Zero shopping days til Christmas

You too can test the limits of this post's sentiments.

What’s the perfect Christmas gift for 2009? Nothing. Or cash. But to be safe, nothing.

This is an old Economics 101 nugget. The logic goes like this: you can’t be 100% sure what another person wants as a gift. Only the recipient knows exactly what she might want. The primary thing stopping her from buying it is scarcity: having a finite income means having to prioritize and choose what you want and what you can forgo.

Therefore the only logical gift is cash, which she can convert into whatever she wants. If everyone followed this rule, no one would be disappointed with a thoughtless or ineffectual gift. But this is where economic sense runs into societal expectation. Cash can be perfectly quantified, of course: it comes in dollars. Say you have two people: a purely rational boyfriend and girlfriend who decide to do the utilitarian thing and give each other cash. (This scenario is a stretch, but it does lead somewhere.) The boyfriend gives the girlfriend $500, the girlfriend gives the boyfriend $450. The net result, aside from the boyfriend giving the girlfriend $50, is that the boyfriend now feels insufficiently loved and the girlfriend feels miserly.

So the sensible thing to do is to give cash gifts of equal value, which means you might as well keep the cash in your respective pockets. This sounds silly, but similar situations arise every Christmas. Until this year, a Control Your Cash author and her mother engaged in the same nonsensical dance. Mom’s annual Christmas gift to daughter was a $100 gift card to a particular restaurant. Daughter’s gift to mom was a $100 gift card to a different restaurant. The result, of course, is that mother and daughter each eventually spend the scrip. However, there’s the added inconvenience of feeling obligated to use the card (especially if it expires.) Plus there’s the feeling of frustration every time the cardholder passes by said restaurant with a potential dining partner at dinnertime, only without the card handy. And there’s the temptation to spend more than one normally would at the restaurant, in order to use up the $100. After all, if a meal ends up costing $93, is the cardholder going to bother keeping $7 worth of scrip in her wallet? The biggest beneficiaries of this exchange end up being the restaurants. At least mother and daughter weren’t so absurd as to have used the gift cards on each other.

So we’ve established that there’s an implicit fear of giving a gift of unequal value than the gift received. But if you want to alleviate that fear, and thus exchange gifts of identical value with someone, isn’t that all the more reason not to exchange gifts? Me giving you $100 and you giving me $100 means we might as well just smile at each other. Me giving you a gift worth $100 and you giving me a gift worth $95 (or $105) just has the potential to cause bad feelings.

By the way, putting a dollar figure on a gift is no sillier than the standard practice of removing the price tag on a gift. Why do we do the latter? Because we’ve decided as a society that it’s classless and tasteless to keep the price tag on, as if a recipient will think, “Sure, this Amazon Kindle will save me the trouble of lugging different books around everywhere and let me buy more books at the touch of a button, but more to the point, am I really only worth $440 plus 8% sales tax?” And if you bought the gift from a wholesaler at a steep discount, some exceedingly sensitive gift recipient might take that as an affront. (Instead of saluting you for Controlling Your Cash.)

Removing a price tag is a manifestation, however slight, of the debilitating mindset that says money should never be spoken about nor acknowledged. Even though it doesn’t appear anyone’s willing to take the first step, we need to be more frank about money. A world in which people would broadcast their salaries, net worths and credit-card balances would encourage prudence and responsibility. Shame is a big motivator.

But we live in the real world. If you’re going to do like 99.8% of the people reading this post and give standard tangible gifts anyway, at least leave the price tag on, just this once. But if you really want to Control Your Cash, go to SomeEcards.com and send each other funny wishes instead. Better yet, send emails out to everyone on your list and lie about how you donated in their name to Armenian earthquake relief or the Spina Bifida Association. Better still, really do donate on their behalf to Best Friends Animal Sanctuary. Animals make the perfect gift recipients: they’re eternally grateful, they can actually use the gesture, they won’t hold it against you at future family gatherings, they won’t read anything into it, and best of all, they can’t pay you back.

3 Investments for the next decade

Received honorable mention. Put on own socks. Enjoys lists.

Disclaimer:

Posting in list form is for the lazy and the epistolarily challenged. However, in an attempt to get more readers than the tens of thousands who already stop at Control Your Cash regularly, we’re following the edicts laid down by the people at ProBlogger. They recommend a different daily exercise for a month. Today is Day 3, and the exercise is…a post in list form. It’s embarrassing to even reference this contrived method of indirectly canvassing new readers, but in a couple of lines we’ll move from self-flagellation back to financial advice. Let the form of this week’s post be a lesson in the virtue of seeing a commitment through, no matter how dumb parts of it seem.

So here’s our list. Of investments it’ll be OK to make for the foreseeable future:

1. Commodities.

These are the protoplasm of the market, the most fundamental securities of all.

What are most institutional investments, really? A bank account sounds simple, but on its surface it’s somewhat intangible – it’s really a bet you’re making on the credibility of the bank and its officers. In a sense, you’re wagering that the bank’s lending and borrowing policies are conservative enough that the bank will pay you back with interest.
Say you advance to a slightly more sophisticated investment – 100 shares of Ford Motor Company. Ford, somewhat unsurprisingly, makes cars. They also make parts and lend money, but their primary business is the creation of Mustangs and F-150s. When you become a shareholder, your investment doesn’t directly correspond to a particular car, or part of a car. What you’re really buying is another intangibility – the future prospects of the company. You’re hoping that Ford management is adept enough at its primary business and its ancillary businesses that the $1013 you invest today will appreciate.

But commodities are as tangible as it gets. You buy a commodity, you’re actually buying cotton, hay, milk, heating oil, light sweet crude, gold, whatever. Take the unassuming soybean, available for about $1000 per metric ton. Soybeans fill bellies, thus taking care of the most basic human requirement. Soybeans trade in a more sophisticated manner on today’s Chicago Board of Trade than they did in the Sumerian marketplace of 6000 BC, but the principle is the same.

Remember the hierarchy of human endeavor. With apologies to Abraham Maslow, mankind’s highest occupations are, in descending order:

1. agriculture
2. engineering
3. medicine.

First, we need to eat. Second, we need devices that free our labor for other uses. Third, this all loses meaning if we get sick and die. The farmers, engineers, doctors and their related professions do all the productive work on this planet, while the rest of us just emit carbon dioxide. There’s nothing wrong with this, as we all benefit from the symbiotic relationship among the 3 categories above. The engineers create the axial-flow combine and develop superphosphated fertilizers, making the farmers more productive, which makes food cheaper, which frees the remaining 98% of us up to become investment bankers and bloggers.

2. Single-family homes.

Good Lord, there’s never been a better time to buy a house.

Even if you’re as unobservant as a TSA official, you might have noticed that home prices have dropped in the last couple of years. A desultory look online can show you graphs that demonstrate how 2009 median home prices are essentially what they were in 2001. You can find other graphs that seem to state that the recent bust has lowered home prices to levels not seen in 100 years.

“Median” doesn’t mean “average”. “Median” means this: say you ranked all 110 million houses in America in order of price – starting with the $20 house in Detroit we mentioned a few weeks ago and ending with Susan Saperstein’s $125 million home in Beverly Hills. The median home would be the 55,000,000th on the list.

There’s no question that a median home in 2009 is more valuable than its 2001 (or 1890) counterpart. That 2001 house probably wasn’t wired with a flat-panel TV and a wireless router, or even an iPod dock. The 1890 house didn’t have a flushing toilet, let alone a fridge with a vegetable crisper.

Building materials have improved – everything from fiberglass insulation to your decorative cedar accents and maintenance-free exteriors. So…

-the quality of the median house has doubtless improved;
-the median house fulfills its function as well as ever. You can still live in it, and it’ll still protect you from the elements.
-yet the price has tumbled.

And houses are necessities. Economists talk about substitutes – if chicken gets too expensive, you’ll buy turkey. But there’s no substitute for shelter.

Now if builders are creating a product that’s superior to its predecessors, and the prices have shrunk in constant dollars, what does that mean?

It means there are too many houses and too few buyers. There are too few buyers because a lot of people either can’t get credit or can’t make enough money. Which means that if you can get credit (which you should, if you have a job and Control Your Cash), and if you make enough money (if you Control Your Cash), you should be making offers on whatever houses you can find. Not necessarily to live in, but to invest in. You’re supposed to buy at the bottom of the market. The market will never be (much) lower.

Don’t take our word for it. Listen to the clueless brass at the National Association of Realtors, while keeping in mind that that organization’s main agenda isn’t to increase home ownership, or to educate homebuyers, or to increase stakeholder value, or any of that nonsense. Their goal is to maximize the number of real estate transactions. If home prices stayed unchanged for the next century, realtors would still hope that people would want to move across the street to have the sun hit their windows from a different angle, and would gratefully take a 3% commission on every sale.

The NAR’s latest TV and radio campaign stridently reminds us “affordability has improved” (Corporatespeak for “houses have gotten cheaper”.)

Read between the lines. What they’re not talking about is how attractive an investment a house is. They’re (not) doing this for a couple of reasons. First, half the realtors’ clients are sellers, who don’t want to hear the inevitable truth that this is a horrible time to sell a house.

Second and more importantly, people are idiots and only assume an investment is worthwhile if it appreciated in the past, rather than the future. They see a graph of median home prices that points in a southeasterly direction, and they assume the pattern will hold – even though as we’ve shown above, that’s untenable. Prices can’t get much lower, or they’ll barely cover the labor and materials.

3. Your own judgment.

This isn’t any of that Jiminy Cricket personal motivation talk. We’re being practical here, as always.

Using your judgment means that when you’re confronted with an investment that sounds uncommonly good, look at what could possibly go wrong and ask the most challenging questions you can think of. Of all the people who’ve ever lost money investing, how many were merely the victims of haphazard market conditions, and how many refused to look at the economic reality that was staring them in the face rather than the heart?

The penny stock of a company that’s created a transcendent product, yet refuses to demonstrate the prototype. The cheap rural land that will soon sit adjacent to a burgeoning new development, except there are no roads and no water and no means of getting it there. The inert icon of American commerce that still trades on the New York Stock Exchange, even though it’s been losing market share to efficient foreign companies for decades and relies on government largesse to pay its suppliers. The clothing store that your friend is opening up, even though she has no experience handling a payroll nor a budget and only got the lease because the last tenant absconded and the landlord figures it’s better to set a few hundred dollars on fire every month than a few thousand.

Buy into any of those and you’re selling, metaphorically speaking, your judgment short. Think of the downside – even the surest things have a downside. If it’s as easy to visualize as the scenarios above, step back and let another pioneer take those arrows.

Wow, three items. That hardly counts as a “list”, but given that this week’s post is even longer than our average post (or our median post), it solidifies Control Your Cash’s position as the most comprehensive blog of its kind.