increase in profitability by a factor of five sometime in your lifetime?

Why would someone think this stock is worth over 100 times its earnings?  Oh, right, the financial press.  Online websites abound which offer stock "analysis" that amounts to little more than speculation.  Take for example, this "article" on "investorplace"
When I last discussed Chipotle, the technical expectation was bullish. The anticipation was that a smaller, first-stage weekly base would continue to hold support and resolve itself with a clean breakout above $500.

That was on May 8. As is apparent on the provided daily chart, CMG stock failed to comply.

Over the past few sessions, conditions have become increasingly grave for shorter-term traders as shares  broke below a fairly decent-looking hammer candlestick. [wtf?] More important in our view is the $425-$430 area — a critical support area for the current uptrend, and one that remains intact.
The highlighted words sound so technical and smart, yet they mean absolutely nothing.  The article is accompanied by a chart of the stock price, with lots of lines drawn on it.  No mention is made of profits, dividends, P/E ratios, or any other metrics.  Just stock price.   Read the entire article - it is gibberish.   What the author is saying is that the price should go up, just because of momentumOh, and because of a 2-for-1 burrito offer.

Note also, that this fellow seems to be suggesting leveraging yourself to make a "play" in the stock - using derivatives (going long and short).   This is very risky investing for the amateur.

People read gibberish online "stock reports" and bid up the prices of stocks into the stratosphere.    And in this case, that is exactly what happened to Chipolte stock.  In the last few years, the price has been bid up from $75 a share to $750 a share, for no apparent reason whatsoever.   And as the price has spiked so has the P/E ratio, form a more modest 29 to an outrageous 500, before settling down to the 103 we have today.   This looks like a classic example of a bubble, as it is too drawn out to be a pump-and-dump.

Granted, profits in the past were pretty good, but back then, the P/E ratio was at least rational.    The relationship between share price and profits seems disconnected.   And this tells me that people investing in this stock are not looking at anything but share price.

And sadly, this is how I invested when I started out, listening to idiotic advice like this, and trying to divine something about a company based on its stock price chart.   You have to look at the fundamentals.   You can't divine what a company is worth based on its price history.  A place that makes burritos is not a gold mine.

Or maybe you just bought the stock because you like the burritos, never really thought much about price-to-earnings ratios, dividend yields, or where the company might be headed.  And well it might seem there's a Chipotle on every corner near the tech sector of every large city, there really aren't as popular across the country as other fast food and fast-casual chains.

One of the biggest mistakes I made early on in investing was to buy stocks and companies because I liked their products.  And this is very typical, I think of a lot of young people.  We buy stocks in things which were familiar with because it gives us a level of comfort.  But we don't think about the basic financial soundness of the company involved.  A company could make a great product and still be headed for bankruptcy, or at the very least, be overpriced.

It doesn't take but a few people to bid the stock price of any company through the roof.  This doesn't mean the majority of the market thinks the company is worth that, only that a few people are willing to pay that much, and  a few more are unwilling to sell.

And it first, a fast food company might seem like a pretty safe bet, is they are making products and selling it and us are making profits and have very low risk of going bankrupt.  But as Chipotle is demonstrated three times now, unforeseen incidents can cause huge disruptions in their business.  The e.coli thing took at least a couple of years to die down - and profits really never recovered from that.  I think these latest incidents, particular the mouse one, will probably take at least 6 months to a year for sales to recover to even post e.coli levels.

And of course, it could just be that football-sized burritos are no longer a "thing" - the landscape is littered with the skeletons of fast-food chains that peaked and died, as people lost interest.  I miss Little Tavern.

But even assuming they could overcome these latest setbacks, the stock is still wildly overpriced.  It's P/E ratio is in tech territory, but it doesn't have the potential logarithmic expansion that some tech companies have.   Burritos are not tech. 

It just makes no freaking sense whatsoever.  And when things doesn't make any sense, one of two things is going on.  Either I'm too dumb to figure out what's going on, or maybe I'm smart enough to see that what's going on is idiotic.

Monday, July 24, 2017

Guru Books? Beware!

Should you look for investment advice in a book? Probably not.

A reader writes, asking whether I know of a good book on how to invest your money.   I am not sure how to respond to that.  I think he is still searching for the "sure thing" or the quick, easy money.  I get a lot of inquiries from people who see my blog but never really read it and understand it, and they want to know how to make a lot of money in a short period of time.

Sorry, wrong blog.   And the ones promising you that information will cause you untold heartache.

The majority of the money you end up with in retirement will be the money you set aside - the money you save.   The best basic "investment" advice is to put as much aside as possible.   The idea that you can invest a buck and turn it into a million bucks is just not feasible or probable.   You have to save heroic amounts of money.

But, everyone wants shortcuts.  They don't exist.   If they did, no one would tell you about them in a book.  People think they can "invest" a few hundred or a few thousand and become millionaires, as if a fully-funded retirement is something you can buy for not a lot of money.   It just ain't so.

This is basic common sense - logical thinking versus emotional thinking.

I've perused a few of these investment "gurus" and found them lacking.   Suze "Sooze" Orman, for example, started out saying what I have said all along - spend less, save more, diversify your portfolio, and wait.  Time is on your side.  Good Advice.

Then she became a spokesperson for Buick and Sea Ray boats, and then got a TV show where she "approved!" people to buy shit.   And it all fell apart.  She went for the money because, I think, she realized that people desperately want to believe the emotional theory - that you can "have it all now" and somehow leverage investments.   No one wants to hear about the drudgery of cutting expenses and counting pennies.   No one.

And you can't blame her for seeking personal gain.   The powers-that-be want you to spend money on a leased car, or a new boat, or a cell phone plan, or cable television.   They don't want you accumulating wealth and becoming independently wealthy.

Oh sure, they want to you pretend invest by buying stock in an IPO that friends of theirs are running.   The shouting guy wants you to BUY! and SELL! on his command, like you are a Pavlovian dog.   You will go broke this way.

I have been approached - twice now - by a "reality" TeeVee show that wanted to have "stingy" people on their program.  They wanted kooky people who annoyed their families with their stinginess.   You know, saving dryer lint to knit a sweater - that sort of thing.   Of course, they wanted to make saving money and cutting spending look like ridiculous things to do.

Gee, I wonder why?   "We'll be right back to 'Crazy Stingy People' right after these messages for leasing new cars, refinancing your house to pay off credit card debt, and a fun new miles rewards credit card!  Stay tuned!"

Oh, right, that.   The TeeVee, which I rail against, is full of horrific messages.  And most of them are along the lines of "we're all victims here, living paycheck to paycheck!  The only way to get ahead is by extreme couponing or buying your Abercrombie shirt on sale!   If you just shop enough on Amazon, you'll be wealthy!"

In other words, just give up on saving and spend it all now.   And I get that from a lot of readers who think I am crazy (why do they keep reading, then?) and that you can "score" with a car lease, and you should mortgage yourself up to the hilt and then invest in dot-com stocks.

I had a friend who did that - he tried to kill himself later on.

I saw a book from Dave Ramsey once in a supermarket.   I was reading it and thought, "Well, this guy gets it!"  And like the Sooze, he had  some good advice, save your money, pay down debt, invest in rational things.   It all sounded so good until I hit chapter 3 and he started talking about how much to tithe to a church.   He said 10% of pre-tax income was a "baseline" and that selected "gifts" on top of that were expected.

I put the book back on the shelf.   I leaned later that he gives seminars at churches, who pay him to tell parishioners to tithe to their church and not the evil Gods of Mastercard and Visa.   My advice is more to the point - tithe to no one but your own self.   And no, this is not "selfish" it is a matter of survival.   Moreover, we don't need more victims in the world, so you do me a favor by taking care of yourself, as much as you do yourself a favor.  If you get your finances in order, you are one less person I have to support with my tax money.  Let me thank you in advance.

You see, there is no "trick" to investing or getting ahead.   It is basic logic.   You can't spend your way to success.  When you decide you need a fancy car and a fancy kitchen and an oversized house, you are bankrupting your future.  There is no way out of this other than to shed the material and use that money to provide for your future.

"But Bob, isn't there a way I can still have a new iPhone 8, granite countertops, a new leased Acura, and still make money in the stock market?   What if I buy all these new IPO stocks, surely I can get rich and have all my toys, too!"

You haven't listened to a damn thing I have said, have you?

Getting ahead requires sacrifice, not indulgence.   You can have a Jet-Ski or $8,000 more in your IRA.   You can't have both.   You have to learn to do without, and that is the hardest thing to do.   And no one wants to hear this, hence it doesn't appear in investment books or seminars or on the TeeVee.

The idea that there are "secrets" to making money is just idiotic.   And again (and I have repeated this so often, I sound like a broken record) if there were such secrets, no one would ever tell them, as then they would no longer be secrets and no longer be effective.

"But Bob!" a reader writes, "Maybe he wants to tell others these secrets to help his fellow man!"

No, people really think this way.  Some days, I feel I should just give up.

A Hedge Fund manager recently promoted an underling to run his fund, paying him $250 Million dollars.  Why did he do this?  Because he felt this 34-year old had the secret to making money.   If he felt he could get this information from a $39.95 seminar or book, he certainly wouldn't be paying him all that money.   And the hotshot kid ain't selling his "secrets" if indeed he has any, in some stupid book.

People want to believe in the tooth fairy.   And if you want to believe, that's fine.   But don't expect me to validate belief-based investing.  It is emotional thinking, not logical.

There is no big secret to wealth.   Spend less, save more, put money aside in a plurality of rational things, avoid hyped and promoted investments, invest for the long-haul.   You will do OK in the long run.

That has always been my rational message.   If you are looking for something else, you are barking up the wrong tree!

But then again, I guess if the TeeVee people offered me a million bucks to tell people they're "Approved" to buy a Jet-Ski, I would probably go for the money.

So, fuck it.  Buy nothing but IPO stocks!   Lease a new Acura!   Buy that mini-mansion - you'll get a huge tax deduction!   Leverage yourself with as much debt as you can handle, because the more debt you have, the wealthier you are!   Tax deductions are the key to success!   Buy more - the more stuff you buy "on sale" the more money you SAVE!  It all makes sense now!  What the fuck was I thinking?

Mea culpa!  The American way of debt is the only way to live!

The sarcasm light is ON.

Why I Don't Own an Airplane

Owning an airplane is a major commitment of time, energy, and money - and not something you can do part-time.

At one time, I was quite the airplane enthusiast.  We used to go to Oshkosh every year, as well as Sun 'n Fun in Lakeland Florida, to see all the airplanes.   And it was interesting in that you would see everything from commercially manufactured planes, to kit planes, homebuilts, ultralights, antiques, warbirds, and whatever.

And for a brief time, I thought about getting my pilot's license and maybe buying an airplane.   But I never did and it is not hard to understand why.   It is a major commitment of time, energy, and money, particularly the latter.  It is not something you can dabble in, part-time, and expect to live very long.  And if you decide you want to fly, well, it kind of has to be your life.  And if you do this, you have to live in an area where it is easy and inexpensive to fly.   You can't tie down your Piper Cub on the apron at National Airport.   You basically have to live in the country.

Flying lessons is the first hurdle.   Getting your private pilot's license is an expensive and time-consuming process that can cost thousands of dollars.  Not only do you have to hire an instructor, but you have to pay for use of the airplane and pay for fuel.  And you will have to take these lessons regularly, plus learn everything out of the book, before they will let you solo.   Oh, and you have to visit a doctor and get a medical certificate.

Once you solo, it isn't over.   You have to "stay current" by flying every so often, which means you have to make time in your schedule and fly, and if you don't own a plane, renting one.   Again, if you live in a big city, this is hard to do, as you may have to drive an hour or two to a rural airport, outside the restricted airspace of large cities.

And it doesn't end there.   So far, all you have is a "VFR" or "Visual Flight Rules" license that allows you to fly on nice clear days where you can see what is going on.   The problem is, of course, not every day is a nice clear day.   You may want to fly at night, or in overcast conditions.   Or worse, these conditions may occur when you are flying from point A to point B, and you may find yourself in a lot of trouble.  "Instrument Flight Rules" or IFR requires an entirely different skill set, and you can't fake it.   One of the largest cause of accidents in general aviation every year is VFR pilots flying into IFR.   "Spatial Disorientation" occurs, and they stall the plane and auger into the ground.

So, back to school for IFR lessons, and if you want to fly IFR, you need an IFR equipped airplane, which is going to cost more to buy, rent, or own a share of.   You see, VFR is fine and all, if all you want to do is drive out to a rural airstrip, rent a plane, and take it up to see the sights.   But that kind of gets boring after a while.   You want to go somewhere in your airplane, not just fly it in circles.  And while it is possible to fly to a neighboring town for the famous "$50 cheeseburger" (the actual cost, with plan rental, fuel, etc.) this isn't the same as traveling by air.

Now, if all you want to do is fly in circles, there is a new form of license available called the "Light Sport Pilot" which is easier to get.   For the medical, all you need is a driver's license.  The training is less onerous and the requirements to "stay current" are less as well.   But again, this allows you basically to fly a small plane in circles around a rural airport, or perhaps to a nearby airport.   It really isn't meant to be used for people who want to fly cross-country.
And "staying current" is important.  Inexperience or rusty skills also kill a lot of people every year.   So the idea you can get a license and fly once or twice a year is kind of flawed.   And yet a lot of people try to do it.   I am just not so sure I want to be one of them.

So far, we haven't even talked about buying a plane.  Now it gets really expensive.   Some folks tell me, "Well, Bob, you can find an older plane for about the price of a car!" and that is true, but often we are talking about pretty expensive cars.   And the problem is, unlike a car, you have to take your plane in for an "annual" inspection where the mechanic - who has zero incentive to not find something to fix, will often tell you that your plane needs a lot of work, perhaps an engine overhaul, and suddenly you are spending more on maintenance in one year than you paid for the airplane.

Again there are workarounds for this, as there are ultralights, homebuilts, kit planes, and Light Sport Aircraft that skirt some of these rules.   But again, many of these planes are not suitable for transportation but merely for flying around the pasture.

If you really want to travel by airplane, well, you'd better be ready to pony up a lot of dough for a fast airplane that is designed for travel.   And such planes are a lot harder to fly as they often have higher landing speeds and stall speeds.   You'll need to go back to school again to learn how to fly a high-speed, twin-engine, retractable gear aircraft.  And yes, multi-engine requires a new endorsement on your license.

So you see, this becomes a real commitment.   And even if you have the go-fast plane, you aren't going all the fast.  Because as you putz along at a couple hundred miles an hour, watching the cars below you travel at ant-like speeds, far above you is an airliner traveling twice as fast.  Maybe that's the ticket - a personal jet!

Few can afford the rarefied air of the personal jet.  And despite the promises of the past, it doesn't look like the low-cost personal jet will be a reality anytime soon, or at least one that will allow you to fly with "the big boys" and go coast-to-coast in a few hours.   And even if you could afford a jet, well, you guessed it, its back to school for a lot more difficult lessons.
The other problem with owning an airplane is that machinery doesn't like to sit.   Whether it is hobby cars, motorhomes, boats, or airplanes, often the worst thing for any piece of equipment is to have it sit idle.   An airplane parked on the ramp will fade in the sun and acid rain.   Fittings corrode, things degrade.  Insulating on wiring becomes brittle in the heat.  Tires dry-rot. Birds build nests in the engine compartment  - and wasps to as well.

Worst of all, in any internal combustion engine, when stopped, at least one cylinder has an open intake valve and another has an open exhaust valve.   So in moist, humid environments, rust can form on the cylinder wall.  Not a lot, but enough.  Iron oxide and aluminum oxide are incredibly abrasive - it is what they make sandpaper from.   Moisture in the crankcase (most small aircraft have crankcases vented to the atmosphere) can corrode the camshaft.  Yes, hangering your aircraft will help avoid some of these problems.  Running the engine regularly is the best preventative medicine.

We have a friend who kept an airplane in Michigan so they could fly to an island they had a cottage on.   It always disturbed me that he was flying (at well over 70 years of age) an airplane that sat in a hanger, unused, for six months of the year.   Trying to stay current with your license in that scenario is tough (eventually he lost his medical).  Trying to keep an airplane in good running condition with such intermittent use, is also difficult.

As with cars, you are paying a lot of money to own something that spends most of its time sitting.   Some folks, to cut the cost of flying will go into together on an airplane in a "flying club".   My Brother-in-Law does this and initially it was a good deal.   The older members had lost interest (a pattern we shall see later) and he got to fly this airplane a lot.   Of course, several of his flights were to neighboring airports to see mechanics for repairs and upgrades.  Some fun.

But he enjoyed flying the plane, although it was more just flying in circles than actually going anywhere.   Oh, and his wife wanted little to do with it.   If your wife doesn't want to fly with you, the deal is essentially off.   The most successful pilots in General Aviation have spouses that are as enthusiastic about flying as well.

So, given all this, why do people own planes or fly for recreational fun?   Well, that is the problem right there - fewer people are doing this today, even as the population has increased.   Owning your own plane and recreational flying is something that really came into being after World War II, when many returning GI's had learned to fly courtesy of Uncle Sam.   There were a lot of surplus aircraft to be had, and the factories that had churned out fighter planes now turned their hand to churning out General Aviation aircraft.  These were the golden years for Piper, Cessna, Grumman, Luscombe, Stinson, Champion, and a host of other smaller manufacturers.   And many of the planes flying today are from that era still.

By the 1960's, the market had been reduced to a few players.   Sales were still going strong, and many a small businessman would buy an airplane on the grounds they could use it for "business".   It was, of course, a luxury and having the business buy it made it a neat tax write-off.  But as time progressed, the cost of airplanes skyrocketed.   Litigation was partially to blame.   Like I said, many of the planes from the 1950's, 1960's, and 1970's are still flying today.   Since planes are so expensive, they get rebuilt time and time again.   Every small plane that leaves the factory basically is kept flying until it crashes.  Few are "junked" as cars are.

And when a plane crashes, the widow sues the manufacturer, who built the plane a half-century before, claiming a "factory defect" in a plane that has been overhauled and rebuilt four times in its history.   Since every small plane's life will eventually end in a crash, the lawsuits are built-in.   And the plane manufacturers had to put the cost of the lawsuits into the cost of the planes.   Prices skyrocketed and many companies, such as Cessna, decided it wasn't worth it to make planes anymore.

A Statute of Repose was passed by Congress, limiting liability on new aircraft to a number of years.  Manufacturers were no longer liable for crashes of planes they made decades ago.   Cessna went back into production.

But crowded skies, urban living, and the high cost of training and staying current, as well as the high cost of aircraft, maintenance, and fuel, has kept a lot of people from getting into flying.   And let's not forget, the middle-class is shrinking today, leaving people with a lot less money to spend on things like airplanes and other hobbies.  More and more small airports are closing, leaving aviators with fewer places to learn to fly and to keep their plane.  It remains, for the most part, a rural hobby.

When I was living near Washington, DC, the nearest place I could fly a private plan was in Manassas.  So I would have to drive at least an hour each way to go fly for a few hours.   Not only was this not practical, I was kind of busy at the time - starting my own law practice and buying and re-habbing rental properties.  It sort of took up most of my life.   In addition, I was tinkering with some old cars and had an RV.   There wasn't enough time in my life to do everything and flying an airplane is something you don't want to do half-assed.

As I explained to Mr. See, you can be Mr. Hobby Car, or Mr. Motorhome, or Mr. Recreational Boater, or Mr. Airplane.   But you can't be all of them - and indeed, to be even two of them is more than most people can handle.     Toys, when neglected, will bite you on the ass.   Like I said, machinery doesn't like to be left to sit.

When we bought our boat, I told Mark we had to sell the motorhome.  He couldn't understand why.  Can't we have a motorhome and a boat?   Yes, that would be nice, but the reality is, of course, that if you are spending each weekend on the boat, when do you use the motorhome?  There is such a thing has having too much, as I found out the hard way.

Today, I live in an area where a small airport is within walking distance of my house.   The guy who runs the airport, a Delta pilot for many years, has even offered to give me flying lessons.   I could probably afford to own a small plane and fly around the patch, or even a larger plane that might take me to Florida or the Carolinas.    And maybe someday, I will take him up on his offer.   But Mark isn't that keen on it, and spousal support is essential in any endeavor.

And besides, he wants to get a boat.  And you can't be Mr. Boat and Mr. Airplane, it just won't work.   Well, you could try to make it work, but it won't work out well, and a neglected airplane and neglected flying skills could kill you in short order.

If you live on a farm, ranch, or in some rural area, or maybe a fly-in community, it is a lot easier to commit to flying on a regular basis.   But for the vast majority of us, it just isn't a workable part of our lives, which is a shame, as flying in a small plane can be exhilarating in a way that jet travel is not.

You have to really be an enthusiast, I believe, to own an airplane.  You can't be a dilettante or a part-time pilot.   If you really want to learn to fly and spend a lot of time flying, then maybe get a job flying airplanes.   A friend of mine did just that.  He always wanted to fly airplanes, so he went to Embry-Riddle, learned how to fly airplanes, built up his time and is now flying freight for FedEx.   He gets paid to do this, and someone else has to deal with the cost of the airplane and maintaining the engines.   As he puts it, he gets paid to do something he would have done for free - or paid to do.

Sunday, July 23, 2017

Bank AmeriDeals and Online Couponing

Why does Bank of America want me to click on these "deals"?

One of the strangest online offers I get on a regular basis are BankAmeriDeals®.  Since I have account with Bank of America and one of their credit cards, they're constantly sending me emails telling me I have all these great deals waiting for me.  They really are not so great.

If I go to the website, and click on the correct tab, there is a list of these deals presented as a number of icons as shown above.  The deals are usually 10 to 15% off for various retailers such as Starbucks, 1-800 Flowers, AutoZone, Ruby Tuesday's, Hilton, and something called Stitch Fix, whatever that is.

In order to get one of these deals, you must check off the box on the corresponding on the list.  There is no cost to you for checking off a box (nor does it obligate you in any way), so you can check off as many boxes as you want, or just all of them.   So initially, I was puzzled as to why they made us go to the website and check off these boxes on the deals we wanted, instead of just automatically offering us these deals.

And then I realized this is an example of incidental discounting.   Incidental discounting occurs when you offer a discount as an incentive to attract new customers, and one of your old customers obtains the discount as a matter of course.  You are not optimizing your overall income from each transaction.  You are giving a discount to someone who would have paid full price.

As we learned an economics class, in a perfect theoretical retail environment, each customer pays what they feel a product is worth. Thus, Mrs. I.M. Gottrocks will pay $500 for a new widget and think it is a good bargain.  Meanwhile Larry Witetrash will pay $100 as that's all he can afford.  If each person pays the maximum amount they feel is appropriate, then you sell as many widgets as possible and maximize your income stream.

It is like the situation with outboard motors as I noted earlier posting.  Back in the day Johnson used to make a V4 two-stroke outboard offered it in 3 horsepower sizes, 85, 100, and 115 horsepower.  Each engine was the same exact size externally the only difference being changes in bore and stroke and carburation.  The parts cost and assembly cost were identical. And yet the hundred 15 horsepower model sold for an awful lot more than the 85 horsepower model.

And this struck me as odd, as a young man, because I wanted the 115 horsepower model, but wanted only to pay for the 85 horsepower model.  But what was explained to me, was that they're not selling engine parts, they're selling horsepower. And when I was working at Carrier we had the same situation with industrial chillers with different capacities.  The parts count and components were largely the same, and the costs were largely the same.  However we were not selling blocks of iron to our customers we are selling tons of chilling capacity and if you wanted more chilling capacity paid more money.

Thus, there is this entirely irrational relationship between the price of things and the cost of things that most of us don't realize.  As consumers we think that larger things should cost more, smaller things should cost less, even if they both cost the same to make.  But not only that, we all expect the same pay the same price for goods in an egalitarian democratic society.  However from an economic point of view, it makes a lot more sense to sell rich people things at a higher price and poor people at a lower price.

And if you read that last sentence very carefully, you'll see one the keys to getting head in America as a middle class person.  Live what I call the Walmart lifestyle, buying things at the low price rather than paying the Whole Foods lifestyle price.  Yes, a surprising number of Americans prefer to pay high prices, as they perceive a status in shopping at certain stores.  And some people can truly afford to overpay for things as they are Millionaires or Billionaires.  But a lot more of the people shopping in these upscale stores are nearly strivers who want to appear to be wealthy and spend what little income they have on overpriced Goods.

But getting back to discounts and couponing, I wrote one of the original patents on internet couponing for a client and I learned it off lot about the couponing business.  Coupons have a number of uses.  One is to entice people to buy products that they might not ordinarily buy, either because they are really can't afford them, or they are not aware of the product.  Another use of coupons is to get people who cannot afford to buy your product to buy it on regular basis using the coupon.  In other words, coupons allow you to provide a range of pricing for different consumers.  A third reason is to obtain "conquest" customers who are loyal to other brands, who may be induced to switch by a coupon deal.

Mrs. I.M. Gottrocks goes to the upscale supermarket and buys her Tide laundry detergent and pays full price.  Larry Witetrash clips the coupon and buys the same Tide detergent, but pays a far lower price than Mrs. Gottrocks.  The net result is that Tide sells two boxes of detergent rather than one, even though they don't make as much money off of Larry, they still make more money than they would if the box just sat on the shelf and Larry bought store brand.

And this works fine in the paper coupon environment, as Larry has to go to the trouble of buying the newspaper, finding the coupons, clipping the coupons, saving the coupons, and presenting the coupons which is a hassle.  You make Larry work for that discount and he doesn't get the discount unless he does the work. Not only that, Mrs. Gottrocks doesn't get the discount because she views clipping coupons is beneath her and a waste of time (which is largely is). So she doesn't get the coupon discount.

With internet or online coupons, the problem arises that if you offer discounts to everyone via a simple click, that everybody will get the discount whether they really deserved it or not.  That's the incidental discount that arises where people like Mrs. Gottrocks end up getting a discount on items and services, and the retailer doesn't get the advantage out of the bargain as they had in the past.  Sally would have bought the product anyway, so they are not getting a conquest customer for another brand.  And Sally would have been happy to pay the higher price so they're not selling an additional box of detergent to Sally that otherwise would have sat on the Shelf, they were just selling it in the lower price and thus come out behind on the deal

How do you avoid this problem?  One way that Bank of America uses is to force you to go on to the website and click on the icons.  It seems like a pretty stupid waste of time until you realize that it forces the consumer to look at these deals and remember the physical act of clicking on them which creates a psychological tension in the brain.  Now, the next time the person drives by a Starbucks they will think to themselves, "Gee, I get 10% off on Starbucks! I should go in there and buy a cup of coffee even though I'm not really in the mood for coffee!" And you might laugh at that last statement but a lot of people actually think that way.

Even worse, Bank of America sends emails reminding of these deals are expiring, further prodding you psychologically to use these virtual coupons.  There are a lot of people in the world who feel they're missing out on a bargain if they don't use a coupon before it expires.  I recounted before how a friend of mine was at Michael's one day running around the store looking for something to buy because the coupon was set to expire that day.  She was going to buy things she didn't really need or want, just to take advantage of a perceived bargain.  This was a total of victory for the store.

So yes as stupid as it sounds, there are people who not only will click on the coupon for Starbucks and then get the coffee that they don't want because they perceived they are getting a value, but those who will think, "Gee I should use the Starbucks discount before it expires today, and buy a coffee even though I'm not in the mood for coffee!"  People are that stupid.

It's also a sneaky way for Bank of America to put advertising into their banking website and also spam you via email for third-party vendors.  Since you're not about to shut down emails and blacklist your own bank (you want to receive important notices from your bank)  you are allowing the flow of data into your life that advertises for other companies.  Moreover when you log on to their website, these advertisements - and they are advertisements - appear for these other companies in the form of these "deals" you are reminded about.  You go to the deal page, and click on these things and they know that you've clicked on them and tell their affiliated advertisers that you actually clicked on these physical icons showing an interest in the product.

It may sound like a trivial thing, but Bank of America probably makes enough money off of this to pay for the entire operation of their website, which by the way was crashed for almost four hours yesterday.  And by offering "discounts" they come across as the good guy finding and scoring deals for their loyal customers rather than as a heartless advertiser who is flinging commercial messages into their face whether they like it or not.  Pretty clever shit, that's why I own stock in Bank of America.

I did mention in passing earlier that couponing is a waste of time.  I covered this before with several postings on this site.  The reason why couponing is a waste of time is that Mrs. Gottrocks and Larry Witetrash might both by The Tide detergent, with Larry using his coupon.  However both of them could find a better deal by buying store brand detergent, which is often just as well and it's always priced lower than the name brand, even with coupons.

"But Bob, what about all these extreme couponers we see on television?\" They have garages full of food neatly stacked on racks they all got for free! Sometimes they even get money back!" That is indeed true, but these are often stunt buys.  They save up coupons over time and cash them all in at once at stores that offer double coupon days, coupon stacking, or other discounts and get amazing bargains.  However, in order to get any of these coupons, they actually had to buy product in the past. So you are not really getting a free bag of dog food if you had to buy 5 bags of dog food to get the coupons.

Moreover, the weird fascination these extreme couponers have with carefully storing and sorting their "coupon wins" in racks in their basement or garage is somewhat disturbing.  This is not so much shrewd purchasing as it is merely hoarding.  And it strikes me as odd that some of these people will obtain these products via coupons and then keep them displayed on these racks, but never actually use or consume the products.  I think the conquest part of the deal is the entire deal for them, and having racks of products and showing it off to their friends and bragging about how they got all this stuff for free is the real payback for them.  In other words it is a form of status seeking. A form of status seeking that actually costs you money like most forms of status you can, and could lead to hoarding disorder later in life.

Couponing in the internet age is an interesting sport. And it's interesting to see the techniques people are using to prevent giving discounts to people who were not seeking discounts.  And the way of granting coupon discounts and distributing them is also very complex.  I'm sure you've been to more than one website where at the checkout they say "please enter coupon code here."  And if you open another window and search online, sometimes you can find these coupon codes at various websites. Again, another example of incidental discount.  You are already in the process of checking out and willing to buy, and they just gave away 10% for no reason at all.

And possibly coupons and their ilk could disappear as a result of this.  Maybe we will go to a more egalitarian pricing model and perhaps we already have.  But so long as they are people willing to pay more for the same product than others will, retailers will continue to figure out ways to offer the same or similar products, for different prices for different buyers.

Your Service Drop and You

Hard to believe 220V power just lays out in the sunshine like this, but it does.

Today was an interesting day.  I went to sweep all the pine needles off the roof, which is a routine chore for our house (otherwise, you will have a garden growing up there).  Still sure owning a home is such a sweet deal?

Anyway, in the 90 degree heat, I am sweeping and something catches my attention.  The wiring on our electrical service drop is bare.  The insulation on the "hot" leads has cracked and peeled off, and more over, the neutral/ground lead has frayed and some of the strands have clearly been touching the hot leads - as evidenced by welding marks.  We had been having problems with lights periodically dimming, particularly in wind storms.  Now I know why - in the wind, the loose strands of the ground/neutral wire are touching the bare hot leads and making sparks.  Some fun, eh?

NOTE:  Do not even get NEAR your power drop.  If you slip and fall on your roof, you could end up touching these wires, and even a tiny crack in the insulation could cause you to be electrocuted.  If you didn't die right away, the fall from the roof would finish you off.   I am not suggesting that you attempt the repairs I have made, and indeed vehemently suggest the opposite - call an electrician.  I am not only an Engineer, but was trained in this kind of wiring at Carrier.  You could easily kill yourself doing this.  I am only discussing this repair to point out that home ownership is basically nothing but a series of repairs.  Which is why you never see your friends at the bar, once they buy a house.

By the way, this goes double for downed power lines.  Just stay away, period.
So I call Georgia Power, figuring I'd leave them a message and someone would come out next week and fix it.   They came out in under an hour.   The fellow glances at the wiring and says, "Well, we're gonna have to cut your power!"  and I replied, "to fix it?" and they said, "no, so you can fix it!"

Seems the power to the drop is their responsibility.  Anything from the splice blocks (those black square things in the photo above) onward is your deal.   I didn't mind them cutting the power in a heatwave, but did they have to seem so happy about it?

Once again, we are reminded that a house is just a machine for living - a complicated machine with a lot of expensive parts that break on a regular basis.   Appliances, maybe 15 years.  Air conditioners and furnaces, maybe 15-20.   Roofs, maybe 15-30 depending on type.   Main sewer connections, water lines, electrical service entrance - 40-50 years before problems develop.   Eventually all of these things have to be replaced or overhauled over time - even foundations.   And foundations get expensive, really fast.

Are you still certain that renting is a bad deal?  Because I'm not.  But I've owned a number of properties and had them for years.   So I've seen a lot of bad go down.  Leaky basements, tree-root clogged sewer lines, broken water mains, outdated electrical panels, and appliances, hot water heaters, and air conditioners, several times over.

A house is just a thing, and no it is not the American dream.

Fortunately, I am an Electrical Engineer.  But more importantly, I was a lab tech, and I used to hook up three-phase chillers with triple-ought copper wires, so the big wires don't scare me too much.   For you?  Hire an electrician.   I am serious about this.   There is no surer way to get killed that dealing with high voltage if you don't know what you are doing.

It is odd, that such a dangerous thing and such an important thing is left out in the open, exposed to the elements (where wind, rain, ozone, and sunlight degrade the insulation).  And also where falling tree limbs can damage it, or squirrels can nibble through it.   Just sitting right there on your roof, waiting to kill you the first time you accidentally put an aluminum step ladder up against it.  Odd, ain't it?

We drive to Lowes, which has 4/0 4/0 2/0 wiring which has four-ought for the power leads and two-ought for the ground/neutral.   This is what Georgia power uses, but for some reason the house is wired with 4/0 4/0 4/0.  So we go to Home Depot.   One advantage Home Depot has is they are staffed better, have a larger selection and are more helpful.  At Lowes, you have to press a button to get help, and then they act dumb.  At Home Depot, the fellow and the lady there were very helpful.

(Amazon offered to drone the wire to me, but then admitted that drone delivery was a fantasy).

We run into a Canadian at Home Depot who says, "Well, that's odd, in Canada, Hydro Quebec would come and fix that for me!"   Good for Canada.   But this isn't helping me, my friend! 

It took less an hour to replace the cable.  The meter box was full of skeletons of dead gecko lizards, who probably tried to rest on the hot and neutral leads at the same time.   What a bug-zapper that was.

I call Georgia Power and believe it or not, they agree to send someone out, on a Sunday, to hook the power back up.   He arrived just as nightfall is upon us, and within 30 minutes, he has crimped the new lines to the main power and we are back in business.   It is a lot easier to like the guy who turns on your power than the guy who turns it off.

Total cost, including some electrical tape I bought for other projects, was $55.11   I was lucky, as most electricians would charge "emergency service" prices, and probably not come out for hours, and we'd be looking at tomorrow before we were hooked back up to the grid.  I suspect it would have cost over $1000 for a service call.

And again, this is what I strongly suggest you do - call an electrician, as you are not me, and would likely kill yourself attempting such a repair.

Of course, the fun is not over.  I still haven't replaced my fire-prone Pacific Electric junction box, and probably should replace the rest of the main power lead when I do that.  Then there are carpets that are wearing out.   The garage needs painting.   After 12 years, probably every room the house needs painting.  Heck, we've already repaired a lot - remember the toilet flange job?

And it is not like we live in an "old" house - well, OK, it is 50 years old.  But it was basically gutted and remodeled 12 years ago.   Which means most of the appliances are about ready to fail in the next 5-10 years.

So what's the point of all this?   Well, if you buy a house and are "house poor" you will end up in trouble, as "unexpected repairs" are to be expected.   Even when you buy a newer home, these problems crop up.   And with a brand-new home, you might be covered with a home warranty from the builder, getting him to come back and fix things can be a nightmare.

Home Warranties are an interesting beast, and often sold to first-time buyers.    If you are stretched thin on your financing, it can be comforting to know that if you have a broken pipe or bad wiring, it will be covered.   And they are remarkably inexpensive.   I've never bought one myself, but Mark used to recommend them to buyers.   If you are not handy and skilled, then maybe such a thing is for you.

But for those of you renting, well, don't fret that you can't "afford" to buy a house or whatever.   I suspect you spend a relaxing Sunday at the park or beach, or just reading a book or going on a picnic.   You probably didn't spend it driving to lumberterias looking for four-ought cable, or standing out in the rain stripping cables and wrestling them into the meter box.  Some fun, being a homeowner!

Even worse would be trying to figure out where to put all the food melting in the freezer or where I was going to sleep tonight with no air conditioning or how to shower tomorrow with no hot water.  And for most people, that would be a real concern as well (and yes, hotel rooms and throwing out food is also expensive).   Fortunately, we have the camper as a back-up plan.

But this experience drove home to me that a house is just a thing, and expensive complex thing with a lot of components that break down over time.   When you buy a house, you are not buying a place to live,  just the repair rights.   The previous owner put in new windows, new doors, and a new A/C unit.  Now its your turn to replace the carpets, upgrade the kitchen, and rewire the fuse box.   Some fun, eh?

Keep that in mind before someone tries to sell you on the "dream" of home ownership.   It can also be a nightmare!

Fake Living Stingy Site

Someone is impersonating me!  I guess I should be flattered.

A reader notes that someone has obtained the "Living Stingy" domain name and copied my entire blog to it.   I notified Google and the content was removed.  The site remained blank for several weeks but today has new content (undoubtedly scraped from someone else's blog).

Most of the stuff posted is dreck - "50 ways to save money" for example, which suggests becoming a "secret shopper".   Most "secret shopper" deals are rip-offs.   They ask YOU for money, not the other way around.

Anyway, I could care less, other than someone might stumble upon that site and think I wrote it.

I did not.

UPDATE:  While the "50 ways to save money" page is kind of lame, some of the other stuff isn't too horrible, such as the "how to save" page after it.

The compound interest calculator is a nice touch as well.

I wonder whose blog they are stealing from now?   Some of it appears to be too well-written to be from some Indian blog farm.

Hmmmm...... maybe I should just cut-and-paste their content and put it here and retire.

Turnabout is fair play!

Oh, wait, a simple google search shows they cut-and-pasted it from a book:

Gotta love Indian blog farms! Or maybe not.

The Time Machine Conundrum

The problem with time machines is that they don't exist.

A reader writes that I am unduly pessimistic about emerging technologies, new companies, IPOs and "The Next Big Thing!"

After all, what is today's blue-chip company was yesterday's "Next Big Thing!" - right?   So why not invest in these hyped new stocks and become fabulously wealthy?

After all, if you bought Microsoft early on, you'd be rich by now, right?

Yes and No.  The problem is, of all the companies that are "The Next Big Thing!" maybe 1 in 100 end up staying in business for even a decade.  The rest fall by the wayside or are gobbled up by other companies or the re-morph into something else.   Or they limp off into slow-death mode.

Now, in retrospect, you can selectively look back and say which companies would have been good investments back in the day.

I can also, today, look back and realize that yesterday I could have played 05 32 44 53 60 09 on the Powerball Lottery and ended up with more than a quarter-Billion dollars.  In fact, that is a much better deal than buying stocks and waiting years for them to go up in value, right?

You see the fallacy here - that just because some stocks shot up in value over time, a stock you buy today in some speculative "dot com" company is guaranteed to shoot up in value over time.  Just because one set of numbers won the powerball doesn't mean all sets of numbers will or that it is a good idea to play the powerball.

But.... you could win big!   You are missing an opportunity here!

Perhaps.  But the people who "win big" at these emerging companies are the people who invest millions before the IPO is offered and then cash-out of their holdings by selling the stock to you.   And while you may think you are investing in the next Facebook, you may in fact be investing in the next Groupon - there is really no way to tell for sure.

What's more, this is a game you can't afford to lose.  And yet many people - particularly those in the middle class and below, tend to lose badly at this.   They don't invest their money, they gamble it.   They take long-shot bets like stocks, IPOs, gold, bitcoin, and whatnot, and then end up losing money.   And often these are the only things they are "invested" in other than their car, their cell phone, and their restaurant meals.

In other words, they aren't "investing" so much as they are spending money, and to them, an investment is just a way of spending more money - like going to a Casino.  And they are so used to losing in life, the fact their "investment" doesn't pan out doesn't even faze them.

Take these Elio "investors" and "depositors" - or anyone who "crowdfunds" someone else's dreams.  They've thrown away thousands of dollars on something that was never going to work out (and please, don't compare Elio to Tesla - his deposits are always refundable!) but they are unrepentant.   You talk to these folks and they say, "Well, I lost my $1000 deposit, but it was a dream and I really hoped it would have worked out!"

When you ask them how much they put into their retirement savings, they give you a blank stare.

The middle-class of America is shrinking not because anyone took our money away as Bernie Sanders and his ilk contend, but because we gave it all away.   The saving and investment mentality of our parent's generation never carried over to the present one.   Our generation seems to be obsessed with spending, acquiring the latest "gear" and pretending to be wealthier than we are.   Few save for retirement or think that saving money is even an option - after all, they are "paycheck to paycheck" because of the payments on their new SUV.

And maybe this is what drives this gold-rush mentality.   Since they have nothing saved, they believe they have to gamble big in order to win the jackpot.   As Jeff Foxworthy once said, "You may be a Redneck, if your retirement plan is to buy lottery tickets" or something to that effect.

The reality is, you can save up money for retirement if you get out of this get-rich-quick-scheme mentality and just put money away into normal and ordinary investments (not things hyped in the media) and then do this regularly for 30 years or so.   Over time, your money will double about every 7-10 years, and you could end up with hundreds of thousands of dollars, if not millions in the bank.

You can't pick winners in the market and strike-it-rich unless you have a working time machine.   Looking backwards and saying "well, such-and-such a company hit it big, so this new company will do the same thing!" is false logic.

And compounding this is the fact that many of these IPOs are really just excuses for the founders to cash-out of failing tech companies, selling dreams to small investors, who $100 or $1000 at a time, fill the bank accounts of insiders with millions of dollars.  Telling the crooked IPOs from the legit ones is nearly impossible.   So just avoid them all.   You can't expect to "win" every time in the market or be on every elevator going up.   If you try to do this, you will fail twice as hard.

Saturday, July 22, 2017

The Madness of Crowdfunding & Obama's Legacy

What will Obama's legacy actually be?

Early on the Obama administration, conservatives took umbrage at the government loaning money to Solyndra, the ill-fated solar company.  In case you missed it, Solyndra came up with a cockamamie design for solar panels using glass tubes which were sputtered like semiconductors.  It offered no real advantage over traditional solar and in fact cost a lot more.   Then, cheap solar panels from China flooded the market and the entire thing went bankrupt.   No one is selling tubular solar anymore.

Those on the Left argued that the government should subsidize energy alternatives.  At the time of the market crash, or more precisely just beforehand, we had a mini-energy-crises in the US, with gas shooting up to $5 a gallon briefly in 2008 and just as dramatically crashing in 2009.  The Energy loan program has, since then, managed to turn a profit.  But not before a few high-profile losses.

Nevertheless, many on the right argued that these kind of programs favored one business over another, which is something those on the right have no trouble with when the business being favored is theirs.   But it raises the question, how much should the government intervene in markets and try to influence technology?

Back in the 1960's, cars ran on carburetors and leaded gas.   Smog choked our cities and a "powerful" car might get 350 horsepower out of a 350 cubic inch engine - on a good day - and get gas mileage in the teens, if the owner was lucky.   Pollution controls and safety standards implemented in the 1970's caused cars to get horrible gas mileage and put out pitiful amounts of power - and run like crap.   But a funny thing happened.   By the 1980's horsepower was up, emissions were down, and gas mileage got better and better.  Today, you can buy a car that cranks out 300 horsepower out of 3 liters and gets 30 miles per gallon, and pollutes so little that you would be hard pressed to die of CO poisoning if you locked yourself in the garage.

Now, granted, much of this change was due to competition in the marketplace - particularly foreign competition.   When Japanese and European cars started putting out more power on less engine, the US automakers took note.   But our foreign counterparts didn't have the strict emissions rules we had here in the States - rules that today they have only relatively recently adopted themselves.   And the air today is cleaner as a result of these regulations - and cars get better mileage because of CAFE requirements as well.

So, it is possible that sometimes, government regulations can push an industry in the right direction.   But there is a huge difference between mandating that all players in the market behave a certain way and to loaning or giving money to selected players or selected industries, and the latter is what upsets conservatives.

Another legacy of the Obama administration was the JOBS act which created something called Regulation A - allowing startup companies to raise money through crowdfunding and issuing stock in a more informal manner.  In other words, with few regulations - the opposite of what Democrats are supposed to believe in.  While many hailed this as an advancement, allowing small-time entrepreneurs to get into the game, the record of crowd-funding has been spotty, to say the least.   As it turns out, a lot of money has changed hands and not a lot of product has been shipped.   And perhaps the poster boy for this has been Elio motors - a Regulation A company that is set to unwind the entire concept.

The Elio thing sticks in my mind because as an Engineer I cannot see how this concept could work - where so, so many others have failed.   The cost and mileage targets are insane, and well, we are seeing the whole thing melt down in slow motion, with thousands  of people losing money, in terms of non-refundable deposits ($60,000 people @ $1000 apiece is $60 Million!) or folks who bought the OTC stock that has now sunk to six bucks $4.50 a share.  The folks snookered into this deal are not sophisticated, but rather are being manipulated by a lot of hype and hoopla.

But hey, don't worry about Elio.  It's not too late to make a deposit on your air-powered car!

Sadly, both hyped vehicles will never see the light of day.  And the people plunking down money for imaginary cars are Externalizers - people who won't take action in their own lives until the world changes to suit their tastes.   When it was mentioned to one Elio believer that for the price of an Elio they could buy a nice late-model second-hand car with four wheels, doors, and seats, and drive it home today, their response was, "well, then you'd have to deal with an unreliable secondhand car!" - as if a three-year-old Corolla was some clapped out piece of trash.

Who are these people?  Not professional investors.  Not engineering types.  From what I can divine online, the typical Elio deposit holder or investor (other than the insiders, for the latter) is young, male, left-leaning, and harbors mild conspiracy theories about the oil companies, the "big three" and "evil corporations" in general.   They didn't so much invest in Elio as try to make a political statement.   This is a dangerous thing, I think, when people blend politics with investing.   Yea, sure, it would be nice to fund politically-correct industries, but if they end up losing money or are outright frauds, are we really saving the planet?

And moreover, doesn't this Regulation A filing thing seem like a really bad idea in terms of consumer protection?   We are not protecting the small investor, who is most likely to be harmed by sketchy or even outright fraudulent stock offerings - which are targeted at the small investor.  The whole crowdfunding thing is no different - asking people for non-refundable deposits on things that don't exist yet.   There is a reason that these types of "investments" were illegal at one time.

It seems odd to me that an administration that was obsessed with regulating Wall Street more, created a huge loophole in the securities field, that allows small shady companies to offer stocks to unsophisticated investors with little or no oversight.   The same administration that wanted to crack down on "the big banks" for financial sloppiness, was willing to allow crowdfunding and Regulation A stock issues, with little or no oversight.  And the latter was far more likely to rip-off the small investor than the former.

But then again, the administration got snookered the same way with Solyndra.  They wanted to believe it would work, without doing the requisite math.  They loaned money to a company that Wall Street and the Banks would not touch.   And maybe they should have listened to the professional investors before committing government money to the project.

What will Obama be remembered for?  Obamacare?  Solyndra?  The JOBS act and stock fraud?  It is hard to say.  But I think overall, his legacy will not be as spit-shined as some on the left want it to be.  Granted, Republicans never really gave him a chance at all.  But then again, he never really tried very hard to woe the few votes he needed to get some of his agenda passed.

I think even die-hard Democrats see the Obama years as a series of missed opportunities, and not just because the intransigence of the GOP.   And today, we lurch forward with a national healthcare plan that is a patchwork of Medicare, Medicaid, VA, private insurance, company insurance, and Obamacare "market" plans, all of which have flaws and need fixing - but no one wants to do the hard job of fixing, just destroying.

And sadly, a small minority of Americans (like me) are buying our own policies in the Obamacare "marketplace".   So the government feels it can shit all over the 10-20 million of us, because they can get re-elected, even if we vote.

No, I am not sure that Obama's legacy will be all wine and roses.