5.3 billion birds in the hand

December 31, 2010
A bird in the hand

We had the hardest time keeping the little freak still for the picture

Is the ability to recognize opportunities a characteristic from birth, or a teachable skill?

Most of us miss out on most opportunities, by definition. Otherwise we all would have sold our houses in 2008, invested the proceeds in Cost Plus stock, then bought the houses back this fall for pennies on the dollar. You didn’t, which is why you’re still reading personal finance articles and trying to make sense of the world.

Are you familiar with Groupon? Not a ridiculous question – we asked a fairly with-it 24-year old woman about it the other day. She’d never heard of it. The company’s clever name gives you a hint as to how it works. You enter your location at Groupon.com. Every day, in every city Groupon serves, the company pairs with a local retailer to offer a limited-time deal. This isn’t 10¢ off a jar of lemon curd, either. Current Groupon deals include $49 for a 1-hour facial, $10 off a ticket to a Stanford University basketball game, $50 of food at the Pewter Rose Bistro in Charlotte, NC for $25, etc. The catch is that a certain number of people have to sign on or the deal won’t go into effect. (That number is posted for each deal, along with the number of remaining people needed to activate the deal.)

The mutual benefit here is obvious. Customers save money if enough of them exist to activate the coupon, but lose nothing if there aren’t (membership is free for both customers and businesses.) Meanwhile, the merchant gets guaranteed customers who went out of their way to show an interest in buying the product. If too few people sign up to activate the deal, the merchant loses nothing (and gains information – either “we need to offer a sweeter deal” or “what we’re selling is so bad that no one’s interested.”) Groupon keeps half the coupon revenue.

Like Twitter and eBay, Groupon is the kind of enterprise that makes a rational person kick himself for not thinking of the idea first. The website is sleek, informative, and easily navigable, particularly on a phone. Even the descriptions of the deals are entertaining to read – a staff of moonlighting comedy writers and stand-up comics creates them. Groupon started a little over 2 years ago in Chicago, offering discounted pizzas at one particular joint. Today, the company has 35 million members in 250 cities on 4 continents. It employs 3,000 people, most of them in sales. When the venture capitalists came calling, Groupon management stood at attention. Liberal estimates say the company will take in $350 million this year. It’s hard to imagine that Groupon’s expenses are more than a tiny fraction of that. Back in April – 1/3 of Groupon’s life ago – the company was making $1 million weekly. Groupon founder Andrew Mason has lofty ideas – he claims that he wants to do for local businesses what Amazon did for online retail.

Mason might be a visionary, but his business acumen is curious. A few weeks ago, Google offered $5.3 billion (excluding incentives) for Groupon. That’s about what Sirius XM is worth, but Groupon makes money. Whether the Google offer was in cash or Google’s resilient stock, Mason and his partners could have gotten ultra-rich faster than just about anyone in the history of commerce.

Mason turned Google down, because he’s insane.

Groupon is a great idea, and one that’s easy to copy – just ask LivingSocial, CrowdSavings, Tippr or one of Groupon’s hundreds of other new competitors. LivingSocial already has almost as many visitors as Groupon, with a website that’s hard to distinguish from Groupon’s at times. Groupon didn’t just get big quickly: it reached its perihelion shortly thereafter. Sure, there are millions of non-members to convert, but why should they patronize Groupon when its competitors are offering the same thing free? The competitors are increasing exponentially while the potential customer base grows arithmetically. It’s a Malthusian problem for a different century, only this one doesn’t involve cannibalism and starving orphans. Besides, how many discounted spa treatments can the world handle? (Groupon’s clientele is overwhelmingly 30ish and female.)

Mason’s strategy, at least as he tells it, is to do an initial public offering and turn his company over to ordinary investors by 2014. By which time we’ll have discount-searching polycarbonate chips implanted in our heads. Seriously, at the rate the number of his competitors is growing, Mason could have 2000 Groupon knockoffs to contend with by then. The greater the dilution, the less interest Google or anyone else will have in Groupon’s targeted customer information. Groupon management let a winning lottery ticket expire in the name of future aspirations. The iron is almost cool to the touch as this point, and Mason still isn’t striking it. Check back in a few months when another potential suitor makes a low-9-digit offer for Groupon. If that.

And if someone offers you what seems like a ridiculously high price for something, don’t double down on your own good fortune. Take the freaking money.

**This post is featured in the inaugural edition of Totally Money Carnival**

Filed Under: Economics, Estate Planning, Finance, Making Smart Choices Tagged With: , , , ,

Dartboard investing only works when you stand inches away

December 27, 2010
Dartboard Investing

Those ancient Mayans had one messed-up clock

 

Every day, people miss out on great investments because they don’t know how to quantify risk vs. return. You need written investment criteria.  Here’s a sample.

If you don’t have the energy to click the link, it’s mostly a series of questions that read something like this:

What type of investment is it?
Real estate.

This is a straightforward question with a clear answer. Knowing what classification the investment falls into tells you how liquid it is and how much its value might fluctuate. If the investment were a stock it’d be easy to sell, though not necessarily for a premium. A plot of dirt, improved or raw, has tangible value. But selling it, even in a seller’s market, can burn a lot of hours.

If I bite, how will this affect my allocation?
Negligible.

You don’t necessarily want your eggs in a million baskets, nor in one, but you do need to know how many they’re in. And if the breakdown among the baskets gets out of proportion, you want to know that, too. Say your portfolio starts out with 33% in growth stocks, 33% in long-term notes and 33% in real estate. Six months later, if the percentages have changed to 5, 34 and 61, you’ll want to rearrange to keep things in balance (or ride the 61% component if so inclined.)

But what if this transaction did affect allocation? What would you do to balance the imbalance? You could sell an asset, buy other assets, or decide you’re going to live with a different breakdown.

What do you estimate the return will be?
4½–8%, plus however much the property appreciates, which we estimate will be nothing for the next 3-5 years.

We keep score when building wealth. Amazingly, some people haven’t figured this out yet or refuse to acknowledge it. If you think investing has an emotional component, and that either being a nice person or playing hunches is part of the game, please stop reading Control Your Cash and find something less demanding. Seriously. See, we said “please”. Didn’t hurt your feelings or anything. You should be happy.

What exactly is the investment?
A 2nd floor, 1-bedroom/1-bath 770 ft2 condo in an above-average part of town. The condo’s listed at $50,000 and approved for a short sale*.

Meanwhile, nearby condos rent for $650-750 a month.  Estimated annual expenses read like this. (This is something called an annual property operating data worksheet. Download it at your leisure.)

The above question is self-explanatory, right? And its relevance should be self-evident. If it isn’t, return to kindergarten and start over. We’ll be waiting.

———-

Anyhow, this investment allows for multiple variables that affect ROI (that’s return on investment, in case you forgot.) Variables include things like rents, and whether you can buy the property as owner-occupied, which means you should be able to get a cheaper loan with lower closing costs. Here’s what we mean:

There are two primary ways to buy this condo as an investment if you have neither the cash up front nor excellent credit. Find a partner, or incorporate.

1. Find a partner (a joint venture.)

An investor lends you $50,000 interest-free to complete the sale. You buy the house and live in it.

Nothing’s free, of course. Under this form of owner occupancy, you pay the investor 70% of the house’s net operating income (i.e., the rent.) Another 10% of the rent goes into a reserve maintenance account – out of which you pay for things like appliance repair. Which you shouldn’t need to if you have a home warranty. But there’ll always be some unexpected expense that a warranty won’t cover: stucco repair, interior paint, etc.

What about the remaining 20% of the rent? That’s yours to keep. Yes, under this arrangement you pay only 80% of fair-market rent. On the other hand, doing it this way you can’t write off your expenses on your tax return.

Who would work out a scheme like this? Lots of people. It’s a perfect vehicle for a father who wants to help his kid buy a home and still earn a return.

Or

2. Form a limited liability company (details here, here, here, and here.)

You and the person who’s lending you money are partners in the LLC, which becomes the official and legal owner of the property. Once you create the LLC and it takes ownership of the property, it’s the sole owner: nobody and nothing else. It’s not as if you own x% of the property and your partner owns 100-x%. The LLC owns it all. You own a particular share of the LLC, but that’s a different issue.

Each LLC has an operating agreement that lays out the details of the deal: such as who gets to write expenses off, how you’ll split profits when you sell the property, and specific duties for each partner. The LLC also protects you from unlimited liability in case a tenant or a visitor decides to sue. They can sue for $1 trillion if they want, and even have a case, but they can’t get more than your investment in the LLC.

With this example, the investor again lends you $50,000 interest-free. You find a tenant, charge her the going rate and again keep 10% in a maintenance account.

This scheme works for partners with disparate skills – e.g. one partner with the time and expertise to find the property (in this example, you) and the other with most of the money.

What’s the downside?

Property values could drop even further, meaning you might need years just to break even. If the property doesn’t rent immediately, your return will decline.

The renter might damage the property. This is why you qualify prospective tenants and collect a security deposit. If you really want to avoid headaches, spend 10% of the rent on a property manager. If you value your time at all, hiring a property manager will pay for itself quickly.

You and your partner might disagree on how to manage the place and, when it comes time, how to sell it. You solve this with an operating agreement, one that looks something like this:

That’s pretty much it. Just make sure that every conceivable subject of potential dispute finds its way into the operating agreement, and that you register your LLC in a state that’s business-friendly. That usually means Delaware or Nevada. Or failing that, your home state. (You can live and operate in, say, North Dakota but register in Maine if you want. It’s totally legal.) Just don’t register in California, and never New York: their LLCs don’t protect you enough.

The old pessimistic saw says you have to have money to make money. That’s not true if you leverage someone else’s.

*Selling a house short means begging the lender’s representatives to take less than they originally agreed to, on the theory that a wounded bird in the hand is worth more than a potentially rabid pair in the bush. Details here.

**This post is featured in the 1/4/11 edition of the real estate investing carnival**

**This post is also featured in the Carnival of the Road to Financial Independence**

Filed Under: Investments, Making Smart Choices, Math, Net Worth, Personal Finance Tagged With: , , , ,

10 Tips for Writing a Personal Finance Blog Post

December 20, 2010
Misspelled wrist tattoo

A misspelled wrist tattoo will greatly reduce the chances of your law firm making you a partner

Start by giving it an easily digestible title, preferably one that features a particular number of ways of doing something.

Then, drop in a lazy reference to Google and the number of hits it returned regarding a key phrase from your blog post. That’ll make people marvel at how many others from around the world are presumably thinking about the topic you’re writing about. Did you know that the phrase “the topic you’re writing about” returns 427,000 results?

(By the way, that’s a gigantic lie. Now, if you type in that phrase in quotes, Google’s first page will indeed attest to that many results. However, if you click through them all, hitting the “next” page on the bottom right corner and going through 10 pages of results at a time, you’ll find that the number of results Google initially estimates and the number it returns differ exponentially. This goes for almost any search term. In this case, Google really returns only 282 results, no more than 278 of which are unique.)

Now that that’s out of the way, talk down to your readers as best you can. Whatever you do, convey as little worthwhile information as possible. State the obvious, and don’t even bother to dress it up in original or unorthodox prose. We read one recent entry from a prolific cross-poster who opened a post on life insurance with the sentence “I don’t like to think of my husband dying unexpectedly.” She wasn’t going for humor, either. She was as earnest as the Pope conducting Easter Mass. You see, because her husband is someone whose company she enjoys, and whom she therefore wants to live, i.e. not die.

Use exclamation points to show readers where the funny parts are!

Shoehorn your own experiences into the post, regardless or how relevant they are. Even better, if you can find an instance or two from your personal life that somehow illustrates the bad habits you don’t want your readers to exhibit, and you’re not even self-aware enough to make the connection – well, then you’re close to striking gold. Something like this:

Now, I never gamble. Well, once in a while I go to Vegas with friends, but only for a few days at a time and we only play the slots – none of those complicated card and wheel games! Besides, it’s not like we’re there just for the purpose of wasting money. On most of those trips we go primarily to drink as much as we can, pay for bottle service at clubs and maybe buy some cigars. That’s just me and my friends, though. I certainly can’t tell you what to do. A little moderation is good, though, if you’re looking for rationalization and for a bromide from a person who clearly can’t form an independent thought and is reduced to only speaking in clichés and catchphrases.

Another critical maneuver that separates the award-winning blog post from the merely unreadable one is sloppy editing. Whatever you do ,ensure that you’re punctuasion marks conflict with standerd usage. Spell however you feel like speling, too. Youve got content to create! Your not some english professer of something. Most importantly   screw up you’re homonyms. Their to vital too get correct.

Another thing to remember when writing a personal finance blog post is to be as stilted as possible. When you write with the awkwardness of a middle school student, i.e. someone between the ages of 11 and 14, who goes to school, your writing will achieve a level of dry lifelessness that exudes from the page. Or more precisely, a level of dry lifelessness will be achieved by your writing. When the passive voice is used by you, that sentences pile on top of one another instead of flowing will be noticed by your readers, especially if you think a comma is interchangeable with a period and a run-on sentence is as easily read as a series of sentences. This type of writing is preferred by attorneys and politicians, and thus is indicative of a highly cultured brain. Speaking directly is to be discouraged.

Even if you’re going to use the active voice, never ever cut. Always leave every word in. Don’t remove anything you’ve written. Even if you conveyed an identical thought in a nearby sentence.  Don’t write conversationally, if you can help it. Using “needs” as a noun is just one way of showing that you’re far too bright to communicate in everyday parlance. Why tell people to buy the cell phone with the right tradeoff between features and price when you can tell them to get the one that best suits their communication needs? Better yet, tell them to get the one that provides the best overall phone experience. Or that specializes in phone solutions. If you can work “needs”, “experience”, “solutions” and “going (or moving) forward” into the same sentence, move to the advanced class.

Finally, elicit feedback cheaply with a series of open-ended questions that summarize your post’s content. Use boldface and italics if at all possible.

Do you think these are legitimate tips for writing an uninspired blog post? Do you have tips of your own you could share?

Filed Under: Bad Examples, Book Promotion, Making Smart Choices Tagged With: , , , ,
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