Shopping: You’re Doing It Wrong

It’s Black Friday in America. And in some other places.

On Monday, it will be Cyber Monday.

The stores are already bedecked with their bargain and LOW PRICE and flashy “Only 2 per customer” signs. I have no doubt that the queuing has already begun.

Here’s a fun fact: the reason it’s called “Black” Friday is because it’s the day that stores usually go from being in the red to making a profit (in the black). And yet, here most people are, frothing at the mouth, eager to assist.

So I wanted to write a post about all the things that make us really vulnerable to retailers (and I’m relying heavily on this article from the Atlantic, and this one, and this one from Forbes):.

Thing 1: We’re Really Bad at Math

Especially when it comes to percentages.

A recent study posed the following scenario:

Starbucks offers two deals on a cup of coffee:

  • Get 33% more coffee for free!
  • 33% discount on the regular cup!

The participants were asked what the better deal was.

The general response: they’re the same thing.

That would be a no. If you start with a 300ml coffee for $1:

  • The first deal offers you 400ml for $1 (ie. $0.25 per 100ml)
  • The second deal offers you 300ml for $0.66 (ie. $0.22 per 100ml)

Or: the second deal is equivalent to giving you a 50% more coffee for free.

Further evidence of the problem: I’m pretty sure that almost everyone who read those bullet points had an eye-glaze, I’ll-take-your-word-for-it moment…

Thing 2: We’re completely influenced by random numbers

I wrote about this in my third Heresy post (I do love a religious reference). In the one of the experiments I described, students were asked to write down the last two numbers of their social security number on a page, then bid on a variety of items as they were presented in the room (they had to write down how much they’d be willing to pay for them). The general finding: the higher your last two numbers of your social security number, the more you were willing to pay.

In real life, this plays out something like this:

  • They want HOW MUCH for that bottle of 18 year old Chivas Regal?
  • R1,800?!
  • *blank speech bubble*
  • Oh look at this bottle of Bombay Sapphire gin. It’s only R280.
  • Bargain.

And suddenly, you’re buying gin, when you only really came in to buy some mixers for a party.

Thing 3: We’re middle-of-the-road people

We don’t order the cheapest bottle of wine on the menu (because we don’t want to look cheap and/or we wonder if there’s something wrong with it that it’s so cheap). Or the most expensive one (because we don’t want to look like an idiot and/or a spendthrift).

Retailers know this.

So they place their high margin items between something much pricier and something cheaper.

Thing 4: We Have No Idea What Things Are Worth

We rely on shorthand.

Example: how on earth do you know what an ice-cream maker is worth? You certainly don’t do a cash flow forecast in your head to try and work out how much you should pay before it makes better sense just to buy your ice-cream.

But we’re capable of seeing that one ice-cream maker is cheaper than another.

So shops place competing models in close proximity, so we don’t have to do the burdensome think – and can just jump straight to “this one seems like a good deal because it’s cheaper than that one, with the same features!”

Thing 5: We Get Tired Quickly

How often do you get to the till with more than you planned on buying?

Once you’re committed to buying a shirt – it’s increasingly likely that you’ll get a tie to match. And another shirt. And look at those jeans.

It’s why we need lists. To give us restraint when the decision fatigue kicks in.

Happy shopping!

Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.

“How can I spend my $35 to get the best return on investment?”

Every so often, I log onto Quora to see what questions the world is asking. This particular question was top of my newsfeed, and it had 823 people following it for answers*.
*Which is very impressive by Quora standards – most of the questions I see have, like, 9 people asking the same question.

Here was the most upvoted answer (2.4k votes – even more impressive):

How to spend $35

So I liked that answer – but it’s heavily biased in favour of the up-skilled.

Then, of course, there were many of the boring “Invest in yourself!” and/or “Buy something for someone that you love!” responses. Which, you know, not original.

Here are two other answers:

Screen Shot 2014-11-27 at 8.31.16 AM

Screen Shot 2014-11-27 at 8.32.33 AMWhich are the ones that I liked best.

Here is why: How The Poor Survive

Some time ago, I read “Poor Economics” by Abhijit Banerjee and Esther Duflo (and then wrote about it here and here). One of the things that they talk about is these poor Indian mothers that buy goods and then re-sell them to support their families, all the while borrowing money at punitive rates of interest.

Consider this:

  1. A poor Indian mother has no money.
  2. So she borrows, say, $5 to be repaid by the end of the day.
  3. It has to be repaid at $6 including interest.
  4. By the end of most days, she has enough money to cover her family’s food (let’s say that she spends $3 on food).
  5. She repays her loan with interest.
  6. The next day, she starts again with no money.

So: she has to make $4 a day in margin ($3 for food, $1 for interest) off $5 in borrowed money (and her own sweat).

That is a Return on Investment of 80% – in a day.

Sure, in absolute terms, it’s not very much at all. But almost no company can claim to be making that kind of ROI.

And how does she do it?

Two basic things:

  1. Repackaging; and
  2. Relocating.

Example:

  1. She buys a box of teabags, and then sells the teabags individually.
  2. She walks 10km to buy the box of teabags from the store, and then brings them back to her roadside spot.

It’s how many of the poor entrepreneurs do it. They buy in bulk (because for a poor person, even a box of teabags is buying in bulk); and they can walk.

And it’s also why, for all the tongue-in-cheekiness of those second two answers, I think that they’re the ones that come closest to the truth.

Irony, right?

If you really want to learn about high returns, you need to learn from the poorest of the poor. After all, they have to generate them every day.

Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.

The Investor Diaries: Week 36

The Preamble

For the background to this series of posts: herehere and here. And the summary:

  1. Small investors have some investing options.
  2. You can invest occasionally in lump sums (the once-off investors) or monthly through debit orders (the monthly investors).
  3. As for things to invest in, I’m a general fan of low-cost equity-index-tracker ETFs (as is Warren Buffett). But there are other possibilities as well.
  4. This series of posts is there to see which would work out well.
  5. Then there are some indicators at the end. Because why not.

In general, I thought that the week past felt like one of rationalisation. The SARB kept interest rates constant. It was announced that South Africa’s GDP grew by 1.4%, which was slightly better than expected. And I know this because the big stories in the news weren’t about Japan, or quantitative easing, or Mr Draghi – the big news was an Uber executive declaring that he wanted to dig up dirt on journalists. It was meant to be an off the record comment.

Seems that everything is on the record.

A look at the week everyone had:

Once-Off Investors

In numbers:

Once Off Table Week 36

All fairly flat.

In pictures:

Once Off Graph Week 36

Monthly Investors

In numbers:

Monthly Table Week 36

In pictures:

Monthly Graph Week 36

Indicators

Week 36 Indicators

The stock market also stayed pretty flat:

Week 36 ALSI

And slightly less flat in real terms:

Week 36 ALSI USD

The exchange rate pulled back (probably on the news of the repo rate staying unchanged):

USD ZAR Exchange Rate Week 36

The 10 Year Government Bond yield dropped as people bought up bonds (also on the rate news?):

Govt Bond Week 36

Oil recovered a bit!

Oil Week 36

ZAR Oil Week 36

Gold and Platinum also recovered – and the gold price crossed upwards to above that of platinum:

Gold Platinum Week 36

ZAR Gold Platinum Week 36

Which is strange – unless you consider that investors stockpiled platinum in the waves of strikes. And now that production has recovered, why stockpile? So a sell-off maybe?

Until next week!

Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.

Just Found A Foundation. For The Tax.

For the past few weeks, I’ve been eating mince pies.

Because I love mince pies.

And as I keep telling people, when I eat a mince pie, “It’s the most wonderful time of the year” starts playing in my brain.

I blame the brandy.

Mince pies always come back onto the shelves (at least here South Africa) in early November. And as they land, you know that the festivities are just beginning. It’s the herald of end-of-year functions and Secret Santas and pre-Christmas dinners. Work starts to wind down; email signatures get a dash of tinsel; leave application forms get filled out. It’s bonus time. And holiday time. And release time for new music and new books. There’s usually a new Peter Jackson film to look forward to. And turkey sandwiches with cranberries and stuffing.

And it will officially begin with Thanksgiving Thursday this week*. Followed by Giving Tuesday next week.
*I know it’s not a South African holiday – but I never pass up an opportunity to roast a Turducken. And Thanksgiving is such a great-sounding holiday.

In the lead-up to Thanksgiving, Black Friday and Giving Tuesday, all the finance/economics podcasts are freshly themed with season-appropriate topics. Three main ones:

  1. The economic crazy of gift-giving
  2. The best way to do charity
  3. Sale prices are all in your head.

I’ve covered most of that before:

  1. The Irrationality of Gifts
  2. Charity: Do It Directly. In Cash.
  3. Are Sales Really Sales?

But then I listened to “The Philanthropy Edition” of the Slate Money podcast, which went in a slightly different direction on the charitable front. And mainly, they were questioning the benefit of tax-deductible donations. Because if you’re going to give money to a cause, how much difference does a tax deduction really make?

And actually, why would donations ever be made “for tax reasons”?

The argument has always seemed wildly-flawed to me. Example:

  1. My tax rate is 20%.
  2. Let’s say that I donate $100,000, which is tax-deductible.
  3. So I get a $20,000 tax deduction.
  4. But I’m still $100,000 short.
  5. I just paid $100,000 for a $20,000 tax deduction.
  6. Seems like a terrible bargain.

Is the theory that without the tax deduction I would only have donated $80,000? Leaving the charity $20,000 out of pocket?

In which case, the whole story of tax-deductible donations is simply a government subsidy for charity, without the administrative burden of having to collect the tax and then pay it across.

Which still seems like a really curious thing…

Why The Wealthy Start Foundations

Good news: after some trawling, I’ve another explanation for why foundations are so hot right now.

Here’s how a foundation works:

  1. It’s registered as tax-exempt.
  2. It receives tax-deductible donations, which become part of the foundation’s endowment.
  3. It has to pay out a minimum 5% of its assets each year.
  4. That 5% payout is made up of charitable distributions and expenses.
  5. Those expenses can include the salaries of the family members that run the foundation.

So if you’re being taxed in the top income bracket at 40%, you could do one of two things:

  1. Pay the 40% tax; or
  2. Donate half of your income to the foundation for free, and drop your effective tax rate down to 20% immediately. The foundation can pay your family members for their “services”, as well as cover some of the family “expenses” (parties fundraisers, holidays trips abroad on behalf of the foundation’s initiatives, etc). The endowment can be invested and earn returns, creating a passive income stream to support your errant offspring. And at the most, you’ll have to give out 5% of the asset value each year (if you can’t come up with any family members to pay), topping your effective tax rate out at 22.5%*.
    *40% of the 50% you keep + 5% of the 50% endowed = 22.5% of the full income.

Perhaps it seems bizarre – to place your assets into the hands of an entity that is not you. But the wealthy do it all the time: placing their money into trusts and offshore vehicles and so on, where they technically don’t own it and it’s technically not in their hands.

And that’s how you make charity work for you.

Of course, it does mean that foundations will tend to give out a maximum of 5% of their endowment each year – which does call into question whether they’re actually effective (sometimes, you need the big cash injection to make a difference, not a dribble of what the foundation has to distribute in order to keep their tax-exempt status).

But I suppose some money is better than no money at all? And at least the libertarian folk can rest easy in the knowledge that there is some autonomy for the rich in how their otherwise-tax dollars are being spent…

Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.

South Africa. Time to see clearly. After all – the rain has gone.

Magnus Heystek is a chop.

At least, he was one last week when he wrote “Death of the Rainbow Nation“, which has rapidly burrowed its way into my facebook feed, email, and lunchtime conversation*.
*Also, the time that he declared that retirement advice should come with an age restriction because anyone that’s younger than 60 lacks “real life experiences in the real world”. I shake my head. Could it get any more old-timer?

There have been a few rebuttals since (one from the Moneyweb managing editor, and one from DA Parliamentary leader Mmusi Maimane). And I’m adding another one here.

The background

  1. Magnus Heystek believes that South Africa is “hurtling towards being a failed state”.
  2. Because the ANC is “a power-mad liberation movement prepared to follow a scorched-earth policy in order to achieve its political objectives.”
  3. On November 13th, one of those political objectives was allowing President Zuma to get away with all the taxpayer spend on his Nkandla residence, by approving a report exonerating Mr Zuma.
  4. The DA and EFF opposition parties got together (how’s that for rainbow-nationing?) and filibustered the voting for a good three hours.
  5. During that filibuster, one of the EFF members stood up and declared “President Zuma is a thief. He is a criminal. He is the greatest thief in the world.”
  6. She was directed to withdraw that comment.
  7. She refused.
  8. The riot police intervened.
  9. People scuffled.

The intervention of the riot police is meant to represent a dramatic constitutional crisis. And from that, we can infer the following (thanks Magnus):

The ANC has only one political objective and that is to remain in power.

It will use every mechanism available to it. It will use legislation that was drawn up by the Nationalist Party in 1961 in order to control the flow of money, namely foreign exchange control.

It will use the legal system for as long as it can at the expense of the taxpayer. It will use the tax system to spy on taxpayers. And it’s bound to get worse.

But do we really think that this whole series of events was somehow filled with malicious forethought and intent?

It almost certainly wasn’t.

The EFF MP was making the speaker of the house look like a fool. She was spouting off wild defamation. She was refusing to act with any kind of decorum. The speaker was flustered and annoyed. And after months of this EFF attack on her authority, and after a night of filibustering, Baleka Mbete snapped. At least, that’s what I think.

But however you feel about it, here are the more important points:

  1. There was a filibuster. In South Africa.
  2. The President was called “the greatest thief in the world” during a Parliamentary session, and it didn’t end with arrests and MPs going missing and mysterious car accidents and the banning of opposition parties.

Those are not signs of a failed state.

In fact, I’m reasonably sure that if a US congressman tried to do something similar, he/she would be a threat to National Security and charged as a terrorist.

And as for the points about exchange control and spying on taxpayers – this is not uniquely South African.

At. All.

Truthfully, South Africa is an amateur at it…

How (Not) To Deal With A Constitutional Crisis

Mr Heystek goes on to say:

  1. The ANC is planning “to take possession of property if it deems it to be in the national interest.”
  2. “And ‘property’ in this context, does not merely refer to your personal residential property, it refers to property in the broadest possible sense of the word, i.e. all your earthly possessions, be it a farm, business, factory, restaurant, café and even intellectual property rights which you might own.”
  3. So “repatriate as much of your personal assets out of the country as you can (sic).”
  4. “Government will one day, is my forecast, simply send in its jackbooted bankers from the Sarb to switch off the offshore investing tap. It will happen overnight, without warning and at precisely the time when the demand for foreign assets is at its peak.”
  5. “It reminds  me of the old joke that used to circulate in the offices of The Star in the mid 1990s when I was employed there: there are only two types of ex-Rhodesians in the world. Those who took all their money out of the country and those who wished that they did.”

It sounds like… he’s having a bowel movement.

There are four main problems here (apart from the grand and sweeping leaps of logic):

  1. Firstly, there are actually four types of ex-Rhodesians. The third type stayed and invested in their Zimbabwean businesses and now spend much of their time fishing on Kariba houseboats. The fourth type moved to Australia and do their own housework.
  2. Capital flight is an expensive business for both the people fleeing and the people left behind. And it’s also self-fulfilling when it happens en masse.
  3. Taking possession of property is not nearly as simple as it’s being made out. It can happen in physical terms – but when it comes to businesses and the like, there is intellectual and reputational capital that can’t just be “confiscated”. Just ask yourself why Zimbabwe has been backtracking on its indigenisation plans…
  4. And finally, I’m not sure why he thinks that South Africa (and Southern Africa) are the only places where property rights are vulnerable to confiscation. Cyprus, anyone?

The Problem with Capital Flight

When capital decides to flee, it snowballs:

  1. Departing capital causes the exchange rate to devalue.
  2. Which causes more capital to flee.
  3. Which causes more exchange rate devaluation.
  4. Which causes inflation on anything imported (like fuel).
  5. While wages are constrained by time (because we don’t immediately adjust wages when the exchange rate plummets).
  6. So the consuming class have their purchasing power confiscated and spending slows down.
  7. And you get a recessive-depressive thing happening.
  8. Which makes capital even more likely to cut its losses and depart.

Makes it sound like you should get out the sooner the better, amirite?

Except:

  1. A devalued exchange rate mean that South African exports just got a whole lot cheaper in real terms.
  2. So there is a great opportunity to invest in export industries.
  3. And it’s particularly attractive, given the global alternatives.
  4. So foreign investment (and local offshore capital) starts to return to South Africa in search of return.
  5. And the exchange rate stabilises.
  6. And even, strengthens.

Frankly, I think the pessimists forget that the world has balance: my expense is someone else’s income; my loss is someone else’s gain.

Sure – you get situations where there is destruction, and then no one wins. But even in those extremes, there is opportunity. Just look at Germany – which suffered through two hyperinflations. Or France – which was once destroyed by populism and the guillotine. Or Zambia. Or Mozambique.

There is no need for dire pessimism. What we need is realism – and realism is not one-sided.

This naysaying, however, is one-sided, and blind to the fact that the world is filled with uncertainty. You don’t just travel abroad and find guaranteed returns and evergreen pastures.

To be frank, we need to stop being victims. It’s all “poor me” and “look at what this government has done to us”. We’re forgetting that we have the option to be active in all this. And I don’t mean “active” in the sense of having a political voice. I mean “active” in the practical sense.

Sour grapes can be made into wine. Spilt milk can be turned into cheese. Spoiling fruit can become jam.

But if all we want to do is talk about the sour, the spilt and the spoiling, then nothing will taste good.

Even if we have glorious sunshine.

Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.

South African Bank Accounts: The Premier Banking Delusion

Things that I have learned that are contrary to popular belief:

  1. Contrary to popular belief, the leading cause of ageing is not ageing. It is, in fact, the sun. So use sunblock.
  2. Contrary to popular belief, most of the money in the world is not money. It is credit. (Although I say this one a lot).
  3. Contrary to popular belief, these facts from wikipedia. In particular: the somewhat disappointing news that migrating lemmings do not engage in mass suicide off cliffs. This was apparently a figment of Disney’s imagination. And when you watch the scenes of lemmings leaping to their demise in the Disney documentary White Wilderness (here’s the link), you are actually watching the photographers throwing them off the edge.

At this point, I should be honest and say that I have forgotten why I wanted to start this post with things that run contrary to popular belief. There was a thought process – but then I got distracted by the lemmings story, and a youtube video about Disney’s 5 Darkest Secrets (disappointing).

But I think it went something along the lines of:

Contrary to popular belief, prestige banking is not about better service. It’s about better branding.

People don’t get black credit cards (or whatever) for the service – they get black credit cards for the pleasure of whipping the card out in front of people that aren’t “eligible”.

Perhaps that sounds cynical.

But consider this:

  1. Banks charge higher fees for these cards.
  2. If you’re willing to charge higher fees for the card, then you’re clearly capable of recovering the costs for these extra services.
  3. Why then make people below a certain annual income “ineligible”?
  4. Surely this should be a question of: “If you’d like these services, then you must pay these higher fees”?

On the basis of “extra services”, the discrimination simply does not make sense. Even if you say “Oh – but larger clients make for higher bank transaction revenue!” – you’d still be left asking yourself “But then why are the account fees more expensive?”

It only makes sense if you add in some ego-stroke.

It makes even more sense when you consider that exceptions are made to that annual income rule for “young professionals”. Being all those article clerks and medical students who are being groomed for future snobbery.

So what you’ll get when you step into the Private Banking realm:

  • Higher fees (although not for cash withdrawals – which makes sense, given that the wealthier individuals do most things by plastic anyway).
  • Access to airport lounges – if you haven’t already got that with your normal cheque card (although you still have to pay to access the international lounges – I know this from experience)
  • A Private Banker (who you’ll call occasionally when you need them for something – only for them ask you to come in and do your finger-printing in person at the branch).
  • You’ll earn rewards faster (maybe – if you suddenly spend more because you’ve got a Private Bank card).
  • The joy of flashing an elite card at a table of your plebbish lackeys (who are just aspirational enough to know that you’re quite a big shot if you’ve got that particular card).

Is it worth it?

That depends on how much time you spend in an airport.

But even that is a questionable side-benefit – because if you’re that frequent a flyer, then you’re probably already entitled to a lounge benefit through your loyalty program of choice. And once you’re in that class of traveller, you go to a different lounge where you’re not surrounded by all the “young professional” riff-raff who are attempting to recover their higher bank charges through free gin.

But hey. That said, there is nothing wrong with wanting to flaunt a bit of success.

I’ve just found that most of my young professional brethren got disillusioned very quickly. Usually when they realised that even Private Banking clients can get their mortgage applications turned down.

Because that’s when the bank puts their cards down on the table. And as it turns out, clients don’t really get the upper hand.

We’re just lemmings.

Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.

South African Bank Accounts: The sheer ADMIN

This week, I have been sorely tested by my bank. There have been phone calls and emails and smses demanding yet another proof of address, and some documented proofs of income*.
*This happened after a request made for a bank-stamped set of bank statements. A request made over 2 weeks ago. Which is still outstanding. But I must get the proof of address to them immediately.

Because clearly, money laundering is now South Africa’s real issue. Forget that 67% of South Africans remain unbanked and locked out of the formal financial system – the big problem is all those account holders whose last utility bill is now 18 months old.

Oh – and they want my fingerprints for biometric verification directly linked with the Department of Home Affairs.

Because my bank want to keep me secure and safe from fraud.

Here’s an angry letter about it:

You are LYING, person behind the sales desk. Biometric verification has NOTHING to do with my security and EVERYTHING to do with your fraud insurance bill. 

The irony is that I pay for the privilege of being incessantly bothered by the call centre. And while I would love to revert to cash – all manner of regulatory entity won’t allow that. SARS in particular.

In the counting-to-ten breathing pause that follows those phone calls, I remind myself that this is not really what the bank wants to be doing. There are two other factors in play:

  1. FICA. Even though September 9/11 did not happen here. And even though no terrorist is going to feel any shame about getting a fake utility bill. But still – FICA is probably less responsible for the admin than one might think. Because…
  2. The Insurance Houses. Who are tired of paying out for fraudulent transaction claims, and have decided to regiment from the outside just what the bank must be doing in order for the bank to continue to be covered against fraud.

My bet: insurers are far and away more responsible for the amount of administration that banking now entails. After all, governments just bumble along and occasionally fine banks long after the fact – which just becomes part of the cost of business.

It’s insurers who have money to lose and income to protect. And no bank can afford to lose their fraud insurance (in fact, I’m pretty sure that having it is a regulatory requirement). And even if it’s not about losing the insurance altogether, competition between the banks probably means that they’re not willing to hike their banking fees to cover the higher cost of less-administrative insurance.

So my thought is: if this is going to be the general trend in banking, then we should just find the cheapest bank to use. And that bank is clearly Capitec – because here is this awesome banking infographic that I found on Moneysmart:

I realise that the above is just a comparison of the lower-end banking products. And it doesn’t really consider rewards programs*. But still.
*By my reading of the above, you’d have to collect R1,000 worth of ebucks to make up the cost differential between FNB and Capitec.  Which works out to R40,000 worth of retail swipes in any given year – and given that there are only R36,000 in the model above…

Although what happens when you head into the Platinum/Private-Banking realm? Because Capitec doesn’t play in that field. In fact, Capitec only really plays in the Global One account field (it’s how they keep their costs so low).

So I have some thoughts on that point. Mostly, I want to ask the question: “Why do banks have prestige banking?”

And the key is in the word “prestige”.

To Be Continued…

Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.