100% Profit on Small Investments

Some of the best investments are not stocks or bonds. In the spirit of the holidays, here are some investments for $15 and under that promise great returns in convenience, time saved, and value. All of these these ideas are from Reddit users in response to the question

Reddit, what are some not well known products, $15 or less, that have made your life incredibly more enjoyable/easier?


Magic Eraser
Rain-X
Zip-It
Styptic Pencils
gaffers tape
A headlamp.
knife honing steel
Bodyglide
Gold bond powder
Dr. Bronner's soap, especially the lavender kind.
Mattress sheet clips.
Noise and light blocking curtains
Bengay
SOS tuner
Magic hair remover
Goo Gone
head massager
A meat thermometer!
F.lux
Vaseline
Jar Opener Rubber
A roll of Glad "Press n' Seal".
small cast iron skillet
little pen-shaped, battery-powered hair trimmers
Bagel guillotine
10mW green laser pointer
Tongue Scraper
rice cooker
Kitchen scale
Drop Stop
Staedtler Mars Plastic Eraser
Utili-Key 6-in-1 Tool
Oxo can opener
Baby wipes
DivaCup
Distilled white vinegar
Body Pillows
hard drive enclosure
HDMI cords
Grandma's Lye Soap
flask

There are even more in the Reddit thread. More than half the fun is in reading the dialog commenting on these suggestions, so go check it out.

Separated by Miles

U.S. consumers are ebullient.
http://www.conference-board.org/data/consumerconfidence.cfm

Paul Krugman is depressed.
http://www.nytimes.com/2011/12/12/opinion/krugman-depression-and-democracy.html?_r=3&pagewanted=all

Millions of people, vs. Krugman. Hmmm, who is right?

(9:07amET edit: This could also have been titled:  "Harbinger:  economists trying to set normative policy" because writing political articles like Krugman's is a sign of desperation and the need to control.)

Harbingers: Financial Engines

I recently received free advice from Financial Engines that implied strongly I should re-balance my portfolio to decrease my weighting of equities and increase my weighting of bonds. Considering coming inflationary pressures from a U.S. expansion and continuing high oil prices, the need to raise U.S. interest rates, and the incentive for the Federal Reserve to inflate domestic real estate prices, we think that Financial Engines' advice is dead wrong.

We suggest taking a contrary position and decreasing holdings of safe debt securities and increasing your weighting of small- and mid-cap stocks. This is not a short-term suggestion. Gains will occur over the next 24 to 36 months.

A Short List of New Trends

I will try to keep this short, sweet, and therefore highly informed by subconscious perception.

Germany is the new, unstoppable economic leader of Europe. Harbingers: Michael Lewis envious shit article in Vanity Fair, hand-wringing by France and United Kingdom over the 1990 unification, Germany's low unemployment despite Europe's fragile economics in 2011, Poland's and Russia's stated interest in seeing Germany continue to lead, Greece's need for German cash handouts to fill in their deficits*, and of course the burgeoning of articles like this one where the authors point out Germany's recent economic success.

China's undeclared global cyber war is about to become reciprocal. U.S. government and industry leaders, both Republican and Democrat, civil and military, are in 100% agreement about the need to stop deep infiltration of U.S. information technology infrastructure by China state-sponsored hacking. This rare unanimous agreement will make for some very interesting counterattacks. Side effect: sales of computer parts made in countries other than China will increase at the expense of China-made parts; or prices of China-made parts will decrease.

The U.S. economy is poised for a surprising upturn. Growth in tax receipts is above reported income growth, indicating that strong retail sales are not coming at the expense of savings. EU angst over Greek, Italian, Spanish, and even French deficits, sovereign credit ratings, and the resulting spikes in sovereign borrowing rates has cast a pall over the world economy for much of 2011, holding U.S. growth back as well. Despite this and the lingering issues from the bursting of the housing bubble and consequential banking crises in 2008 and 2009, negative forces are being used up. U.S. corporate cash hordes are the largest they have ever been. Even a small increase in capital spending by U.S. business would result in an economic resurgence.

U.S. manufacturing growth will begin to come at the expense of China. Already there are small signs of manufacturing coming back to the U.S. As wage inflation in China and "probity loss" weighs on the China cost advantage, some kinds of manufacturing will become more efficient in the U.S. than China. The waves and waves of consumer products from China are widely perceived as sold by Wal-Mart, made of cheap plastic, and don't last. In contrast, the consumer product reputations of U.S., Japan, and German-made products is top-notch. Consumers have experienced austerity in 2009-2011 and want to spend precious dollars on products that last. They are willing to skip cheap "plasticky" products that have been proven to contain poor quality control and design.

Beating Your Plants to Death

...or How to Avoid Stranding Your Capital

As we said before, recent poor U.S. economic results have been strongly driven by stranded capital in the housing sector. What can this idea tell us about practical management of future investments, such as investing in M&M-making machines?

Clearly, the primary lesson is avoid investments in which you bear a high risk of stranding your capital. If the future is very uncertain, then the promised return had better be high or occur quickly. Other techniques for reducing the risk include all of the classic lessons of investment finance theory, such as diversification across assets and asset classes. These lessons are taught many places; pick up a finance or investment textbook to learn more there.

Going further, the truly significant returns on capital occur when we're investing in real assets, not paper like equity and debt securities. Even if we are investing in paper assets, our best returns will occur when we investigate the company as though we were considering managing or owning the whole thing ourselves. Hence, whether we are an actual manager or a passive one, we still have the task of evaluating the best way of making real investments.

By "real investments" I mean primarily purchase of capital goods. This also includes long-lived supplies, if we are required by circumstances to hold supplies over some long period of time, or if some risk outcomes would involve our holding supplies unintentionally for a long period.

On the surface, it seems like an easy job: Buy only equipment you need. Don't pay too much. Think about it first so that you don't buy the wrong thing.

In full, however, this task is one of the more difficult tasks in business. It can be used to show why certain investors are better than others, why certain national growth rates arise because of different political systems, why some industrial sectors are more productive than others, and of course why some managers are better than others. It might also be useful in analyzing sources of inequality of economic outcome in a population.

Making a real investment requires estimating the future course of events. The better you are predicting the utility of your capital good, the more likely you will get the expected return.

The quality of your investment will also depend on the number of choices you have. Awareness of more options and the availability of multiple options will increase the likelihood of finding an excellent investment. If you have only a few choices, the probability of finding an excellent return is diminished.

What may be more surprising to most of us is that operational execution has a large influence on the investment return as well. Money well spent can be lost through poor use of the capital good. Excellent employment of a marginal piece of equipment can generate impressive rates of return. Most importantly, the actual use of the capital good must drive the original decision to buy it.

The best illustration that comes to mind is an article on M&M/Mars written 17 years ago and which appeared in Fortune magazine. The passage:

"The reason most often cited for Mars's distribution problem is its long-held policy of maximum asset utilization or, as some put it, beating its plants to death. The company is obsessed with asset utilization..."

The phrase "beating its plants to death" speaks volumes. One can imagine senior management carefully watching to make sure that every production line, every machine, every bit of signage, and the capitalized labor effort required to establish production is amortized over as many billions of M&Ms and candy bars as possible. If a machine can be used to make a billion M&Ms, then can we run it out even more and get it to make two billion? And then three, and ten billion? When someone suggests that we reconfigure a line, has it been too soon since the last rearrangement (capital injection) and did we get our money's worth from that last arrangement?

Measurements of asset utilization in this case are so far ahead of "winging it" that it's not funny. Any competitor making a decision about equipment that doesn't consider capital return rates will be at a severe disadvantage. The candy-making business is marked by fairly consistent predictions of future demand and steady supplies, so the future is much more predictable. When the future is predictable, quantification of the investment analysis is an excellent choice.

There is power and beauty in that phrase "beating its plants to death." This is the path to follow to avoid stranding your capital: Can you use the candidate item so much and so often and so profitably that you will have figuratively beaten your capital good to death by the end of its useful life? This is what you seek. You want the result to be equipment that is so well-used, so worn at the end, cycled so many times that it is like a member of the family. Every investment needs to be compared to this standard. Those that pass are much less likely to become stranded. Those that don't, you may not want.

Students Put Into Debt by Government Aid Part 2

Here is more evidence that gains of a college education are captured by the college itself, not its graduates, and therefore students loans from the Government causes a net transfer of money from students to the universities.

Trapped by $50K Degree in Low-Paying Job

Some of the motivation for the Occupy Wall Street protesters is the phenomenon where society and the university promise a good job upon graduation, and an even better job upon finishing graduate school, then don't deliver.

http://www.bloomberg.com/news/2011-12-07/trapped-by-50-000-degree-in-low-paying-job-is-increasing-lament.html

What? You say that better jobs aren't promised? Yes, they do promise. I'll quote the article:

Debra Stewart, president of the Washington-based Council of Graduate Schools, said advanced schooling is still the “pathway to success in the modern economy.”

“The more education you have, the more highly regarded you are going to be in the workplace,” she said.

There isn't a single person on this planet who doesn't translate "highly regarded" as "better pay."

College Costs Are Rising Faster Than Cost Of Living, Medical Expenses

This article features several graphs of prices relative to 1978 levels for medical care, college costs, and the general cost of living.

http://www.huffingtonpost.com/2011/10/28/college-costs-are-rising-_n_1063617.html

Rent-Seeking

I've put this link in not because it pertains specifically to tuition, but as general background education in the economics of rent-seeking behavior:

http://en.wikipedia.org/wiki/Rent-seeking

Some useful passages from the Wikipedia article on rent-seeking:

"From a theoretical standpoint, the moral hazard of rent-seeking can be considerable."

"Rent-seeking may be initiated by...firms that stand to gain from having special economic privileges, which opens up the possibility of exploitation of the consumer."

More on that "Austerity" Thing

Several days before I wrote yesterday's article, I sent Mr. Livingston an email in hopes that I'd have a chance at a dialog on the subject of his article against austerity. When he didn't respond, I decided that the only way to carry the dialog forward was to write and post my article, and also post a comment on the Bloomberg excerpt.

The comments on Bloomberg seem to go heavily against Livingston. I'll cite some of the comments you can find on Livingston's excerpt:

"This is outright wrong...."

"The logic here is horribly flawed...."

"Austerity is bad??? Badly-wrong sentence...."

"...the idea that work is a function of what is wrong with the human condition flies in the face of not only some of the most enlightened thinkers throughout history but also most people's own feelings...."

"The more I read this the less sense it makes..."

Another Bloomberg columnist, Caroline Baum, posted a different viewpoint that also tilts against Livingston's thesis. Her piece, Mall Rats Can’t Bring About the Wealth of Nations, starts out as a comment on Black Friday and retail sales as an indicator of economic health, but necessarily turns deeper and more analytic, concluding with a definition of consumption from Webster:

"the utilization of economic goods in the satisfaction of wants ... resulting chiefly in their destruction, deterioration, or transformation."

Why harp on this? Over-spending is a bad idea, but although some people think it might be bad for the individual, I don't get the sense that they feel that it hurts society. There is the underlying assumption that an over-spender slightly hurts themselves while benefiting the rest of us by making the economy go faster. And this is absolutely incorrect. A unnecessary purchase is the opposite of a vorpal trade. Poor purchase decisions harm the economy for everyone.

I am not against spending or consumption. Several articles in Vorpal Trade have described what a good purchase might look like. This might be a good time to write down some of the characteristics of a purchase that fits the definition of a vorpal trade:

- it costs less than you budgeted

- the purchase comes at exactly the right time for the seller

- it arrives just in the nick of time

- it generates cash shortly thereafter, or significant time or cost savings

- the payback period (moment at which net benefits exceed the price) is very short

- it is elegant, beautiful, or has character in its form or function

- it lasts

- it is a good candidate for using it up, wearing it out, making it do

- it greatly empowers you professionally, artistically, or personally

- it fits in your budget

You know a vorpal trade when you see it. When you think about the all-star products you have owned in the past, or present, it is quite clear that some things were simply vastly better investments than others. Couldn't we all use a few more things like those?

Where did all of the "who ate my privacy?" posts go?

For those of you who enjoyed reading my occasional article about Facebook, Google, and invasions of privacy, don't worry, I haven't stopped writing them. What I have done is started a new blog, called, rather modestly, "I Own All Information." The name of it is intended to correct any misconceptions that Facebook's Zuckerberg and the Google crowd might have. I think they have been misinformed about the legal status of information gathered using Facebook and Google searches, as they don't own that information, I do, of course.

Me and Al Franken, we have a lot in common.

You can find the new blog here. Actually, I'm not moving any of the posts that have appeared in Vorpal Trade. There are a bunch of the "I Own All Information" stripe that have appeared here, and since they are part of the Vorpal Trade history, they will stay here. New articles that are mainly about outrages over misappropriation of information, spying, surveillance, and all that juicy, gossipy stuff will show up in I Own All Information, while all of the articles on economics, investing, business, finance, psychology, and the peculiar blind spots that people live with will continue to appear here.

For those who are curious about what the heck a "privacy outrage" is, here is a short list of the articles appearing in Vorpal Trade that were more about information and privacy than economics or business:

Accelerometers in Smart Phones Might Be Useful for Spying

JSTOR Prosecutes User for Downloading Too Much

Social Media Websites are Designed to Spill

Strauss-Kahn and Reputation Shredding, Brought to You by the Internet

Eric Schmidt out, but we still want updates on BMs

All Your Informations Are Belong to Me

Zuckerberg's Rights to the Privacy of Chinese Activists

More on Google's Rights to Your Privacy

On Stranded Capital

There are significant differences between what the current economy feels like, especially as reported by the media, and its underlying strengths and weaknesses.

The cause of the current malaise is the necessary adjustment period after a boom. The current recession was not caused by the financial crisis of 2008. The financial crisis was driven by the boom of 2003 to 2006. During the boom years, optimism for increasing housing prices caused people to spend and invest more than they otherwise would have. As a result, they stranded their capital on a deserted island.

When you over-invest, you take a risk of stranding your capital in an unproductive place. A classic example of an investment is a house: You need a house, so buying one might be a good investment, as it may reduce your costs of housing yourself over rent. Suppose that you are so impressed by the good returns on your first house that you buy a second one. Whether this second investment pays off depends on the external market. If no one wants to buy your second house from you, then all the money you poured into it is stranded until such future time as the market comes back and decides once again that it wants to buy your house. In the meantime, all of that money is tied up in concrete, wood, nails, flooring, roofing, electrical cabling, appliances, and all of the labor that was required to put those items into the shape of a house. You can do nothing with that money because it has been converted into goods. It is stranded. Presuming that the rental market too is down along with the housing market, the house is a stranded investment, providing no payback.

If the entire economy contains a significant amount of stranded capital, then the economy will show the same signs of stress that the owner of the second house is under. Of course, this example is extremely close to what actually did happen in the mid-2000s, and our current situation continues to reflect stranded capital sitting in houses that are not returning any value to their owners or society.

The solution to the current recession is then quite clear: Wait long enough for there to be enough people that those houses can be useful and occupied, or long enough that the capital that was stranded is small compared to the new capital generated by all of the country's other useful pursuits. Any other attempted solution potentially ignores the fundamental problem of the stranded capital, and therefore will not repair the problem.

Austerity Is Good for You and It Makes More Fun

The nature of economic cycles is that it produces excesses and then teaches us how we erred so we can fix those excesses during recessions. The details are not always easy to understand or track. They exist in a multitude of small decisions. Everything from working too little to spending too much on cars and houses to over-investing in new factories that make more than the market will absorb contribute. I've written in the past (Everything is an Investment) that poor decisions help cause the recession, and it is the austerity of the recession itself that helps people figure out how to better allocate their money.

The problem is that some people think this is bitter medicine, and don't like the taste. James Livingston of Rutgers sets a distinctly contrary tone to the Puritan work ethic in an excerpt published last week in Bloomberg (Austerity Is Bad for You and It’s No Fun).

So let's go over it again: In a boom cycle, people believe things that aren't true, or they are too aggressive. For example, they may believe houses will rise in price 50% in the next 3 years. Or they may believe this hamburger is $6 which is twice as much as the $3 hamburger but it doesn't matter if I overpay because it is better. If money were tighter, they would allocate it differently. By rewarding the maker of $6 hamburgers rather than the more efficient $3 eatery, they temporarily subsidize inefficient producers. They put more money into a house than they should, because there aren't enough people to live in it. But because they believe it will be worth more later, they move their stored time (savings, aka capital) into the additional house purchase.

Austerity acts as a catalyst for better thinking. When you don't have enough, all your money goes further because you will tend to make better decisions. Typically, media stories on this topic go for the most dramatic example they can. They write things like "Last year we bought a BMW back when we both had jobs. Now that we're both disabled, penniless, and having to darn other people's socks to earn pocket change, we eat ramen noodles six times a day, with extra salt to give it volume." Horse puckey! The vast majority of austere decisions are not so dramatic. They involve cents, not dollars, deferral, and deletion of stuff you didn't need in the first place. It's things like shopping at two grocery stores instead of one, and watching more of the prices more carefully so that you don't get snookered by fancy "profit-oriented" pricing of certain specialty items.

Let's get to the "no fun" claim. Having more money is certainly better than having less. Which leads directly to the contention that if being austere puts money in your pocket, then you are wealthier when you are not spending money! What could be simpler? Having money is a heck of a lot better than having none.

Austerity is more fun because saving resources is part of a game, and you can keep score with money. The higher your score, the wealthier you get. It is better for the vendors too, because now they get honest feedback. When their prices are too high, and stupid, they get whacked with inactivity and low sales. With fast feedback they can tune their own operations to be more efficient. Unless of course they are fat and lazy and feel entitled, in which case they can just throw a temper tantrum and whine about the need for new Keynesian spending by the government.

Austerity is more fun because when you cut spending, you cut marginal purchases that had low payoffs anyway. Whenever a business invests in new products, it gets worse results if it invests in all of the ideas than if it weeds out the bottom 90%. The same applies to consumer spending. If you buy everything on your wish list, your results will be worse than if you ruthlessly stick to only the top 10%.

Here is a trick comes from my own personal experience: Deferral of spending can save money by reducing purchases of things you stop wanting. If you have a wish list of things, and you wait six months, a number of items will drop from that list because you simply won't want them anymore. Imagine what this says about the payoffs from "I want it" types of spending: If 30% of what you buy ceases to be of interest or utility within 12 months, that is like losing 30% on your investments in a year. Certainly we can and should do better than that, and if austerity helps create discipline that allows us to weed out that 30%, then it is an incredibly useful tool indeed.

Naturally, part of the motivation for writing such an article as Livingston did could be political. It seems clear to me, at least, that setting aside any normative arguments, Keynesian spending that depends on this aversion to austerity is unlikely to create the desired outcome of improving the economy. As I have written before (Consumer Spending Will Not Save You), the outcome from Keynesian expansion government spending depends very strongly on the individual decisions of the recipients of the spending. Even worse, reinforcing the notion that austerity can be avoided by sugar-daddy spending by Uncle Sam will cause many small bad decisions to be perpetuated.

It has been said that virtue is its own reward. This is not just a hard-bitten saying. It is literally correct. When you save instead of spending, you have more money to spend later. When the requirement is that some types of fun avoid expenses, you find more of the free things in life that are excellent to experience. When you have the habits of thrift, you will go farther, see farther, enjoy more, get more from life, and appreciate your leisure pursuits more. In Shakespeare's As You Like It:

Sweet are the uses of adversity,

Which, like the toad, ugly and venomous,

Wears yet a precious jewel in his head;

And this our life, exempt from public haunt,

Finds tongues in trees, books in the running brooks,

Sermons in stones, and good in every thing.

Best to heed the bard.

Students Put Into Debt by Government Aid

Judith Lynn Clayton reports in the NY Times piece Student Loan Debt: Who Are the 1%? on the state of student loans.

http://finance.yahoo.com/news/student-loan-debt-1-130033806.html

Along the way, she mentions a New Yorker article by James Surowiecki about student debt. Upon reading this, it struck me that some people ascribe too much credit to the "rational human" model of economics. The way Surowiecki puts it, you would think that students were making their own choices about how much tuition to pay:

"...the college wage premium—how much more a college graduate makes than someone without a degree—is at an all-time high. In fact, the spiralling cost of education has to some degree tracked the rising wage premium; as college has, in relative terms, become more valuable economically, people have become willing to pay more for it."

http://www.newyorker.com/talk/financial/2011/11/21/111121ta_talk_surowiecki

What Surowiecki is glossing over is that college tuition in this case isn't behaving like a commodity good. It is acting like a monopoly good. Colleges determine the advantages a degree will currently confer, then they carefully set their prices to capture most of that advantage. The student must take it or leave it. Loyalty and brand name count for more among universities than almost any product on the planet. If you have your heart set on getting into Princeton, you pay what they ask, and there are no discount holiday sales or outlet stores for a Princeton degree or a Princeton undergraduate experience.

The intent of Government aid is obvious: Make it easier to pay these onerous bills. But the net effect of Government aid is to cause an offset increase in tuition rates, since the universities will charge what the market will bear, and with Government aid in place the market is suddenly able to pay more, in total, than before.

The effect of Government aid for college is therefore to raise tuition and increase the number of students with outrageous student loans. There may be some studies that show that aid causes a shift of costs from less affluent to more affluent students, but along the way there will be some students who simply wind up paying more money overall.