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Friday, August 31, 2012

Another Elevator Analogy

You thought we were done with the elevator analogies, right?  Not so fast...

Last year I attended an elementary school science fair for one of my kids.  Predictably, there were lots of lemon juice batteries, repelling magnets, and baking soda and vinegar volcanoes.  One child, however, chose to do a psychology experiment.

People are creatures of habit.  When we get on a elevator, we almost always face the door.  It makes sense to watch the entrance/exit, and so that is what we do.  But there is another reason why we face the door.  It's what everyone else does, and we have a strong desire to fit in.  In other words, facing the door is proper elevator etiquette.

The student decided to do an experiment about how people position themselves in an elevator.  The child and her family got on an elevator and they all faced away from the door, toward the back of the elevator.  Then they trolled the floors, picking up new riders and examining their behavior.  The idea was to see how many people would still face the front out of habit, and how many would face the back out of peer pressure.

The results were interesting.  What actually happened was that no one got on the elevator at all!  Upon seeing a handful of people all facing the back of the elevator, everyone refused to get on.  People have certain strong societal norms they've come to expect, and when those norms are violated, they are simply confused.

Perhaps this explains one of the reasons why a disciplined approach to personal finance is so difficult for many people.  We live in a society that views shopping as entertainment, and where investments are often selected to impress others.  Most people don't know or care about their balance sheet.  They just want to know if they have the desired cash on hand for this afternoon.

Discussing a slight modification to that behavior may resonate with people, but suggestions to radically change may be viewed as facing the wrong direction in an elevator.  People may just be confused and recoil from advice that is so different from what they see all around them.

Thursday, August 30, 2012

Using Multipliers in Financial Thinking

I work with a lot of people who do financial calculations all day. I'm always surprised at how many of these people insist on making the math so complicated. One of the clumsiest parts of many financial calculations is how people deal with percentages. In finance, many of the problems involve a percentage increase or decrease. In these cases, you can make the calculations much simpler by using multipliers. It's a great math shortcut and money hack.

For example, if something increases by 5%, you can take the long way and divide 5 by 100 and then multiply that by the original number and then add that product to the original number. But to save time, you can simply multiply 1.05 times the original number. That "1.05" is the multiplier equivalent of "+5%". "1.20" is the multiplier equivalent of "+20%", and "0.90" is the multiplier equivalent of "-10%".

If you can learn to think in terms of multipliers when you see percentage increases or decreases, you can save yourself a lot of work, especially in more complicated calculations. Let's try a couple of examples.

An item cost $45 and the sales tax is 6%. What is the total cost?

45 x 1.06 = 47.70

An item costs $29.95, but you have a coupon for 20% off. What is the cost?

29.95 x 0.8 = 23.96

A mutual fund returned +12.5% one year, +4.7% the next year, and -8.5% the next. How much did the fund return for the entire three year period?

1.125 x 1.047 x 0.915 = 1.078, which is +7.8%

If you invest $10,000 in an investment that returns +5% each year, how much money will you have after 10 years?

10,000 x (1.05 ^ 10) = 10,000 x 1.6289 = 16,289

You bought a house and sold it for a 70% gain 15 years later. What was the annualized rate of return?

1.7 ^ (1/15) = 1.036, which is +3.6%

You will get the maximum benefit out of this hack by learning to think in multipliers. Whenever I see +5% in a calculation or a word problem, I think 1.05 in my mind, and when I see -5%, I think 0.95 in my mind. If you do this often, it will eventually become second nature and save you a lot of time.

Wednesday, August 29, 2012

The Importance of Finding a Good Mechanic

A lot of blogs will encourage you to do everything yourself in order to save money.  While this advice is well intentioned, I believe it's a mistake.  Everybody cannot be an expert at everything.  In fact, nobody can be an expert at everything.  This means you need to pick a few areas where you can be proficient, and get some professional help in other areas.

For me, this meant finding a good mechanic because I am mechanically challenged, especially with vehicles.  For others, it might mean finding a good plumber or accountant or landscaper.

One of the best things that ever happened to me financially was finding a good, honest auto mechanic.  This happened in the late 90's, and I've been using him ever since.  A really good mechanic is not going to have a low hourly rate.  Why would that be the case in a free market?  Instead, my idea of a good mechanic is someone who can fix anything, do the work right, and stand by that work.  Also, a good mechanic will work with you as a long term partner and give you a lot of advice.  This includes advice about what kind of car to buy, when and how to make repairs, and when to junk a car and get another.

I have written in the past about "enablers" - things that enable you to save money in areas you would otherwise not be able to do so.  A good auto mechanic is a great enabler.  Long time readers of this blog know that I drive old cars to save money.  These savings would not be possible without my mechanic.  If I ever have an early retirement party, the first invitation I send is going to my auto mechanic.

Tuesday, August 28, 2012

Estate Sale Lessons

You've probably heard that attending an estate sale is a good lesson for your children.  You see an entire lifetime of things that were accumulated being dispersed by an auctioneer at bargain prices in an afternoon.  It is, indeed, a good warning of the transitory nature of life, and a reminder to find meaning outside of our possessions that so often control us.

But having attended a few of these sales, I've also noted a second lesson.  This lesson is not as important as the first, but it's still worth mentioning.  For not everything is sold at giveaway prices.  A few kinds of items typically bring more than their original purchase price years ago.  This would include things like antiques, original artwork, stamp and coin collections, high quality handmade furniture, and well maintained musical instruments.  Although we don't typically think of home furnishing as "investments", it's clear that some items can be investments, in the sense that they will hold their value and perhaps even appreciate over time.

A good rule of thumb is that if you can buy it at Walmart or Macy's, it's not likely to hold value over the long run.  The kind of things that tend to appreciate are not things you typically buy at the mall.  This is an interesting idea because the average person buys almost everything from chain stores.  Perhaps one valuable financial lesson is to broaden your shopping habits and locations if you want to avoid the eventual depreciation of everything you own.

Monday, August 27, 2012

Mortgage Progress

We're exactly 5 years away from our mortgage being paid off completely.  It seems like we've been paying this forever!  Mortgage debt is our only debt, so we will be debt free at that point.  At current rates, I'm not really very anxious to prepay anything, but I'm also not going to drag it out by refinancing into something longer.

People have a tendency to want to "do something dramatic" with their mortgage, like paying the whole thing off in one lump or refinancing it back to 30 years to get a really low payment.  I understand the emotions that pull people in these directions, and there are certainly times when I feel like doing something like that.  In the end, however, I always come back to the middle of the road.  I plan to just make the contractual payments for the next 5 years and be done with it.

Sunday, August 26, 2012

Neil Armstrong

With the passing of Neil Armstrong yesterday, I thought about my recollections of him as a young boy. I remember foolishly thinking how lucky he was to be the first man to walk on the moon, and I also wondered why I couldn't have that sort of luck happen to me.

Years later I learned just how wrong that thinking was. Luck had almost nothing to do with it. In fact, Armstrong was considered one of the best pilots in the world at the time, and when the computer malfunctioned during the Apollo 11 landing, he actually manually piloted the lunar module to the surface of the moon.

This was an important lesson for me. Never assign luck as the cause of success when speaking of things you know little about. Many times we have no idea of the talent people bring and the effort people endure to succeed.

Saturday, August 25, 2012

Why Buy Individual Stocks?

I'm often asked why I buy individual stocks.  The tone of the question is usually that someone like me really ought to know better than to do a foolish thing like that.  Why not just buy mutual funds or exchange traded funds?

The arguments for funds are very strong and I understand that.  Most of the arguments are variations of two key points: (1) Most investors aren't likely to beat the indexes, and (2) the commissions and other fees are much less for funds.

I'm not going to debate the first point in this article.  The second point, however, involves fairly straightforward mathematics.  The commission expenses of your portfolio are mainly a function of how often you trade, how diversified you want to be, and the size of your portfolio.

If you only have $1,000 to invest in equities, buying individual stocks does not make a lot of sense.  If you want to buy 10 different stocks so that you have at least some level of diversification, then you are going to buy a paltry $100 of each stock.  At $10 commission per trade, your entry commissions would eat up 10% of your money.  Buying $1,000 of an index fund is clearly more appropriate in this case.

Similarly, if you want to own hundreds and hundreds of stocks, it's unlikely the size of your portfolio will be large enough to support the commissions for all those stocks at a reasonable cost.  Also, if you like to market time most or all of your portfolio, you will not want to to have to place dozens of buy or sell orders and incur dozens of transaction commissions when you want to "get in" or "get out".  This is why short term traders love exchange traded funds and index futures.

However, there is a particular type of portfolio that is the sweet spot for individual stocks.  They can be very cost effective when you have a reasonably large portfolio in dollar terms, you only want to buy 20 or 40 stocks, and you don't trade often.  For example, the value of my dividend portfolio is getting close to $700K.  I hold about 25 to 30 different stocks, and only make about a half dozen trades per year.  The commission costs on such a portfolio is about 0.01%.  This is actually cheaper than index funds, and much, much cheaper than actively managed funds. 

Friday, August 24, 2012

Market Efficiency: Take 3...Action

I've previous written about market efficiency as a theory and as a ratio, where I said the appropriate question to ask is not "Are markets efficient?", but instead "How efficient are markets?"  This framing of the question recognizes that the efficiency of markets is not 0% or 100%, but somewhere in between.  Efficiency may also change over time and vary from security to security, so I cannot give you a number like 70% or 95%.

Nonetheless, I've observed one consistent theme about market efficiency throughout my life and you can take this to the bank:

Markets tend to be a lot more efficient than the average person thinks.

In other words, with respect to any particular investment, while I don't know the exact efficiency ratio, it seems to be a lot higher than most investors realize.  I see this thinking everywhere I look.  Many times people use incorrect data in their investment decisions.  This bad data makes the potential investment look fantastic.  It looks like free money lying on the sidewalk.  They tout this "amazing investment" to others and sometimes even put money into it.

A few months ago, I received an e-mail from a former coworker.  He had seen some amazing price quotes on Yahoo Finance for some call options.  For those unfamiliar with call options, they give you the right to buy some other security (i.e. the "underlying security") at a predetermined price (i.e. the "strike price") for a certain period of time (i.e. until the "expiration date").  A call option is always worth at least as much as the difference between the current price of the underlying security and the strike price.

In this case, the stock in question was trading around $60 and the strike price was $40, so the options were worth at least $20.  However, the price quote on the option was only about $5.  My former coworker thought this was free money.  Buy at $5; immediately sell at $20.  He had talked it over with his wife and had even looked into borrowing money to flip this.  He asked what I thought of the idea.

Wow.  If only investing were that easy.  He felt embarrassed when I explained that many options are thinly traded.  The quote he was seeing was the last trading price from many weeks ago, when the stock was at $45 and the option traded at $5.

Another friend recently confided that he bought a particular blue chip stock because the dividend was so much higher than other stocks.  He later realized the dividend was only half of what he expected because he hadn't accounted for a recent 2 for 1 stock split.

A more public example of this thinking can be found on a couple of posts earlier this week on the All Financial Matters blog.  The author lamented at the "crazy" P/E ratio of 127 for Visa's stock.  A discussion followed in the comments and even a follow-up post.  The rich valuation was discussed, as well as value investing, the risk of P/E's over 100, and comparisons to MasterCard's cheaper valuation.  The author posed the question of whether the EPS could really rise to $6.41 at some point to eventually yield a more sane P/E of 20.  However, nobody bothered to see whether the numbers were accurate.  A quick look on most investing sites would have shown that the consensus EPS for Sep 12 (almost here) was $6.15 and for Sep 13 was $7.15, thus yielding a current P/E of 21 and a forward P/E of 18.  Apparently it is somehow easy to believe that the market would award a large, mature company like Visa a P/E of 127.

My point is not to poke fun at oversight errors.  I make oversight errors every day.  What is interesting is how very smart people often do not suspect something is wrong with their data when it implies extraordinary returns.  They assume extraordinary returns are much more likely than faulty data.  This tells me that deep down, they believe markets are really, really inefficient.

Thursday, August 23, 2012

How to Save 25% on Your Grocery Bill

According to a report on food by the National Resources Defense Council, the average American family could save 25% on their entire grocery bill by doing one thing.  The silver bullet: stop wasting food!  While there is food waste across the entire supply chain, from production to packaging to distribution to retail, the bulk of the waste comes from consumers. 

I wish I could say that the report seems like an exaggeration, but my anecdotal experiences only confirm what's in the report.  I am truly amazed at the food waste at many of the families we visit.  The food hits the table and the kids say, "Oh!  Pizza!  I love pizza!"  They load their plates up with 3 or 4 slices, eat half of one slice, proclaim they are full, and run off to play.  The parents then dump the food in the trash.  Sometimes the adults are not much better.  "We don't really like leftovers."

The food waste from my family can't be near 25% because we are really good about clean plates and leftovers.  For those of you with kids, I would suggest that the old fashioned policy of "no dessert until you finish your main course" will probably save 80% of the food waste from the kids.  We're also good about boxing up leftovers from restaurants, which the report highlighted as one of the bigger culprits.

An area where our household could definitely improve is spoilage.  The typical problems are dairy products and things put in the back of the refrigerator and forgotten.  If anyone has any suggestions, I'd love to hear them.

Consumers wasting 25% of the food supply is a humanitarian and environmental tragedy.  But it's also a financial tragedy.  The report I mentioned estimates that the average cost of the food waste per household is somewhere between $1,365 and $2,275 annually.  At a time when so many people are struggling to make ends meet, this is money we squander.  Please join with me in trying to save money in this area.

Wednesday, August 22, 2012

Autonomy at Work

A lot of workers complain about their lack of autonomy at work.  I certainly feel that way.  I'd also bet that upper management at most places does not understand how that could possibly be.  In order to understand the disconnect, I'd like to describe the experiences of my children when they came to work with me on two very different occasions.

The first time my children came to work was during their school year, which is an important fact in this story.  For during the school day, the average elementary school child in the United States has less autonomy than a convicted felon.  They must sit in their seat most of the day.  They cannot eat or drink except at lunch, and they cannot chew gum.  They must raise their hand to speak.  They can't even sharpen their pencil or go to the bathroom without permission.  They must work on the assigned subjects at the assigned times.  Often they must do the assignment in the exact way that the teacher demands.  (e.g. Math: must show all work. Writing: must be double spaced in cursive. etc.)  If they deviate from the particular method, they must redo everything.  If they daydream or get up, there will be trouble.  They cannot even think of leaving the classroom, let alone the building.

Upon this backdrop, my children came to work with me.  How they loved it and sang its praises to mom that evening.  Dad's work is so cool!  We could eat right at the desk!  I could draw whatever I want!  I did my homework with my feet on the desk!  They have hot chocolate right in the kitchen any time you want it!

Now let's fast forward a few months.  It is summertime, and Kings and Queens would be envious of a school child in the summer.  No worries.  No responsibilities.  No schedule.  Within loose boundaries set by society and their parents, they can do whatever they please.  And this time, when they went to work, they were not so happy.  In fact, they felt completely shackled.  Why can't we just go play baseball outside now for a bit?  Why can't I crank up the Switchfoot Stars video at full volume?  I don't want to use headphones!  Why can't my friends come to work with us, too?  Why can't I lay on the floor if I want?  I want to sing out loud.  And why can't I shoot Nerf darts at the wall clock?

And so it is all relative, and it all depends how far up Maslow's hierarchy you are at the moment.  To the average executive, they figure I have it pretty well.  I've got a variable arrival and departure time, health insurance, and free coffee in the kitchen.   Nobody is standing over my shoulder with a stopwatch.  What more could I want?

But coming from the "summertime perspective", things look a lot different.  A business has customers to please and money to make, so people can't just do whatever they want.  Still, they would like to get up in the morning and dream a little.  Instead, most of us are part of this giant corporate gear assembly that just keeps churning and can't be stopped.  You don't choose what you work on; your boss does.  And he/she didn't choose it either; it was chosen by the next level up.  And the meeting schedule drives the timing of absolutely everything.  Corporate policies and Sarbanes-Oxley tell you exactly how you must do everything.  Every small document you create and every small email you send has a template and a process to follow.

New ideas of any sort are unwelcome, not because people don't like them, but because no one has time for them.  Everyone is too busy keeping the gears moving, so anything new or different just gets in the way and detracts from running the machine.  And so Mr. Executive, that is why we feel no autonomy in the workplace.

Tuesday, August 21, 2012

Efficiency is a Ratio

I honestly do not understood why market efficiency discussions are often framed as a boolean concept in finance.  (e.g. Are markets efficient?  Do you agree that the stock market is efficient or not?)  This leads to endless arguments over whether the answer is "yes" or "no".

In science and engineering, efficiency is a ratio.  It is usually defined as the ratio of the "useful" work done by some machine or system to the energy needed to operate the machine.  So for example, if you put a certain amount of electricity (energy) into a light bulb and you get 40% of the energy out in light, then the light bulb is 40% efficient.  The rest is wasted as heat.  A motor can be 90% efficient at converting electrical energy to mechanical energy, with some energy being wasted through friction.  100% efficiency is only an ideal that can be closely approached.  There is always waste.

This seems like a much better framing of the market efficiency question.  So instead of asking whether markets are efficient, we should be asking how efficient they are.  It's also helpful to recognize that 100% efficiency is not possible except in theory.  I think these points are well understood by most finance writers, yet the boolean framing persists.

But there are more significant questions that an efficiency ratio perspective provides.  Perhaps the most important question is what are we going to use as the denominator of the ratio?  Efficient with respect to what as an ideal?  This ideal market is not described to my satisfaction, and sometimes I wonder if we even know what it looks like.  Interestingly enough, in some other disciplines, we don't always pretend that we know the correct denominator.  For some complicated mathematical problems, we don't really know what the efficiency denominator should be for an algorithm to solve it because we don't know the ideal solution yet.

There are also many markets and many time frames.  While finance literature might discuss the market efficiency of stocks versus bonds, that still seems way too lumped together.  Just like each machine can have a different efficiency ratio, I see no reason why each individual security cannot have a different ratio as well.  Also, machines may have different ratios at different times.  They may become less efficient under certain circumstances (e.g. heat, pressure) and I suspect financial markets are no different.

Monday, August 20, 2012

Stealth Dividend Stocks

If you are on the lookout for quality stocks with a reasonable dividend yield, it's easy to miss the stocks that pay a low dividend now, but wind up paying a reasonable dividend in the near future.  This is one of the problems with limiting your search by screening for dividend yields higher than a certain amount.

One of the difficult issues in valuation analysis is that ultimately no one gives a rip what the earnings or losses or dividends of a company were in the past.  What we really want to know is what they will be in the future.  I'm not enthusiastic about a stock just because earnings were high last year and it pays a good dividend.  If I have reason to believe the earnings will be poor in the future, it's probably not a good idea.  Conversely, just because profits were low in the past does not mean they might not improve dramatically in the future.

While we all know that "past performance is no guarantee of future results", there is nonetheless a tendency to place too much emphasis on it.  Why do we all do that?  The answer is that analyzing the past is very, very easy.  You can find out in seconds all the past financials and past prices and so forth of any stock.  You can screen for criteria easily and make fancy charts.  And in a lot of cases, the past actually does tell you something!  But the information you can glean from the past is limited.

Estimating future financials of a company is really hard and messy.  You have to delve into many things.  Is their industry changing?  Will inflation hurt (or help) them?  What about competitors?  What if there is a recession?  Will management make any big mistakes?  We can research these things, but it will take a long time, and ultimately, we will only have educated guesses.

But sometimes there are niche areas where a little research can go a long way.  If you are looking for dividend stocks, it's not too difficult to find most of the stealth candidates, flying under the dividend yield screen radar.

Cisco Systems (CSCO) is a perfect example of a stealth dividend stock.  Prior to last Thursday, it was lumbering along with a dividend yield of 1.8%, probably uninteresting to most dividend investors.  Then when everyone woke up Friday morning, they discovered that the dividend had been hiked 75% and the stock was suddenly yielding 3.2%.  It had flown in under the dividend screen radar.

Yet it was not really so hard to imagine that Cisco might do this, and I would suggest looking at two indicators to find these situations.  First of all, Cisco was sitting on almost $50 billion in cash!  That is an enormous amount of cash - slightly more than half of its market capitalization.  Second, management has long been on record saying that future dividend increases would be substantial as they became a more mature, slower growing company.  We just didn't know exactly when the increases would come.

Sunday, August 19, 2012

What Elevators Taught Me About Investing

Waiting for the morning elevator in a crowd of people at rush hour seems a lot like investing to me.  Each person has their own own method they follow while they wait, and these methods are a lot like investing strategies.

Some people simply walk over toward the nearest elevator and wait.  They don't try to game the system.  They've decided that taking the elevator is faster or more convenient than the stairs, and that is the extent of their strategy.  These people are like the index investors of the investment world, content to just hitch a ride on the overall upward movement of the elevator.

Next we have the people who (think they) know something about the general state of the elevators.  These people are easy to spot.  When an elevator leaves, they move away from that elevator and position themselves closest to elevators that haven't departed recently.  These are the value investors.  The P/E of the recently departed elevators is high.  The odds are that these elevators won't be back as soon as the low P/E elevators that have been away for a while.  In some situations, these people get very confident.  If 3 of the 4 elevators have recently left, they will go stand right in front of the remaining elevator, which they feel is certain to be the next to arrive.

Then there are the crowd followers.  When they arrive, they go and stand where most of the other people are standing.  If everyone is bunched together near one elevator, they still go and wait there.  They want to be next to other people and chitchat.  These people, of course, are like the investment fad followers.  If everyone is talking about bonds, they buy bonds.  If Facebook is hot, they buy that.  In short, they invest where they perceive everyone else is investing.

The elevator world also has its contrarians.  They go where the others are not.  When the value investors and the crowd followers all start clumping towards a few of the elevators, they go toward the other elevators.  Their strategy is based less on their view of the elevators and more on the view that being where others are not will pay off for them.

Perhaps the most interesting people are the ones who learn specific things about the elevators and their fellow riders.  They've heard that Elevator #2 is being repaired, so they wouldn't want to waste time standing next to that one.  They also observe that Smith and Jones are waiting next to elevator #3, and so that should be avoided because Smith and Jones get off on the second and third floors.  These people are like the research investors, analyzing all the data for a possible edge.  Sometimes these strategies work spectacularly well; other times they do not.  All in all, it's not clear whether they do any better than the index investors who simply plunk themselves down in the middle of the elevator area and wait.

So what about you?  Do you have a strategy you use when there is a big crowd at the elevators?  How does it compare to your investing strategy?

Saturday, August 18, 2012

Why Saving Money Lists Aren't Helpful

A professional blogger once told me that the most surefire way to get traffic is to write a post such as 101 Ways to Save Money or 101 Ways to Make Money.  The internet is filled with tons of articles like that.  From an advertising standpoint, there seems to be something almost magical about titles that start with a number.  Having a large and unusual number of "ways" is also good ad copy.  A lot of people won't click on 3 Ways to Save Money because they feel that if the author has narrowed it down to only the three best ways, then they probably have already thought of these ideas.  But if there are 157 ways, then surely there must be 10 or 20 new ideas!  And since it contains 157 ways, then clearly this article must not be the same as the 95 ways article we read yesterday, and the 63 ways article we read the day before.

Alas, if financial writers only had such novel ideas.  There are really only a few generic strategies we all use to save money on purchases, and these methods are universal.  We can comparison shop.  We can buy in bulk, including bundling.  We can rent instead of buying.  We can negotiate.  We can wait for sales and coupons and offers.  We can learn to make or do things ourselves.  We can substitute cheaper items.  We can take advantage of financing terms.

By the time we're finished with high school, we've probably learned all these strategies and applied them many times.  The problem with all these big lists of ways to save money is that they tend to just enumerate a bunch of combinations of the same 8 or 10 money saving strategies applied to the various things we might purchase.  (Borrow books from the library.  Buy generic cola.  Negotiate your mattress purchase.  Bundle all your telecom needs with one carrier.  Learn to fix a leaky faucet.  Use restaurant coupons.  etc.)  Notice I'm not saying these lists are stupid or don't work.  What I'm saying is that they are all pretty much the same at the core, and we tend to already be doing all these things.

To back up my point, I decided to quickly walk through the first list I encountered in my blog reading today, which turned out to be 55 Money Saving Tips.  (I don't mean to pick on The Dough Roller.  It's actually quite a good blog.  But it happened to be the first saving money list I encountered today.)

Out of the 55 tips, I count 21 that don't apply to me.  Another 33 I'm already doing.  That only leaves one item - install photovoltaic panels to save money on electricity - and that's actually not a money saver for most people, as solar is not competitive with utility rates in most locations.

Know the basic ways to save money.  Apply them in everything you do.  As for reading big lists of ways to save money, I'd save your valuable time for something more worthwhile.

Friday, August 17, 2012

Stop Buying Products Marked Up 365,000%

The title of this post is not hyperbole.  Americans spend 11 billion dollars a year on a particular product that is essentially marked up about 3,650 times (or in percentage terms, 365,000%) over a universally available and almost completely equivalent product.  The overpriced product: bottled water.  You can fill a 20-ounce water bottle every single day for 10 years with tap water for about the same cost as buying one 20-ounce bottled water for $1.25. 

Now you may think that bottled water is a lot better, but about 50% of all bottled water is simply repackaged tap water!  As for the rest, it seems doubtful to me that it's materially better.  The bottled water manufacturers certainly have good filtration systems, but they probably use the same technology that the municipalities use.  And in many locations, the testing and monitoring of the tap water supply is more stringent than what it is for bottled water.

Of course, the companies selling bottled water don't really have 365,000% margins.  The real issue is that producing bottled water is amazingly inefficient compared to a municipal water supply.  It takes about 2,000 times more energy to produce a bottle of water than to simply run the faucet.  (Water is heavy, and pumping it is efficient.  Hauling it around on delivery trucks is not.)  So if your energy costs are 2,000 times more, and you have some other inefficiencies, and you have advertising, and shareholders to take care of, then the margins at 3,650 times are probably about the same as most any other product.

The question is why so many people pay for it.  I suppose this is the ultimate "small stuff" that gets out of hand.  A dollar here, a dollar there, and soon we're talking 11 billion dollars a year.

Thursday, August 16, 2012

Duly Warned

"And now for something completely different..."

- Monty Python's Flying Circus (recurring segue)

I remember well my first day of class in Music Composition I.  The prof entered the room, made a few introductory remarks, and then proceeded to assign the first homework.  The composition had to be at least a certain number of bars, had to be in a certain style, have three parts or something like that.  It didn't sound too bad.  In fact, I was thinking this class was going to be a lot of fun.  Looking around, I could see that the other students agreed.

Then everything changed.  The prof told us we had only 30 minutes to complete the assignment and that each student would then have to perform what they had written in front of the class.  He then dismissed us to the practice rooms to complete the assignment now.  The class immediately erupted into a firestorm of protests.

How were we supposed to be able to just write something with no notice?  And 30 minutes was not nearly enough time.  What if we got stuck?  It was too much, too fast.  Some of us were tired!  What if we couldn't think of anything at all in the next half hour?  Despite all the noise, the teacher stood firm and told us we just had to do it.

This hazing exercise was repeated daily until we had no anxiety about doing this sort of thing.  The prof knew what he was doing.  Forced discipline can't produce a creative genius, but it can usually produce a competent craftsman.

I don't know how much longer this blog is going to be around, but there are still a few things I want to do with it.  One of those things is to learn some writing discipline.  And so, like my music class, I'm going to take 30 minutes each day to write whatever I can get out, and then I'm going to post it - no exceptions.  I'm going to do this for 30 days.

The quality of my writing is obviously going to be really bad for the next few days.  I appreciate your patience.  Hopefully by the time a month has passed, I will have learned something.  I wouldn't bet on it, but we'll see.