The Capitalist Maven

Recently I’ve been begun to detect alot of Jones envy from my fiancee. We have several friends that anything but careful when it comes to their spending. They always like to show off their newest toy. So my fiancee happened to be playing around with their Ipod and decided she had to have one.

I’ll admit in retrospect my approach to persuading her away from this purchase was wrong. I insisted her existing off brand mp3 player was just fine rather than help her investigate alternatives. There are currently many Ipod alternatives available from Sandisk, Creative, Microsoft, etc. many of which are praised for their innovative functionality. The Ipod by comparison is starting to become pretty long in the tooth. It’s been around along time by technology standards, nonetheless it is the Tiffany of high tech. So off she went to Circuit City and with the saleman’s help came home, not with the Nano she had been talking up, but with an 80GB Ipod Classic. So she’s using about 1.5G of a device with all the weight and durability disadvantages of spinning media. When I asked her what she planned to do with 80GB, she wasn’t quite sure… “Movies maybe?” I asked her, “What movies?” She really had no idea. Video codecs and conversion are really beyond her computer ability level.

Another time visiting friends they were showing off their fancy wine refrigerator. That became her new Jones item.

Her: “I want a wine fridge.”

Me: “What are you going do with that?”

Her: “Put my wine in it.”

Me “Putting a few $6 bottles of wine in a fridge is worth $200 + whatever it costs to run?”

As it turns out, running it for 2 weeks costs more than a bottle of wine. The thermo-electric coolers used in these Chinese made wine fridges are small and light but horribly inefficient. Most seem to use around 70Watts 24/7. That comes to about $105 a year with Massachusetts electric rates. I don’t think she was fully aware of the operating cost of such a device and has pretty much dropped the idea.

Now it’s back to the Ipod, this time for the accessories. Having an Ipod is not enough, you’ve got to show it off. Just like nobody keeps Tiffany’s jewelery in their pocket, your Ipod must be on display. “I want to be able to listen to my Ipod around the house without headphones, I want an Ipod speaker system.” Ugh… one of those crappy plastic things with 1 inch speakers that makes your Ipod sound about as good as a cell phone ringtone. I pull out a 3.5mm to RCA cable from my pile and explain that she can hook it up to the stereo and it will sound awesome. “No, that won’t work, I want it to charge it too.” So off to Ebay I go to find a piece of plastic that can both charge and provide audio out, and most likely hold the Ipod up in display position to show off to the friends… $12 later, I’ve got a device that does both but also adds a remote. It’s still in shipping but I don’t have any worries. It will make her happy and sound great.

Jon Budget, Money lessons

The AP published an article today about how premium fuel sales are down significantly. First let me get this out of the way. If your car calls for 87 octane gas, you are a fool for using anything more expensive than 87 octane. If you engine is specified to run with 87 octane, you get no benefit from using anything higher. It is literally money down the drain or up in smoke in this case…

On the other hand if you car engine is designed for premium fuel, using the cheap stuff will cause your engine to run in low performance mode. What this means is that you will lose horsepower, torque, and acceleration. Most importantly, you will lower your fuel economy. An engine that is designed for premium may get 30 MPG using the specified grade, but put in the cheap stuff and you’ll drop to 26-28 MPG or so. So even though you saved $3.00 on your fill up, that tank of gas will go 50 miles shorter.

It’s interesting to note that most of the premium fuel vehicles are European. Gas has been ridiculously expensive for years in Europe it stands to reason that they would want to find a way to make high performance engines run more efficiently. The answer of course is premium fuel. While gas prices have double in the past couple of years, the spread between regular and premium is a relatively constant $0.30. Why not pay a few cents more to get better fuel economy overall?

Jon Money lessons

A hot topic of conversation that came up at dinner this weekend were the long lines at the Dunkin-Donuts drive-through backing all the way up into the road. How lazy can people be? Is it really that much easier to wait 15 minutes with engine idling than to take 5 minutes or less to park and walk inside? While cars probably use vastly difference amounts of fuel to sit in line for 15 minutes (Prius = near zero vs. 5.0L V8 = over a half a gallon), even without the fuel charge is the 15 minute wait worth saving the short walk?

First, I have to make that observation that the vast majority of people are probably just waiting for a coffee. I’m not a coffee drinker but I do drink alot of beer. Even if they did have drive through bars, I don’t think I’d use them. The only beer I’d ever wait in line for is a free beer. Is the coffee that good that’s its worth sitting in your car for 15 minutes waiting for? I understand that caffeine is addictive (by some accounts more so than nicotine) but I’ve never worried about the difference between Coke and Pepsi enough to wait in line for one over the other.

Second, the parking lot at Dunkin-Donuts is not very big, it’s not like it’s a long walk. It would most certainly be faster to park and walk-in than wait in the drive through. Does coffee make you lazy? Perhaps people are concerned that if they get up in walk-in, they will actually wake up enough to not need the stimulative effects of coffee, thus making the trip to DD worthless…

Third, with all this talk of recession (which I still don’t believe), how can people afford a $5 iced coffee every day? I thought everybody was broke and out of work? The recession clearly isn’t bad enough to warrant a switch $5 coffee to $0.10 or less homemade coffee.

Jon Economy, Money lessons

This weekend I saw the movie “27 dresses”, where the main character has been a bridesmaid 27 times and has accumulated a large collection of bridesmaids dresses, all worn exactly once and consuming valuable New York City storage space. It reminded me to update on my attempts at unloading some of my fiancees old prom dresses. Not surprising, not a single dress sold. I have several theories as to why this is the case.

Many people refuse to buy anything that is used. I’m not quite sure why this is as I’ve seen jeans for sale in designer stores that appear that they have been worn previously. People actually pay a premium for these jeans. The idea of buying anything in a second hand store or consignment store is particularly unappealing.

Generally I am more than willing to consider buying used. This is especially true of things that aren’t really subject to wear. For example, buying used video game discs is a no brainer for me, they will function just as well the 1st time as the 100th time provided they haven’t scratched deeply. A quick visual inspection can easily determine whether the disc is good as new. Video game controllers on the other hand are more tricky. How do I know if the controller has a button that sticks sometimes? Perhaps the control stick is flaky in one particular direction? This is something where buying new buys piece of mind.

Let’s compare this to a prom dress. Unless a bunch of sisters or friends have shared dresses, it’s unlikely to have even been worn more than once, so wear is unlikely to be an issue. I think that changing styles is the larger problem. For whatever reason girls seem to be conditioned to want the latest and greatest style when it comes to prom dresses. The problem with Ebay is convincing them that what you are selling is stylish. A couple of pictures of a dress really cannot do it justice. If there was an easy way to PhotoShop the dress onto a celebrity I bet it would do wonders for Ebay sales.

What we can conclude from these examples is that some things tend to decline precipitously in value, immediately after purchase. On the same token there are some things which may actually increase in value or not decline much. For example, old high capacity computer memory can fetch a premium. The highest capacity module of a certain memory type(EDO, SDRAM, DDR, DDR2) is often quite valuable as people try to breath new life into old PCs, unfortunately the memory hasn’t been built in years and the only supply in the market is used and never sold modules in warehouses. Similarly the highest speed CPU that fits in a certain socket will continue to fetch a premium due to folks upgrading. On the flipside you have parts that will drop precipitously in value from day one. Generally the more you spend for a computer part the more it will depreciate. Consider things like high end video cards that go for $500 one day and are eclipsed in 6 months by a $200 card, that’s $300 you will never see again.

A while back I purchased a nice oak kitchen table with 4 chairs, used from a listing I found on Craigslist. This is a solid wood piece of furniture that probably cost $400 new. It was listed for $125, I offered a nice crisp $100 bill. It was funny because because the husband who was selling hm’ed and hah’ed over the offer for a few seconds, the wife then quickly said, “Sold.” I’ve gotten several years usage out of this table, yet it could probably be sold for the same $100 I paid for it.

The residual value is something to keep in mind when considering a purchase. One can have extremely nice home furnishings for virtually no long term cost simply by buying used. Certainly there is significant depreciation in buying new but not as much as things like clothes. Considering how much value you will get out of something and its residual value can go a long way in helping to make informed purchases.

Jon Budget, Money lessons

Just got done reading a great post over at MightyBargainHunter. It happens to be a rant but raises some excellent points:

” I guess a whole lot of incremental changes add up to a big change, but even the biggest change is too little too late now. The best thing to do is prepare. Prepare for $10 gas, then prepare for $20 gas”

I posted yesterday that I used a combination of bicycling and commuter rail service to get to work yesterday, saving 32 miles of driving and 1.28 gallons of gasoline on the roundtrip. I took the same trip again today, and as long as the weather cooperates I’ll continue to bike to work. I’m not particularly earth conscious and certainly not a tree hugger but it’s not hard to see the benefits of using this method to get to work: health and piece of mind.

A more telling point is that I’ve made the decision to do this despite the fact that I’m still not at the breakeven point when compared solely to the cost of fuel: $4.48 gas vs. $6 train cost. As it turns out, today waiting at the train station I met another fellow also on a bike who was making nearly the same trip. He said that he had started doing the bike/rail commute a year ago when his car was in the shop for significant service. It worked out so well that he continues to do it during nice weather even while his car is again operational. It’s also worth mentioning that he was an engineer like myself. In fact looking around the train I’d say there were probably even more engineers on board. Is it a coincidence that engineers are the first to recognize the value offered by bike commuting? No, it’s probably not a coincidence as engineers spend their lives looking for creative solutions to problems. Traveling 30 miles using the least possible fuel is just another great problem for an engineer to solve.

If we do hit $10 gas, it’s clear that my creative solution to getting to work will pay off. The question is, will it take $10 gas for the morning reverse commute train to have more than 2-3 dozen people on it?

Jon Economy, Money lessons

It’s Monday, the weekend is over. Did you go out for drinks anywhere this weekend? Perhaps you didn’t because you couldn’t bring yourself to pay $4 for a beer. I grew up and spent the first few years of my adult life in Pennsylvania. I went to college at Penn State. I lived in North Carolina for 3 months. I’ve traveled to nearly half of the fifty states. Never before have I seen government get so involved in manipulating the free market for beer prices as they do in Massachusetts.

You could say in college I was spoiled. Fraternity and house parties were always free, never a cover or cup charge. Once you were old enough for the bars it’s not like the prices were that much higher than free. The student newspaper has a fine list of specials in downtown State College, for example we see specials like $3 Bud Light pitchers and $1 Miller High Life pitchers. You can bet the bar isn’t making a big profit on these but it gets people in the door where they can spend on things like shots and mixed drinks that aren’t always as cheap. For those still convinced of the horrible inflation, the prices were the same 10 years ago when I was in college.

After I graduated college there was an initial adjustment to somewhat higher prices in the city of Pittsburgh. But I and my friends quickly learned when and where the specials were. I remember nights spent at the Boardwalk and Rock Jungle with tables full of $1 drinks. We always had a great time and seldom had to bring along more than a single $20 bill. Visiting Florida and the southern states shows even more great prices. One would expect South Beach in Miami to carry a premium price, however walking the strip I found several places offering $6 pitchers and 2 for 1 drink specials. In New Orleans you just buy yourself a giant beer for $1 from some guy on the street and take it with you. In the Carolina’s if you haven’t found $1 beers you are probably blind.

Then I moved to Massachusetts and was in a for a rude awakening. I was in the habit of asking the bartender what the special was before I ordered my first drink. I got alot of looks like I was from a different planet. A few bartenders mentioned that they thought it was illegal to have specials?!?!? Eventually a few of my older coworkers mentioned that there used to be happy hours but then they were banned and they weren’t sure why or how or any particular detail. There seem to be few specifics on the law, nobody seems to know for sure how it works. All I know is that this law causes everyone to pay more. Aside from a few particularly dive type places, expect to pay at least $3 for a regular domestic beer and $4 for anything imported or darker in color than Bud. Looking for $1 Coronas on May 5th? Sorry… not in Massachusetts. It seems the copy cat neighbor states in New England all seem to have similar restrictions in place, in New Hampshire it seems bars are allowed to have specials (Live free or die!) but they aren’t allowed to advertise those specials(Can I see your papers please…). Since the point of specials is get people in the door, being unable to advertise them takes away the capitalist incentive for bars to offer them.

So the question is do people drink less because of restrictions like this? If you’ve been to Boston on a Saturday night, you’ll agree that it has not reduced drinking in any way. What it has done is made alot of bar owners rich. They no longer have to compete on price. There are several bars that have figured out how to work around these rules. They offer a certain draft beer for $1 all the time, however the keg always seems to conveniently run empty around 10PM when the special is over. These places are particularly dive and need to compete on price to survive. By and large though few bars try to offer low prices.

Regulating bar prices is one way that government can step into the free market and increase prices for everyone. You might also be familiar with Massachusetts’ highest in the nation insurance rates, which also come about because of its state controlled insurance rates. The examples of government intervention increasing prices just goes on. Take it from this capitalist, government intervention in capitalist markets is a bad thing.

Jon Economy, Money lessons beer, capitalism, government regulation, prices

Over at mymoneyblog, the author has been posting about money lessons learned as a child. This brought to mind the one significant lesson that I was ever taught in school about business, investing, and entrepreneurism. In 4th grade at my school, the lesson planned called for 4th graders to create “companies” to produce candy to sell to the entire school. Little did I know what I was about to learn.

The lesson started with us learning about the stock market and how buying shares of a company works. We printed up business plans describing the candy we would sell, created stock certificates, and set an offering price. Then one day all our companies made our IPO’s. We would bring in our allowances/savings/whatever our parents would give us and buy shares of whatever companies we thought would be most successful. There unfortunately was no stock market for the shares after they were all purchased so you needed to be quick to get in on the best candy companies. The classroom really started to look like the Wall Street trading floor as we rushed to buy the shares.

Here is what I remember about the the candy choices. There were various kinds of chocolate. Some companies centered around just creating chocolate with a specific mold and creating a clever brand name for it. My specific company decided to put Rice Krispies in our chocolate creating a Nestle Crunch type chocolate. There was a company producing rock candies and another producing a Chex Mix style snack. Then there was a company that was producing simple popcorn. How boring I thought?

We used the proceeds from the IPO to purchase our supplies to make the candy. Then another day of the lesson was spent actually making the candy. Needless to say everyone had fun doing this.

Then came the day of the sale. My company’s Nestle Crunch style chocolate did a steady business. At the end of the day I think we managed to sell all of the product we made, with a little help from our own purchases. Looking around the room, it was clear there were winners and losers. What surprised me the most was that the simple popcorn, whose business plan and product I had shunned was first to sell out. Clearly I had misjudged the market.

The next day the lesson called for analyzing the profits. We calculated our profit after all expenses, paid our employees, and then distributed the remaining profits to the shareholders. It’s obvious that selling candy to elementary school students is a great business. Every company turned a profit, I think the lowest performing company still managed to pay 30 cents to buy back the 25 cent shares. My particular company paid out 75 cents. The real shocker to me however was the popcorn company which paid over $2 a share.

It was at this point I realized my mistake. My parents recognized that popcorn was an extremely cheap and healthy food, so I always had access to popcorn anytime I wanted it. Others in the school must not have been so fortunate. Keep in mind that this was the 1980’s before microwave popcorn became commonplace, so making popcorn still involved some effort. Thus there seemed to be an insatiable desire for popcorn amongst my schoolmates. The raw materials for making popcorn are also insanely cheap. $10 of vegetable oil and unpopped popcorn will produce enough to feed a school. Chocolate was much more expensive to produce. A large bag of popcorn was priced similarly to a small bag of candy, however that large bag probably only contained about 1 oz of popcorn and cost about 1/10 as much to produce.

Thus this simple lesson taught me a great deal about capitalism. Just because something is undesirable to you doesn’t mean it’s undesirable to others. There is a great deal of profit to be made by recognizing something that you can produce cheaply and easily that others may be willing to pay a high price for.

Jon Money lessons 4th grade, capitalism, lessons, popcorn