Be a Free Rider

July 18, 2012

It’s only riding a bike upright that you never forget. Riding one this way requires constant mental application every time.

 

Several years ago, your humble, previously fit blogger was testing only one of his body’s limits – its circumference. Tired of being a corpulent pile, he stumbled across a 2-week free membership at the now-defunct World Gym and proceeded to pay for an annual membership once the free one expired.

Months later, left town for a week. Returned home, and went to the gym only to see the parking lot empty and the doors padlocked. Outside were representatives from a competing chain, Gold’s Gym, selling memberships. They offered literally the deal of a lifetime – $99 a year, forever. The agreement was half a page long. Its only catch, if you can call it that, was that the rate would vanish upon cancellation. Quit and attempt to rejoin, and you’d pay whatever the going rate would then be.

$99 a year to maintain, if not improve, this new lighter and stronger body? They could have quadrupled their bid and it still would have been a bargain. Once you’ve exited the ranks of the disgusting pantloads, it requires little encouragement to remain on the outside.

And Gold’s has had a loyal member ever since, The End.

Yes, but that doesn’t explain the financial benefits of the decision to join Gold’s, which are still accruing.

Gold’s won out over 24 Hour Fitness and some local chains for several reasons. Gold’s has 750 locations around the world, perfect for a hopeless vagabond. Most of them stay open all night.

Paying for the privilege of an organized place in which to lift, stretch and run? Some people will do so for the intended purpose. Others, a number we’ll quantify later, join gyms for a different reason. It’s so they can say they joined a gym. Now, they can employ a new set of pronouns. They can tell friends and acquaintances about “my” gym, as if it’s LA’s Wild Card and they’re Manny Pacquiao.

If you’re going to work out once or twice a week, you might as well not bother. 5 times a week is somewhat standard, and there’s no reason why daily isn’t doable. It’s a habit, no different in form than smoking cigarettes or eating breakfast.

Allow a liberal 30 days a year for traveling and other unavailability, and that means 335 workouts annually. 30¢ a visit. In some jurisdictions, that’s cheaper than one of the aforementioned cigarettes. Subtract the cost of soap and water for a shower and, at least for this member, Gold’s is making negligible money on the deal.

Gold’s has been around for almost 50 years, and we already told you how many locations it has. The company is not run by idiots. How can they afford to lose money on their best customers?

Because this blogger is not one of their best customers, but rather one of their very, very worst. Someone who goes into a standard retail outlet 335 times a year and buys something on each visit is a “good” customer. Someone who pays a flat fee and then gets as much use out of the facility as possible is a different type of consumer, taking advantage of a different business model.

But in the whole, the subscription-based model works. It has to. It would be impractical and unworkable for Gold’s to charge per visit. Doing so would discourage the infrequent visitors, and the frequent ones even more so.

During one year’s reupping of the annual membership, the manager marveled at its low rate. (That original member agreement has since been scanned and preserved for posterity’s sake.) Sensing an opportunity to gain some asymmetrical knowledge, and noticing that there was nobody around, it came time for a discreet question. What ratio of members actually use their memberships? His answer could not have been pithier:

This location has 8000 members, 85% of whom I never see.

Of course it’s a cliché, the fat person who activates a gym membership on January 1 and disappears on January 9, but it’s nevertheless valid. Not only is it a cliché, it’s a demonstration of how easy it is to be a free rider if you’re just the least bit conscientious.

The average membership at said gym is around $300 annually. From the perspective of management (and of the 15% of members who actually use the place), the absent 85% are by far Gold’s’ best customers. They’re pure profit. And for the high-frequency members, pure subsidy.

God bless all 6800 of those negligent members’ rotund posteriors. Without them, in order for Gold’s to generate the same revenue, the gym would have to charge each of the rest of us $2000 a year.

So on some level, we’re not talking about being a free rider. We’re talking about being a +$1901-a-year rider, thanks to a bunch of people who make financial decisions with their emotions:

“I have to get into shape. A gym membership will do the trick.”

 

“I need to shed those holiday* pounds.”

 

“That pregnancy weight just won’t go away.” (Note: complainant’s youngest child is now 11.)

 

“I want to look good for my cousin’s wedding this fall.”

That last one takes the cake, not necessarily literally. If you want to look good for anything other than its own sake, or for the feeling of well-being that accompanies it, save yourself the bother. If your body’s composition needs to change, that change should be permanent. And that should be obvious.

This is a personal finance site, not a fitness one, but the lesson remains. Let other people pay your way, if you can.

It follows that you should never be on the other side of that transaction. A $35,000 golf club membership that you use 4 times a year is ludicrous. Your fellow members, the retirees and men of leisure who play hundreds of rounds a year, appreciate your largesse. Even though they probably don’t know that it’s you who’s being so generous.

Buy assets. Sell liabilities. A fixed cost that you’re never going to use is not an asset. Personal finance is agonizingly simple sometimes. Once again, why isn’t everyone rich?

 

*By the way, you can’t attribute a starting date to a particular pound. If you’re fat around Christmas, you will be fat the following July. And probably the previous one. The very act of seeking a scapegoat, however impersonal (“holiday” pounds, as if Christ’s appearance in a manger is responsible for you swallowing that deep fried onion whole), nullifies your commitment and betrays you as insincere. In a similar vein, you don’t have “wedding” debt nor “vacation” debt nor “furnished the new house” debt. You just have debt. Debt that you chose to incur, and that your creditors are entitled to.

 

Filed Under: Healthy Living, Making Smart Choices Tagged With: , , , ,

The Streisand Effect, Revisited

July 13, 2012

Maybe she should invest in Revlon

 

To quote one of America’s dippiest celebrities on her investment strategy:

We go to Starbucks every day, so I bought Starbucks stock

Your humble blogger drives a Ford every day, and wouldn’t touch Ford stock with Ms. Streisand’s nose.

This is the stupidest way imaginable to invest. Equating the utility of a company’s products with the strength of the company’s finances is like saying “Brett Myers can throw a 91 mph fastball, therefore I bet he’d make a great husband.”

But back to the mentally deficient celebrity at hand. Ms. Streisand is more fortunate than you in that she can get rich (and did, and does) off active income. She’s one of those extremely rare people in that her talents alone made her a multimillionaire. She didn’t have to leverage her money and time, defer spending, and research investments in order to get rich. Her voice and acting chops did it for her. Furthermore, she can afford to lose millions in the stock market and not flinch. Depending on how big Ms. Streisand’s Starbucks position is, were the stock to tank, there’s a corresponding number of nights she can perform at the MGM Grand Garden Arena that will wipe the losses away.

 

Other companies we patronize daily include Nevada Energy (stock trading at close to a 52-week high) and Nestlé (makers of Friskies cat food, stock in a similar position to Nevada Energy.) Two companies, one a utility, one a multinational leviathan, both of which have something of a ceiling on their short-term growth. We need better reasons for investing in something.

Our investments include the following:

  • Netflix stock. Despite never being a member, and never wanting to. Your humble blogger hates both movies and subscriptions. But tens of millions of other people feel otherwise, and investing is more about considering what those other people are interested in, rather than what the investor is interested in.
  • Altria stock. It’s hard to imagine a stupider activity than smoking, but tell that to the billions of people around the world who see inhaling tobacco fumes as a perfectly normal thing to do. Hell, if it’s good enough for the President of the United States, why not?

If other people are going to behave irrationally (e.g. by smoking, or gambling, or drinking, or incurring credit card debt), and no one’s going to convince them not to, why not profit off them? It’s the responsible thing to do. Until mankind wakes up one morning and collectively decides, “You know something? Maybe actively introducing carcinogens into my respiratory system isn’t a bright idea. Time to stop now,” which it won’t, we’re going to continue to be indirectly responsible for selling them their poison.

  • Houses in lower-middle class areas. Because, as always, the price was right. Is right. “You make your money going in” is one of personal finance’s all-time great truisms. An inexpensive house that requires a minimum of upkeep (no lawn maintenance company to hire, no pool to clean) is easy to rent. The renters make the mortgage payments (and then some), leaving the landlord with a profit that requires just a little paperwork to maintain.

That’s exploitation of the poor.

Sure, if you say so.

Now that we’ve got the reactionary simpletons out of the room, let’s resume. Renting out comfortable shelter to people is the opposite of exploiting them. It’s providing for them – meeting the most basic of their requirements, no less. For a fair price, one made even more fair by the fact that these renters can’t afford to buy a house. We advocate home ownership on this site, multiple home ownership if you can do it, but not everyone’s in a position to buy. And we might as well make money off some of those otherwise disenfranchised people. Because someone is going to. So why not us?

It’s the same principle as that advocated by buying Altria stock. Say we were to wrap ourselves in righteous indignation and decide, “This is a travesty. Smoking kills 135,000 Americans every year – an entire Topeka or New Haven – and we won’t be a party to the wholesale genocide any longer.”

That position isn’t going to save a single life. And even if it did, why should we care? Altria customers gladly sign their own death warrants, in exchange for rich and mild satisfaction. On a far smaller and more benign scale, the same goes for Netflix customers. If they want to pay big markups for a service that we have no interest in, why should that be our concern? It might not be our business, but we’re making it our business. To the tune of increased returns (and in Altria’s case, years of ever-increasing dividends.)

Umbrage never made anybody rich. It’s a childish emotion…actually, that’s not fair. It’s an adult emotion. But it doesn’t matter. It’s an emotion. Any of which – anger, joy, trepidation – gets in the way of the subject at hand, which is earning enough money via our financial acumen that we can escape our unfulfilling jobs and subservience to The Man.

“Cold” is never intended as a compliment when attributed to a human, and “rational” isn’t regarded much better. But coldness and rationality are critical if you want to grow your money. If you’re going to get excited about a stock, do so because it’s grossly undervalued and no one else seems to notice. Not because its IPO is coming up and you think it’ll be fun to invest in it. Otherwise, have no emotions whatsoever.

Another company we have a big position in is Tesco, a name unfamiliar to most people on our continent. It’s the UK’s largest retailer, their answer to Walmart, with a smattering of stores around Asia and the rest of Europe. We’d say we’ve never patronized Tesco, only looked at the company’s financial statements, but it turns out that indeed we have given them our business.

Tesco also operates a few grocery stores under a different name in the United States: Fresh & Easy. If you’ve never been to one, and if you don’t live in the Southwest you probably haven’t, Fresh & Easy is one of the most self-righteous and condescending places we’ve ever patronized. When you shop there you make a statement, something along the lines of “Slap the word ‘organic’ on a package and I’ll nod my head in brainless approval. Plus I don’t have the budget for Whole Foods.” (If you’re wondering, the statement we made was “We’re stuck in Phoenix, we need milk, and this is the closest supermarket.”)

The parking spaces closest to the door are reserved for…well, here’s a picture:

 

 

(Aside: That’s not a handicap sign. It carries zero legal weight. Yes, we parked our 18 mpg SUV there and didn’t flinch. Besides, if management really cares about ecology, they’d let us park as close to the door as possible instead of forcing us to burn fossil fuels looking for a space somewhere else in the lot. A point we never got to share with the scrawny, disdainful man in the Nissan Leaf who gave us his approximation of a death stare when we disembarked and entered the store. A, You don’t know what’s under the hood, Slugger. B, No, we’re not going to pop it for you. Take it up with management. Guy looked at us as if we were ordering napalm strikes on the Amazon rainforest.)

The point is that this Tesco subsidiary is the kind of place we’d only spend money at under rare circumstances, and would rather make fun of. But the money rolls in, and as an investment, we love it. Tesco carries minimal debt, continues to build tons of market share, and has a history of dividends (even though its American operations are struggling – the company’s recently closed over a dozen stores.)

Smarmy environmentalism isn’t our thing, but again, this isn’t about us. It’s about the market. What other consumers want to buy. What producers, in this case Tesco management, want to offer. And that’s a far more sound investment strategy than “We visit ESPN.com every day, so we bought Walt Disney stock”, any day of the week.

Filed Under: Capitalism, Investments, Making Smart Choices Tagged With: , , , , , ,

Who’s Worth Reading?

July 11, 2012

There is a respite from all the drivel you’ve been reading. Enjoy.

 

Almost no one.

Today we’re recommending the tiny fraction of personal finance bloggers other than ourselves who, for lack of a more convoluted expression, get it. This isn’t one of those reciprocal-link things where we compliment other bloggers so they’ll return the favor and thus improve both parties’ Alexa rankings. We’re just trying to avail you of other sites that reach the same conclusions we do, though not necessarily from the same starting place. This isn’t an exhaustive list, and we’re qualifying it as such only because we’re bound to inadvertently leave someone off. Our apologies in advance. Here’s who you should be reading, if you’re going to read anyone:

Afford-Anything. The brainchild of Paula Pant, an Atlanta 20-something who has all the pluses of a journalist (inquisitiveness, a respect for the English language) with none of the drawbacks (self-righteousness, naked agendas.)

Her writing is crisp and forthright, and her subject matter is original. Like everyone else on this list, she practices what she preaches. She’s a freshman real estate investor who understands that you can either complain about your station in life and look for scapegoats, or you can take uncomplicated steps to build wealth. Paula isn’t hung up on frugality, but she’s also not going to waste money for the sheer enjoyment of it. She likes to travel, but she hates the idea of financing it. Our kind of girl. (Sorry fellas, she’s taken. By a guy who knows his way around a tool box, no less.)

 

Financial Uproar. Nelson Smith is a 29-year-old “chip guy” in Drumheller, Alberta, a little town 50 miles northeast of Calgary. His job is to ensure that the requisite number of bags of Doritos (or pretzels, or whatever) find their way into the retail store with the corresponding point-of-sale display. It’s not particle physics, but it’s a way for Nelson to make a nice living without committing undue time.

Which frees up hours to write one of the funniest sites in any subject. Nelson has opinions, and believes he’d be wasting his time if he wasn’t sharing them with you. He thinks (or rather, knows) that certain investment strategies are stupid while others aren’t. Most bloggers would rather do anything in the world than take and defend a position. Nelson does, every week, peppering his findings with a humor that’s part venomous, part juvenile (our description of which is intended as a compliment.)

 

6400 Personal Finance. Another 20-something, Dave is an army officer stationed at Schofield Barracks, Hawai’i. He recently returned from Afghanistan, where he handled more responsibility than do most civilians twice his age. If you didn’t know what Dave did for a living, you wouldn’t need to be too smart to figure it out from his martial and uncompromising style.

Dave means business. All it takes is one paragraph, sometimes even one sentence, for you to perceive his disdain for fools and foolishness. He does have a sense of humor, but it’s an acerbic one buried under a broad compulsion to snap people out of their bad habits.

We’d bet that Dave has never used the word “consider”, as in “consider adding an extra $20 to your monthly credit card payment.” He’d tell you to quit screwing around and pay the thing off in its entirety, but not before pointing out how irresponsible you were to have incurred said debt in the first place.

The site is named after the number of mils in a circle, a mil being a unit of angle. (A professional marksman requires greater calibration than that measured by the relatively coarse 360 degrees of a civilian circle. And thus for personal finance, too.)

 

Timeless Finance. Our newest discovery is the work of Joe Wood, a “purchasing specialist” in Toronto. Forget every stereotype you have about obsequious, mousy Canadians. Joe spells out what many people don’t want to hear about the banality of consumer debt and the cost of inaction. Timeless Finance is an antidote to the homogenous mass of personal finance blogs that usually consist of nothing more than an overextended writer lamenting her situation and not taking any of the obvious steps to fix it. (And let’s just say that if Joe’s posts ever become half as brazen as his emails, Timeless Finance could one day knock off Control Your Cash as the most hated personal finance blog in existence.)

 

Len Penzo. The only blog on the list whose founder we’ve met in person, the namesake of the site is an engineer who lives in Southern California with his beautiful wife and 2.3 kids in a house that we can only assume is surrounded by a white picket fence. The senior entrant on our list (a comment on the site’s age, not necessarily its founder’s), Len writes in an easily digestible, matter-of-fact style that’s both engaging and amusing. His blog isn’t overly technical, but rather contains common sense observations about both the micro and macro levels of personal finance. (The latter of which means, in so many words, that his political views are in lockstep with ours.)

Len’s blog is family-friendly, rarely delving into even PG territory. You can share his posts with your grandmother, something you probably wouldn’t want to do with a random entry on Financial Uproar.

Len is also so unfailingly courteous that you wonder what deep family horror he’s hiding beneath the surface. Except that we met his parents, and they were a delight too.

 

DQYDJ.net. It stands for “Don’t Quit Your Day Job”, and it’s the work of PK and his crew of like-minded writers. He’s a software engineer who lives in Silicon Valley, and who maintains the most technical of the sites on this list. Sample topics include everything from basic economic concepts like the income effect, and minimum wage laws (and why they’re bad) to more practical matters like the role of gold in your portfolio and the perfect credit card spending strategy. PK is a polymath who complements his pieces with killer interactive charts and other visual aids, as opposed to the stolen photos with cryptic captions that we like to use here. DQYDJ also includes occasional detours into pop culture and other non-financial topics.

 

Sterling Effort. The work of another software developer, this site is the antithesis of the coupon-clipping and balance-transfer nonsense that you can easily find by swinging the proverbial dead cat. Honestly, how many ways are there to tell people how to save miniscule amounts of money?  27-year old Ash Willis (and a partner) are based somewhere in the United Kingdom (sorry we can’t narrow it down any more than that.) Their driving directive is eerily similar to ours, although delineated in a refined British vernacular that we couldn’t hope to duplicate:

Children go to school. They learn how to interpret poems and solve differential equations, but at no point are they taught about money. Sterling Effort was created to stuff some financial knowledge into those of us who grew up without being taught how money really works; how to make it, save it and grow it.

 

The Oblivious Investor. Mike Piper is a 28-year-old CPA (although he looks like a middle-school student) who lives in St. Louis. He’s advanced way beyond the theoretical arguments (“Should I employ Dave Ramsey’s debt snowball?”) that have already been decided, instead focusing on nuts-and-bolts matters. For instance, Mike breaks down funds by category and objective, telling you what’s worth investing in and what isn’t. He takes what could be dreary subject matter and summarizes it beautifully. Mike manages to do this because he refuses to communicate in the pointless and counterproductive corporatespeak that plagues every realm of modern life and that wastes countless hours.

All these sites’ authors have the following in common:

  • Originality.
  • Curiosity.
  • An interest in knowledge, if not for its own sake then for how it’ll benefit them financially.
  • Literacy.
  • An engaging writing style.
  • An ability to get to the point quickly.
  • An understanding that being responsible helps you build wealth, and that there are common habits that are guaranteed to keep you poor.

…all of which distinguish them from the swamp of boring and repetitive personal finance sites that litter the internet. None of the above will ever regale you with stories about how much debt they’re choking under, how difficult it is to get out, or how they’re going to start applying themselves to good habits as soon as they take that expensive vacation they’ve been dreaming about and thus deserve. Anytime any of our favorite bloggers shares a first-person story, it’s to illustrate a point, rather than to assuage their own egos.

If you can’t stomach Control Your Cash (and lots of people can’t, although they don’t typically make it this far into a post), subscribe to all of the above sites and you’ll learn more about building wealth (and thus freeing up your time) than you will just about anywhere else.

Filed Under: Healthy Living, Making Smart Choices, Newsflash
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