Friday, July 28, 2017

Is Having People Wait on You Better Than Owning Things? Or Is There a Third Option?

It is possible to "prove" almost anything if you give people a false choice.

A recent idiotic article from the Associated Press, published in the New York Times, posits that having people wait on you is much better than owning things.  Apparently this study was performed where 6,000 people were given $40 and told to buy something for themselves. Another group of people were given $40 and told to hire somebody to do something for them such as clean their house or mow their lawn.

According to this so-called study, the people who had personal services performed for them were "happier" than those who merely bought things (and you can accurately measure personal happiness using a happy-meter which is sold on Amazon).  Thus, the conclusion of the author of the article is that you should have a maid clean your house for you, and if you hire people to do all the "drudgery" in your life, you will be happier.

Of course, no word on how happy that maid is, or the other people who hire to do this drudgery-type of work.   But hey, they're all Mexican so they don't count right?

Of course, it is a preposterous study.  And the reason why it's preposterous is that it doesn't take into account other options.   This is what is called a false choice or complex question fallacy, in that it offers only two alternatives - thus the "authors" of the study steer it to the result they want.  And no doubt many people will read this article and say, "Let's hire a maid and lawn service and sit around and sip cocktails while they do all the work!  The article says this is our best outcome!"

Besides this answer being false (doing things for yourself staves off learned helplessness and thus reduces depression) it fails to take into consideration other things you could do with money.

For example as a baseline, they should have had a third group of people who they gave $40 to and told them to invest it or keep it.  I have a feeling those people will be even happier than the person who hired the maid to clean their house.

And I say this from experience.  In my life, I've owned a lot of things - cars, boats, recreational vehicles, vacation homes, and whatnot.  And the study is right in that regard, things are fun and all but they don't really make you happy by themselves. The happiest I was with things was actually using things to do things.  So for example, an old car was fun because I enjoyed taking it apart and fixing it or driving somewhere and having a picnic.  Merely owning it was of no satisfaction whatsoever.  The brand-new car wasn't as much fun, as I had no "hands on" activity with it, and we often were too worried about scratching it to enjoy it fully.  The fact that the old car cost $27,000 less was also a factor.

And I can also say from experience of having a maid or other people to perform services for you is nice and all, but at leaves one with an empty hollow feeling.   Having someone mow the lawn for you is nice and all, but doesn't provide the satisfaction of doing it yourself.  The beer tastes better and colder when you have it on your front porch, after mowing the lawn, admiring your work.  Having a maid or a lawn service tends to make one feel worthless and useless, particularly if you were sitting around house while these people are working on your behalf.  Moreover it tends to make one become fat and slovenly.

And not only that, owning things and having people do things for you tends to drain your bank account.  So as a result, I had to go back to work that much sooner and make more money to pay for these people and things, which tends to make a person unhappy.  You no longer feel that your job is an interesting and fun career experience, but drudgery itself, something you need to do in order to pay for all these things in your life.  Moreover since your bank account is empty, you feel like you're never getting ahead no matter how hard you work.  And since you're going into debt to pay for many of these things and services, you feel that you are trapped in your job, which is never a pleasant feeling.

The third way was the last way I tried in life, and that was to have less things and have less people wait on me but instead have more security.  Rather than spend money on cars and boats and toys, I put money in the bank.  Rather than hire a maid or lawn service or even a barber, I invested money in stocks and real estate.  The net result was I became independently wealthy and no longer had to work. This is what made me happiest of all.

I no longer have to worry about losing a job or wondering what would happen if I did lose my job because I can survive without one.  I no longer have to worry about where the next paycheck is coming from because there isn't one.  With my lifestyle slimmed down, I can afford to live without having to work, and also have security.

And the way I got here wasn't by hiring maids and lawn services, but by firing them and putting that money into my investment accounts.   Once again, we have the media telling us to spend, spend, spend and never to save.   And they do this, because they want you to be flat broke and unhappy, so you keep consuming goods and services and watch their programs.   After all, if you are mowing the lawn or vacuuming the rug, that's cutting into your prime TV viewing time or obsessive smart phone watching, right?

I don't have to worry about how I'm going to pay the credit card bill because it never gets very high.  I don't have to worry about making the mortgage payment or having the house taken away from me because there is no mortgage payment.  And I have to worry about having my car towed away or it repossessed because I own it outright.

In terms of happiness, this level of security outpaces the other two scenarios by a factor of ten, a hundred, or maybe a thousand.  Not owing anybody money and not having to go to work is almost an orgasmic level of pleasure.  Daily.  Continuously.  Maybe having a maid clean your house might make you happier than owning a new pair of shoes.  But the incremental level of happiness is very, very, tiny.  We are talking comparing and happiness level 1.2 with maybe happiness level 1.0

Owning your home free and clear, having enough money to live the rest of your life, and not having to go to work everyday, that's happiness level 1000.

And that's why I think that article is stupid. It doesn't consider the most fundamental way of becoming happy.  Owning yourself.

What Kind of Company is Amazon, Anyway?

Amazon went from selling dusty old used books, to selling just about everything.  Today, they are trying to position themselves as a tech company competing with Apple and Samsung.

I recall Jeff Bezos appearing on The Daily Show with Jon Stewart (boy, that seems like ages ago that that show was on the air!).   He was pushing an early version of the Kindle, nearly a decade ago.   And back then, he was a bookseller, trying to branch out into technology to sell e-books, which was a new thing.   Today, it seems that bookselling is the least part of Amazon.   Who the hell reads books anymore, anyway, right?  The smart phone has killed off literature, replacing it with 140 characters of tweets and texts.

Amazon took off after that, and today you can buy almost anything that is legal to sell, on that site.   They haven't started selling cars yet, to my knowledge, but it is only a matter of time.  Oh, wait, they are doing that, too.[1]   But something has changed even since then, which tells me that maybe Amazon sees the writing on the wall with operating as a online merchant.   The mercantile trade is a business of margins, and Amazon, like "tech" companies, is not very efficiently run.  They can't compete with the penny-pinching of Wal-Mart, at least not for very long.

Today's earning report seems to verify this.  Analysts were expecting earnings of $1.42 share and yet Amazon delivered only $0.40.  This is more than just a near-miss.  The problem for Amazon is that retailing is a game of narrow margins and cost-cutting. There are no barriers to entry in the retail market, you just buy stuff and then sell it to people.  There no patents, there are no monopolies,  there is nothing preventing other people from getting in on the game. You can't just raise prices to cover your expenses. So despite all this hoopla on Amazon taking over from brick-and-mortar, perhaps Amazon might find that there's little profit in just selling things.

And Amazon has fallen into the trap of market share, much as General Motors did and many companies before it.   People concentrate on overall revenue (gross receipts) and not earnings (net profits).   Revenues are fine, but it is profits that keep the lights on and the place going.  Amazon's revenues are up, but earnings are down, which means they are facing tighter and tighter profit margins to go after greater and greater market share.   Selling stuff - and it doesn't matter what you are selling - is a tedious and capital intensive business whose profits are to be found in small savings here and there, which take an awful lot of work and talent to find, as Sam Walton discovered.

Retail isn't any fun, is it?   So it seems Amazon is morphing again, selling "Alexa" - its own personal assistant, much like Apple's Siri or Google's whatever.   You talk to "Alexa" and she plays music, starts your Kenmore washer, sets off the sprinkler, dims the lights, arms the alarm system, and programs your Roomba to spread cat feces all over the house.

And this is funny to me, as Amazon was not a tech company before, but now it appears to be trying to morph into one.   Next thing you know, they'll be selling their own format of smart phones.  Oh, wait, they tried that, and it failed.

In fact, Amazon has its fingers in a lot of pies lately, everything from health insurance to meal kits.   And some would take this as a sign of a company on the move - expanding to take over new markets and new conquests.   I see it as a sign of desperation, of a company trying to find something profitable enough to sustain it.  The share price is over $1000 a share and the P/E ratio is over 250, even with the stock losing value yesterday.

Do you ave 250 years to wait to make money on Amazon stock?   Do you think they can improve profitability by a factor of ten?  Not revenue, but earnings.    Amazon sells a lot of stuff, to be sure, but is there room for exponential growth?   Or will others jump into this space and also start selling "stuff" as well?

Much ballyhoo was made yesterday as Amazon's stock price peaked (before the earnings report) and based on the myth of Market Cap, Jeff Bezos was richer than Bill Gates - for a few hours, anyway.   Then the earnings report came out and, well, he's back to #2 position.   You see, Microsoft has a P/E ratio of 27, compared to Amazon's 258.   If both Billionaires had to liquidate their positions in their respective companies, who do you think would end up with the bigger pile of cash?

Bezo's "wealth" is based on the speculative idiots in the marketplace bidding up Amazon stock to over $1000 a share because they buy things on Amazon and listen to the financial press and are convinced Amazon is going to "take over the world".   But buying shit and selling it isn't really that big a deal.   Microsoft, at least,  has a worldwide monopoly on its operating system - at least for the time being.   And that's why they have a P/E ratio of 27 - they make serious money.   Amazon?   It is all based on hype and speculation.  Selling tchotchke on the internet just isn't that profitable a business. 

And that, in a nutshell is why Amazon is floundering about, trying to figure out new, more profitable ways, to make money.   Maybe in groceries, or in meal kits, or in health insurance.  Drones, perhaps?  Home automation?   Let's throw a bunch of shit against the wall and see if  any of it sticks!

In the meantime, they are losing sight of their core business - selling shit on the internet.   Not only that, but all these ancillary businesses require huge amounts of capital to start up - and many of them will pan out to be nothing.   As a result, this means earnings will decrease further and/or prices will have to go up - which means some other company, who does have its eye on the bottom line and is interested only in selling shit has an opportunity to undercut Amazon on price and service, and.... well Amazon has to hope they make enough money on Alexa or whatever to make up the difference.

I wonder if Amazon will split up, eventually, spinning off these new tech companies and other interests and leaving the warehousing and retailing business separate.   Because things like acquiring Whole Foods I don't see as an asset, but a distraction.   While the financial press, which lives on either coast in large cities, might think that $6 asparagus water is a great deal, the vast bulk of Americans are shopping in traditional grocery stores, where eggs are 69 cents a dozen these days - which is all most of us can afford.

[1]  But not doing it well.  The Amazon "Car" site lists every make of car ever made in non-alphabetical order.   You want to buy a Tucker Torpedo?  They have a check box for that make.  Good luck finding it in the non-alphabetical listing of over 200 makes.  A company that can't even HTML properly is going to "take over the world"?   Not yet, is appears.  Also, it doesn't appear they sell cars yet so much as they are steering "leads" to car company websites.

Thursday, July 27, 2017

What The Hell Happened To Snopes?

Snopes has morphed over time into something different and more trendy.

In the news today, a plea from Snopes online for money to keep the doors open.   Seems the Mikkelsons got divorced and Barbara sold her half of the company to some folks who run some sort of media company.    You can read all the dirt about it here.   But that's not what I'm talking about.

I find myself visiting a lot less and less these days.  The site has changed formats and changed content.   It seems today every new item is a click-bait question, such as "Is This Image of John Lennon and Che Guevara Real?"  If you are familiar with Betteridge's law of headlines, you know the answer is "NO".

It seems Snopes is resorting to click-bait titles more and more - as well as celebrity gossip and headline news.   Less and less of the site is devoted to urban legends and debunking myths and conspiracy theories.

And maybe in part this is because myth and conspiracy theories are now mainstream news and what people today want is titillation, not truth.

Some say the company that Barbara sold out to is trying to gin up the revenue by making the site prettier and trendier - so they can sell out to a major media conglomerate.   Perhaps Fox News?   After all, they're fair and balanced, right?

However Snopes sorts out its money woes and discontent among the ranks (and from the looks of it, David Mikkelson has enough shares and votes to prevail) it seems the site has been permanently altered for the long-haul.

Like I said, I stopped checking it regularly, about a year ago.  It just seemed so much of what was on the site was stuff I had already seen debunked elsewhere days ago.   It used to be that stuff appeared on Snopes long before it appeared anywhere else.    Today, that is no more.  Plus, some of the ads on their site are a little, well, over-the-top.  It also appears that one of Barbara's last postings (it appears) wasn't so much an attempt to debunk an internet rumor, but to air personal grievances against GEICOThe posting has since been removed and even excluded from the Internet "Wayback Machine" as well.

The problem with "fact-checking" and rumor debunking is that indeed, everyone approaches these things with a certain prejudicial point of view.   Snopes has some mild bias in many of its postings.   Other sites that attempt to "fact-check" also tip their hands with their analysis.  It is very, very hard to be impartial and develop a reputation for fairness.  When you use your fact-checking website as a platform to air your dirty laundry with the insurance company, well, all bets are off.

Websites have a half-life of maybe 5-10 years, tops.   They become popular for a while, then people tire of them and move on.   This is the nightmare Zuckerberg has every night.   Sure, they have hundreds of millions of users (No, I don't believe the "Billions" part - so many accounts are dormant or fake, and they count those, of course).   But people have shown to drift away from even the most popular sites, channels, and programs.

And that is all these things are - websites.   Whether it is my blog here, or Facebook, or even - they are all just websites on the Internet - easy to copy, mimic, and replicate, or improve upon.   They have a fan base, peak in usage, and then slowly decline until they reach that point of "Hey, remember when we all used to go on Gawker or Geocities?   What ever happened to those?"

Of course, people don't leave a site until they have somewhere else to go.    So eventually, something will come along that maybe will supplant Snopes.   Something with a better layout, fewer clickbait "question" titles, less celebrity gossip, and maybe an easier format to load - and of course, fewer ads.

And if that site has a reputation for impartiality, maybe people will morph towards that.   Who knows?   Every site has its heyday.  So far in the history of the Internet, there have only been a few popular sites that have remained popular for more than a decade.   But even eBay has morphed over time.   Less and less a garage sale and more and more of a merchant platform.  Amazon went from used book seller to online merchant, and today to a tech company selling proprietary technology.

But more about that, later.

Recession Avoided or Merely Delayed?

No, Virginia, Earnings Week isn't another one of Donald Trump's "theme weeks".

Earnings are coming out this week, and analysts are surprised that earnings are higher than expected for many companies.   Does this mean the signs of downturn in the economy are overstated?   Is a recession avoided?   Or merely delayed.

Take Ford, for example, which beat analysts' expectations despite 16% drop in sales.   Ford isn't making more profits, but less.   By taking advantage of foreign tax credits for years of losses overseas, Ford cut its tax bill in half, which propped-up earnings.

The problem is, of course, this is a one-time deal, and you can't make profits out of losses.   The fact remains, Ford's sales - and that of the entire auto industry - are down across the board.  Even pickups and SUVs are only moving out the door with generous incentives - which translates into lower profits.

A lot of other companies are reporting similar results - beating low expectations, but often because of one-time charges, cost-cutting, store closings, sale of assets, and the like.   And this is a pattern I've seen before.  When sales drop off and markets go South, companies start aggressively trimming their sails.   Cost-cutting becomes the order of the day when the sales boom dies.  People are laid off, suppliers are squeezed on prices.

Boeing, for example, also reported earnings that exceeded analysts' expectations, sending the stock soaring 8%.   Boeing has done well in the last few quarters, but are they out of the woods yet?  One reason profits are up is that capital expenditures are down.   They just finished building the new wing assembly line in South Carolina, so capital expenditures are no longer needed.   Despite this, demand for the 777 has slowed, and Boeing plans layoffs.

This does not mean, of course, that this level of profitability is here to stay.  New capital expenditures will be needed down the road - in fact, almost continuously in the airplane business.   This is less about record profits than taking a breath between plane generations.

With a backlog of orders for the 737-MAX plane, which is in dire competition with the new Airbus A320 NEO, Boeing can crank out airplanes without spending too much money on R&D and capital expenditures.  But does that mean long-term profitability?   Perhaps - they will have to spend an inordinate amount of money on the next generation aircraft, as Airbus nips at their heels.  Meanwhile sales of the aging 747 have slowed to a halt.  After decades of losses, the Dreamliner finally appears to be making money for Boeing - illustrating the tremendous risk involved in building a new aircraft, as well as the large amount of time needed to recoup costs.

So this is all good news, but only for the short-term.   Ford can't keep making money through foreign tax credits.  Sometime, it will have to sell cars and trucks at a profit - which it will, just not at as fast a clip as in the last eight years.   And soon, Boeing is going to have to go back to hemorrhaging cash to develop a radically new plane - the so-called 797 with its oval cross-section fuselage.  And Boeing has to do this, before Airbus does.

Across the board, we seem to be seeing the same thing.  I am hearing earnings reports that are better than expected, but always with this asterisk next to the numbers, explaining some one-time charge, sell off, or whatever.  These are great numbers, but what happens next quarter or next year when these asterisks disappear?

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 companies 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.