Some of You Aren’t Spending Enough

November 7, 2012

“Surgical gloves and a scrub cap? I don’t need that fancy stuff.”

 

Earlier in the week we received a last-minute Carnival of Wealth submission from our favorite site never to have previously submitted to a CoW. Rather than cram their submission in and give it only a paragraph or two of attention, we figured it deserved greater analysis.

Timeless Finance is run by the remarkable Joe Wood and Adina J., who are two of the rarest specimens known to man: they’re opinionated, iconoclastic Canadians. Yes, such things exist, although they usually end up emigrating. Their site is a trove of outspokenness and common sense, qualities scarce in a society where most people can’t see beyond their latest Facebook update.

One of Timeless Finance’s favorite targets is yet another personal finance blog, this one run by a couple of married hippies/government employees with matching macraméd hats. Not that the hippies’ choice of headwear is necessarily worth criticizing, at least not when compared to their choice of childbirth. They used a midwife, and like most people of a crunchy persuasion, are convinced that their way of doing things is nonpareil on both an individual level and a global one. Using a midwife saves money, the script says. It’s better for Junior. Mother Gaia smiles on any couple who conserve resources by refusing to patronize the heartless medico-industrial complex and its physicianing brownshirts.

The Timeless Finance duo were just a little displeased with this advocacy of obsolete birthing methods. Their data is unmistakable, their argument so ironclad that it barely needs explaining, but here goes. Bringing an earthy lady with no qualifications but a pillow over to your efficiency apartment to deliver your baby is lunacy, when we have these people called obstetricians who work in sterile environments with incubators, ventilators and pulse oximeters on hand. You know, hospitals. If something goes wrong, maybe it’s a good idea for it to go wrong in a maternity ward with a neonatal intensive care unit.

In previous centuries, pregnancy was almost a coin flip for a woman. Make it out without bleeding to death, and perhaps one day you’d be lucky enough to again get impregnated with another future farmhand. Today, “childbirth complications” often mean nothing more than an emergency caesarean section. Most modern non-emo women would agree that a purple scar is less traumatic than a tombstone.

But not the aforementioned hippies, at least not when applying their own brand of illogic. They’re convinced that midwives beat M.D.s, and use some arcane arguments to back that up. Paraphrasing:

  • Hospitals don’t let you eat before giving birth. At home you can have yogurt, granola, and other stereotypical foods. (Of course, hospitals prohibit feeding women in labor solely to punish them.)
  • When you go to a hospital, you have to “worry about paying for parking and gas money.” That’s a quote. Fueling up the Prius a few days earlier and parking in an emergency space, should it come to that, never entered into these folks’ heads.
  • “if you are not driving it’s a greener choice too, less carbon dioxide in the atmosphere!”

Enough. Never mind that that drive to the hospital would increase world CO2 output by .00000000000000000000000000000000000001%, but as Joe pointed out, exactly how does the midwife get to the house? Or does a truly ecologically attuned couple restrict themselves to doing business with midwives who take only the bus or a bicycle? And how much CO2 does Trek emit with every bike they manufacture, anyway? And…

Alright, we’re getting immersed in the absurd minutiae of the environmentally sanctimonious. (And of a blogging couple who had some paragraphs to fill.) Timeless Finance pointed out how dangerous it is to have a child by “natural” means, citing the points made above and other equally relevant ones. To the hippies’ credit, they backed away and realized their error.

Of course they didn’t. They dug in, relying on ad hominem attacks and non sequiturs (“4 years to be a midwife. Did you know a person can be a financial planner just as quickly?”) to justify their decision to put their baby at risk.

Instead of our encapsulation of the issue, you really need to read the comments in the above referenced article. (Here’s another link, save you from burning any unnecessary CO2 if you were to scroll up the page.)

So…if you’re wondering what this has to do with personal finance,

Plenty. We all have to prioritize. Even Sheldon Adelson can’t buy everything, and you can be sure he looks at the price tags on the things he does buy.

If you’re here, then you’ve probably read another personal finance site or two at some point. Which means you’ve noticed disproportionate attention paid to the topic of frugality. Cut, cut, and cut some more. Spend a Saturday clipping coupons and you can save $4.21 on your next trip to the supermarket. Recycle your Ziploc bags. Don’t pay for a hospital visit when you can hire a midwife on the cheap and maybe even pay her in pesticide-free produce.

Or, you could spend intelligently.

There are places where it makes sense to economize. Audio cables (They’re all the same.) Sunglasses (You’re going to lose or break them.) Shower flip-flops ($3 to avoid athlete’s foot is a bargain.)

And there are places where it’s your moral duty to stop rationalizing and open up your wallet. Having a child would be one of them.

Filed Under: Bad Examples Tagged With: , , , ,

Price Gouging Doesn’t Exist, And You’re An Idiot

November 2, 2012

 

The view from CYC World Headquarters, shortly before disaster struck

 

“Free” market means exactly that: buyers and sellers agreeing on a price. It’s impractical, however, for buyers and sellers to negotiate every single transaction. Imagine if the supermarket clerk haggled with you on every gallon of milk, every red bell pepper. You’d never make it out of the store, and we’d all end up losing valuable time in the process. So retailers set their prices accordingly. Buy the milk for $2.50, or don’t.

Some people like milk so much that they’d pay more than that, say $3.60. Others would buy only if the price lowered to $2.25. You could argue that the grocer is losing money on the former group of customers, and could be enjoying another $1.10 profit per gallon. You could also argue that concurrently, the grocer is failing to win the business of the latter group: by lowering the price by 25¢, the grocer could sell more milk.

Again, you can’t do this as a practical matter. You set the price somewhere in the middle, in our example $2.50, and that way you can enjoy as reasonable a profit as possible – without having to worry about scaring off bargain shoppers nor giving diehard milk enthusiasts too good of a deal. At $2.50, everyone’s as close to happy as possible.

Office Depot sells a case of 24 half-pint bottles of Nestle Pure Life water for $5, and you have several choices:

  • Shop around for something cheaper, and good luck
  • Buy a Brita filtration system
  • Go without, and just drink out of the tap
  • Fill up your tub before disaster strikes.

Sellers aren’t stupid, mostly. Office Depot knows that if they raised the price to $6, they’d lose too many customers. Office Depot wouldn’t sell enough water to justify stocking it. But if Office Depot lowered the price to $4, they’d sell too much of it. How is it possible to sell “too much” of a product? That’s easy, when you’re not getting a big enough margin over cost. If Office Depot buys the water from a wholesaler for, say, $2.50 for a 24-pack, that obviously means $2.50 profit at current prices. Lower the profit to $1.50, and Office Depot would be leaving money on the table. Maybe they’re leaving money on the table as it is, and the $5 price is just to get people in the store. Either way, $5 isn’t so high that no one buys, and isn’t so low that the store runs out.

Add a natural disaster, and it’s interesting to see how government functionaries panic. Several states have “anti-gouging” laws that prevent merchants from setting prices in response to market demand. This is no different, in principle or in effect, from setting a maximum on the price of Apple stock or on an ounce of gold. The idea is to “protect” the consumer, and it doesn’t work. It never works.

Here’s the problem. A customer who’s worrying about Hurricane Sandy goes into Office Depot, happens to be the first one in the door, sees the $5 price, and immediately buys the entire display of 100 packs. Can’t be too careful, right? It’s an emergency! $500 might be a bargain if there’s no water available for weeks.

And now, no one else can buy water. It’s all gone.

So the retailer sets a limit. 5 packs per customer, whatever. So instead of all but 1 person going without bottled water, now, all but 20 do.

But knowing that there’s going to be increased demand for bottled water, what if Office Depot were to quadruple its price?

When a case costs $20, people start thinking.

  • Do I really need all this water?
  • Could I economize, maybe get along with as few bottles as possible?

Raising the price to $20 means that only the most motivated buyers are going to buy. Artificially maintaining the $5 price, in light of increased demand, decimates supply. Office Depot knows it might be a while before it can get more water from the wholesaler, who’s probably not going to be able to deliver any more in the near future. Either way, fixing the $5 price causes shortages – the very opposite of what you want to have happen (and what market forces dictate) in a natural disaster.

The North Carolina Attorney General speaks of “unfair profit”, as if an Act of God leading to the certainty of a dwindling supply is somehow the retailer’s fault.

This isn’t just anti-American, it’s inefficient. Again, prices should be agreed upon by buyer and seller without a 3rd party poking its nose in and claiming to be on the side of liberty and justice. If a seller sells bottled water that turns out to be tainted with E. coli, or if the buyer tries to pay with counterfeit bills, that’s when government should get involved. But when two parties agree to exchange a fixed amount of money for a fixed amount of a good, government intervention only causes problems far greater than the alleged one it’s trying to correct.

(Thanks to Darwin’s Money for the inspiration.)

Filed Under: Bad Examples, Capitalism Tagged With: ,

October’s (Financial) Retard(s) of the Month

October 31, 2012

This is a standup comic named Matt Krantz, rather than the USA Today columnist of the same name. Gannett has a legal department that would crush us like a bug.

 

Multiple winners this time. If the Nobel Committee can give a prize to the European Union, we can give one to a readership.

October’s honorees are the people who pose questions to USA Today money columnist Matt Krantz. That’s instead of giving the award to Mr. Krantz himself, who’s only issuing pat answers to fill column inches. (By the way, USA Today, why did you make your paper harder to read? Is it so you can more easily kill your print edition? And aren’t leading questions great?)

It’s fine when someone like Dear Abby dispenses advice via a newspaper column. The answers are obvious, the advice is straightforward, following it probably won’t result in any lasting damage, and most of the questions are of dubiously concocted origin anyway. But Mr. Krantz’s advice is predicated on incorrect or overly general assumptions. Here’s what we mean.

Q: Is it best to avoid investing in China since the economy seems to be slowing?

China’s economy might not be as robust as a fully developed First World one, especially on a per capita basis, but the Chinese are getting there. More importantly, when your economy involves 1.2 billion people, it can’t help but be diverse. “Investing in China” is a phrase as vague as “attending a college” or “drinking something”. Are we talking about a glass of skim milk, or a double shot of Everclear?

That doesn’t prevent Mr. Krantz from offering universal answers. Why he responded to the reader’s question with anything other than “You have to be more specific”, we have no idea.

The iShares FTSE China 25 index exchange traded fund has fallen nearly 30% from its two-year high set in November 2010.

So what? At the very least, it sounds like the iShares FTSE China 25 is having a sale. A legitimate answer would require our columnist to examine the iShares FTSE China 25’s components. These include China Mobile, the world’s biggest telecommunications concern. (Calling a business a “concern” is funny for some reason, as The Simpsons has shown to great effect.) They also include Petrochina and Bank of China, 2 other state-owned enterprises that enjoy oligopolistic power in what’s supposed to be a burgeoning economy. But no, evaluating even a couple of the 25’s components would take some fundamental analysis. Which consumes time. That won’t do, not when there are easy and unhelpful answers to deliver.

But “Should I invest in China?” is amazingly detailed compared to some of the other questions Matt Krantz fields.

What investment is the riskiest bet?

If you restrict yourself to securities, the riskiest bet is a 500-way tie among penny stocks on the Canadian Venture Exchange and the Pink Sheets. Mr. Krantz explains that small-cap stocks are bad, then contrasts the percentage return of that entire asset class with that of larger stocks.

But people don’t buy “small-cap stocks” en masse, unless they’re buying a small-cap stock mutual fund, a point of differentiation that Mr. Krantz should have mentioned. (If all this jargon is confusing to you, and you don’t know where to start, behold this plug for our book. We’re not the only ones to call it the Greatest Personal Finance Book Ever Written. We start off by assuming you know next to nothing, and by about the halfway point you’ll already be far better versed in personal finance than any of Mr. Krantz’s alleged questioners.)

How frequently are changes made to the Dow Jones industrial average?

Never mind that a 5-second visit to Wikipedia can give a more detailed answer than Mr. Krantz can. Can we stop the charade of writers passing their own topics of interest off as “reader questions”?

It’s not that the advice in this column is necessarily bad, it’s just unbelievably simple. No one’s ever accused USA Today readers of being overly sophisticated, but come on. One “reader” “asked” “How risky is investing in bonds?” Mr. Krantz responded by explaining that bond and stock prices often move in opposite directions, bonds are less volatile than stocks, etc. True as far as it goes, but not exactly groundbreaking and of no help to the investor who needs data more pertinent than

the worst year for large U.S. stocks [was] 1931, when the Standard and Poor’s 500 index lost 43.3%.

Like a good lawyer, Mr. Krantz (nor any of his alleged readers) doesn’t ask any question he doesn’t already know the answer to. Such as “How can investors benefit if the housing market is truly recovering?” It takes almost no effort to Google the names of some prominent home builders, then barely more effort to examine their financials on Yahoo! Finance. (Again, if you don’t know what to look for here, buy our book. Heck, there’s a link at the top of this page.)

Ask Matt:

How do you live with yourself, calling this advice? You do realize that at least a few of your readers are gullible enough to act on your recommendations, right? Just because you’re not telling people to load up on specific overpriced stocks doesn’t mean that you’re providing an honorable reader service here. And look what you just made us do – a double negative.

For the 5th grader in your family who enjoys reading the financial section, Mr. Krantz’s column is fantastic. For those of you who require more detail…well, pick a random article from our archives.

Filed Under: Bad Examples, Financial Retard of the Month Tagged With: ,
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