Look at the BIG PICTURE

August 10, 2011

 

Our generation's U.S. Steel

Slow down, already.

Yesterday, Arizona Diamondbacks left fielder Gerardo Parra went 4-for-4 against the Houston Astros, making Parra the best hitter in the world by far. He batted 1.000, or 634 points higher than Ty Cobb’s record career average. Move over, Georgia Peach, there’s a new all-time greatest: baseball’s first perfect hitter. Parra’s historic achievement will doubtless lead every sportscast across the nation and put him on the cover of Sports Illustrated and possibly Time and Newsweek.

Don’t be ridiculous. One day means nothing. Any idiot knows you can’t look at batting averages over a 4-at-bat period and determine anything meaningful.

Are you sure? Because judging from the nationwide panic over Monday’s stock market drop, the extreme short term means everything.

Our nation’s debt got downgraded Friday, for the first time in history (which is to say, 90 years.) Which presumably means the United States will have to pay higher interest rates to borrow money in the future. Those interest rates will trickle down to the institutional and consumer levels, meaning we’re all going to be paying a few basis points more. The price of money goes up, less of us can afford to borrow, and the economy will stagnate all the more.

That much is likely true. But it’s not going to happen overnight, despite what Monday’s enormous market drop would indicate. Because once again, the market followed a gigantic fall with a massive rise. It almost always happens this way.

It’s tough for the rookie investor to believe this, and it’s tough for the seasoned investor to remember it, but…

Stock prices are nothing more than opinions. They’re values attached, via crowdsourcing, to intangible pieces of dynamic, vibrant corporations.

And collective human wisdom can sometimes be extremely short-sighted.

That’s “dynamic” and “vibrant” in the literal sense of those words, rather than their modern connotations. Those corporations aren’t necessarily growing richer and more powerful every day, but rather their worths continuously fluctuate.

Think about it. On Monday the Dow dropped 634 points, one of the 10 highest absolute falls in history (relative to its level, it didn’t make the top 30.) Take a random Dow component, i.e. one of the 30 stocks whose prices comprise the Dow Jones Industrial Average. (Read this if that makes no sense.) Caterpillar closed Friday at $91.09, shortly before the debt downgrade came down. CAT closed Monday at $82.60.

Step back for a minute. Does it make any kind of sense that one of America’s most venerable companies (its venerability ratified by its very place on the Dow), the world’s largest manufacturer of construction and mining equipment, became 10% less desirable to own in a single 8-hour period?

This is a company that grossed $14 billion in profit over the last year. CEO Doug Oberhelmen didn’t suddenly quit and name Russell Brand as his successor. The FDA didn’t find dangerous levels of peanut residue on Caterpillar’s lift trucks. For Caterpillar’s business operations, Monday was just another uneventful day.

But for Wall Street traders and their clients, news that has only an indirect impact on Caterpillar’s business has a direct impact on its stock price. The propensity of traders is to overreact. We just proved that 3 paragraphs ago: there’s no logical reason for a company to suffer a 10% drop in one day unless something cataclysmic happened to its business. Which of course, it didn’t.

On Tuesday, the day after a market sell-off that some ignorant commentators took as the precursor to brokers jumping out of windows (which never happened, not even on Black Monday in 1929), you’ll never guess what happened. The market rose historically, by 429 points. Caterpillar shares gained most of what they’d lost. Again, if you look at it with absolutely no perspective, did Caterpillar do anything to justify a 6% rise in its price, over one day? Of course not. But if you extrapolate that rise over another 10 weeks, CAT will be trading at $1455. This train’s leaving the station! Are you going to be on board?

Every time the market takes a wild daily swing, whether high (stocks just got more difficult for you to buy!) or low (your retirement account lost value!), step back. Don’t ignore the forest for the trees. Even a wild weekly swing is nothing to panic or get excited over. And maybe you should wait a couple of months before declaring a career .279 hitter with below-average power and no particular propensity for getting on base ready for the Hall of Fame.

Parra ran into a couple of pitchers having a bad night. Or perhaps he just swung, hoped for the best, and made contact via dumb luck. Or took advantage of a hungover third baseman playing out of position and begging that the ball not be hit to him. Either way, Parra is not going to be challenging Jose Reyes for a batting title on the strength of one irregular night. Nor is Caterpillar, or any other major corporation, on the brink of bankruptcy. Regardless of what your fellow investors tell you.

**This article is featured in the Totally Money Carnival #33**

Filed Under: Capitalism, Investments, Making Smart Choices, Math, Personal Finance, Shopping Tagged With: , , , , ,

9/10 of a Penny Wise and Pound Foolish

July 6, 2011

Here’s a fun idea for a drinking game: gather your alcoholic friends around the TV at 6 pm or 11 pm (or if you’re truly committed drunks, 7 am.) Turn on the local news. Anytime an anchor uses the phrase “pain at the pump”, do a shot. If the same phrase appears as a graphic, do 2 shots.

The standard wisdom is that not only are the gas companies setting their prices criminally high, but that it’s crucial that we as consumers take whatever means necessary to economize. It’s thus a moral imperative to find the cheapest gas we can, wherever that might be.

This cultural obsession with recording and comparing gas prices has led to the proliferation of websites devoted to posting prices- Gas Buddy, Gas Price Watch, etc. Even MSN recently got in and took the concept mainstream. Each site helpfully prompts you for a ZIP code and then tells you where you can go to save a few pennies a gallon.

Here’s what’s happening with gas prices in the ZIP code that contains Control Your Cash’s world headquarters.

(Yes, we have a local retailer named “Terrible’s.”)

The cheapest gas on the map is at Location 1, in the southeast. Say we’re stuck in the inconvenient northwest, where retailers are gouging us with expensive $3.85/gallon gas, and we want to take advantage of that sweet bargain-basement $3.79/gallon gas on the other side of town.

To accentuate the point, let’s assume we drive a car that sips fuel judiciously. So we get in our theoretical 36 mpg Honda Civic and drive to the 7-Eleven, ready to fill the trusty coupe’s 13.2-gallon tank. But wait. The needle’s only at the 1/4 mark. Should we drive around the block a few dozen times and thus save even more?

Let’s say we act rationally and don’t. That means we buy 9.9 gallons, and save 6¢ on each one. For a total of 59¢. Easy street, here we come.

And it was only 5 miles out of our way, 10 miles round trip, which means we burned .27 gallons to get there. Or $1.07. Net loss 48¢, not including the 20 minutes or so it took to drive there and back. Even if you value your time at a mere $8 an hour, that’s another $2.67 you’re out for a total of $3.15 just to hunt for cheap gas.

You see? That military-industrial complex has its fangs in so deeply, that they’ve now got it costing us $3.15 just to shop for gas, let alone buy it!

The problem is obvious – there just isn’t that much difference between cheap and expensive gas in the same locale. It’s not like we chose an extreme example to illustrate this. We didn’t go looking for the part of the country that filled the bivariate conditions of having the smallest discrepancy between low and average prices, and the maximum distance between them, only to happen to find that place in our backyard.

Gas Price Watch and its ilk seem to have enough regular readers to stay viable: it boasts 173,382 “member spotters”. If that many contribute to Gas Price Watch, then at least as many must use it, right?

What a waste of resources, brainpower, bandwidth and more.

In the extremely unlikely event that your neighborhood station is selling gas for $6/gallon while one half a mile away is selling it for $4, then fine; go out of your way to buy the cheaper stuff. But under any set of real-world circumstances, you’re mildly crazy if you don’t simply fill up where and when it’s convenient.

**This article is featured in the Totally Money Blog Carnival #27, the Titanium Edition**

**This article is also featured in Totally Money Blog Carnival – Trivia Edition – July 18 2011**

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

Micro Millions

April 25, 2011

Brandi couldn't find the man of her dreams until she won the lottery

Indulge us for a few minutes before you go out and buy this week’s lottery ticket(s)?

Mega Millions and Powerball are America’s two biggest lotteries, available in 41 and 43 of the contiguous United States, respectively. And every week, tens of millions of idiots feed the beast.

Both games are for mental patients, but let’s deconstruct only Mega Millions for now.

To win the jackpot, you have to pick 5 out of 56 white balls and 1 out of a separate 46 red balls.

Regard each of the two colors separately. For white balls, you can pick any one of the 56 for your 1st ball. That leaves 55 choices for your 2nd ball, 54 for your 3rd, 53 for your 4th and 52 for your 5th.

Which would be

56 x 55 x 54 x 53 x 52

except you need to remember that every combination is counted multiple times. Say you pick balls 8, 13, 25, 33 and 50. Well, that’s the same as 25, 8, 50, 13 and 33, right? Any one of your five chosen balls can be in the 1st position, leaving four balls for the 2nd position, three for the 3rd, etc. There are 120 possible permutations, so the total number of five-ball combinations is:

56 x 55 x 54 x 53 x 52
5 x 4 x 3 x 2

Which equals…well, it doesn’t matter what it equals because we’re not done yet. We still have to multiply by the chance of you getting the red ball right, which you have a 46-to-1 shot of doing. So the chance of the numbers you pick being the numbers that come up is

56 x 55 x 54 x 53 x 52 x 46 = 175,711,536
5 x 4 x 3 x 2

That’s right, 176 million to one.

Lots of people, including most lottery players, don’t bother to distinguish among large numbers. They figure that once you get beyond 10,000 or so they’re all pretty much the same. The chance of winning Mega Millions is about the same as the chance of you choosing a U.S. resident at random, then correctly guessing her street address.

Of course, not every dollar collected goes to prizes. No lottery is or can be a zero-sum game. Each lottery corporation needs to keep some cut to cover expenses and turn a profit.

In California, that cut is about 48%.

ExxonMobil’s 2009 profit margin was 8.6%, and more than a few thousand people regard the oil and gas multinational as exactly the kind of thieving leviathan society needs to dismantle brick by brick.

This week’s estimated jackpot is “$105 million”, which is a gigantic lie. Look at this, direct from MegaMillions.com:

The ESTIMATED JACKPOT number is in 20-point font, and ALL CAPS. The Cash Option number is in 11-point font. In other words, the estimated jackpot isn’t $105 million. It’s $66 million. Wanting to believe it’s the higher number doesn’t make it so.

Do you work on commission? Even if you don’t, if your employer offered you a $40,000 bonus this week, would you be interested?

Okay, what if he then said,
“Well, the commission is really $16,900 after taxes. We could cut you a check for that much now, but if you’re willing to take $128 installments every month until 2037, and also add the taxes back in, then that totals $40,000.”

You’d cry dishonesty, and you’d be right. This is yet another example of government functionaries obfuscating the truth in a way that if you or I attempted, we’d get sued. And lose.

After taxes (which average 7¾% state and local in some jurisdictions, plus 25% federal), that jackpot shrinks to $44,452,250.

But that’s assuming that only one ticket will win. The chance of there being exactly one winner varies with the number of tickets sold, but it can never be more than 37%. In other words, there’s never a scenario in which the most likely outcome is that exactly one person wins. If you win – which as we’ve all but proven, you won’t – there’s a good chance you’re going to have to split that prize.

Say there are two winning tickets, which are thus each worth $22,226,125. For doing the near-impossible – getting all six numbers right – you’d get 6% of what you should get. The remaining 94% goes to the government. The very government that has a monopoly on these games, and also has a de facto monopoly on education – and has taken the responsibility of teaching math to the same populace it sells lottery tickets to.

As the brilliant Durango Bill points out, if you drive 1000 yards out of your way to buy a lottery ticket – 500 yards there and 500 yards back – it’s more likely that you’ll die in a car accident en route to get your ticket than you’ll win.

But hey, you can’t win if you don’t play.

**This article is featured in the Totally Money Carnival Blog Carnival #20**

Filed Under: Bad Examples, Capitalism, Consumer Debt, Making Smart Choices, Math Tagged With: , , , ,
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