Blog | Control Your Cash: Making Money Make Sense

She's smiling because she's AB-. That'll get you $20 a quart.

A company is struggling, and the struggle has no quick resolution. (How) can you profit off this situation?

Case in point, and a real-world example. We needed an polyurethane iPad Smart Cover, which is made by Apple and sells for $40. It’s the only accessory we could find that hit the multiple criteria of a) being made especially for the product it’s supposed to accessorize and b) coming from a trusted manufacturer (Apple itself). There are plenty of knockoffs available, but we’re not interested.

While we’re certain the Smart Cover does what it’s supposed to, we still wanted to take a look at it rather than just read the description on Apple.com. So we headed to Best Buy, America’s dominant electronics retailer since the demise of Circuit City. You can touch and play with the iPad Smart Covers there. We did.

Then we bought one on eBay for $23. With free shipping and no sales tax.

Here’s an immutable law of commerce that we’re already seeing regular examples of and will continue to for the next few years: Businesses that operate as showrooms, rather than as businesses, are at a huge disadvantage. Look at the position retailers such as Circuit City and Borders (and now Best Buy, and others to follow) have put themselves in. You can walk in off the street and examine the merchandise at your leisure. The employees range from obsequious to unobtrusive, but none of them are going to give you the hard sell. (Imagine a car dealership operating the same way. More specifically, imagine walking around the floor looking at new models and responding to every salesperson with “No thanks, I’m just looking.” The car dealership would kick you out within minutes. Maybe electronics retailers and bookstores need to place their staff on commission.)

The old business model isn’t just old, it’s counterproductive. Using a retailer/marketplace like Amazon or eBay, plus the wireless provider of your choice, you can walk into Best Buy, look at the items available, buy them from someplace else, then discreetly leave the store. If you really enjoy irony (as distinguished from coincidence), you can buy the items from Amazon or eBay with a phone that you bought at Best Buy. If you’re feeling really daring, you can do it with a floor model display computer.

There’s no obvious solution to this, either, short of Best Buy drastically lowering its prices. Either that or the company could get out of the retail electronics game, and operate exclusively as a seller and installer of large appliances and car stereos. When Best Buy hires us as consultants, that’s what we’ll suggest. Until then, our ideas are merely opinions.

As a customer, your options are plentiful. As an investor, you can make money here: you just have to be resourceful about it. Imagine a market so relatively free that it lets you sell stuff you don’t own.

BBY seems like a perfect example of something worth selling short. This is vastly different than selling a house short. You borrow the stock, hope it loses value, then buy it, then return it to the lender at the original price.

Sound like too much work? Heck, it’s an opportunity. The holder of BBY obviously thinks it’ll appreciate, so it’s only fair that there be a mechanism for profiting off daring him to be wrong.

The compact explanation is as follows. BBY is currently trading at around $20. Say you borrow $20,000 worth of shares, which you can hopefully figure out is 1000 shares. You wait 3 months, and the price has fallen to $16. You then buy $16,000 worth of shares, sell them to the entity you borrowed the original 1000 shares from, and pocket $4,000 (less borrowing charges.)

But instead of following the predicted downward trend for those 3 months, Best Buy gets a patent for a perpetual motion machine. Or finds an oil patch underneath its corporate headquarters (which would be noteworthy, seeing as it’s in a Minneapolis suburb.) The stock shoots up to $60, and the lender wants his 1000 shares back. That’s going to cost you, Ace. $60,000, to put a nice round number on it. You’ll be out $40,000 for your little exercise in semi-sophisticated trading (again, plus borrowing charges.)

What about the actual specifics of short selling? It starts by opening a margin account. E*Trade*, for instance, will let you open a margin account with a minimum balance of $2000 if you already have a regular account with them. When you use a margin account, you’re borrowing E*Trade’s money. You can’t run away from them if you come up short. They know where you live, and they have your money.

So say BBY falls in value, but not by as much as you’d like. After your arbitrary 3-month period, the borrowed money comes due with the stock sitting at $19.53. How much would you make?

This isn’t hard to figure out, and you can probably do it in your head. $470, right?

Go back and read the post again. From the top. E*Trade (or anyone else, other than a particularly dupable family member) is going to charge you interest. Your net profit for that imperceptible decline in the stock price is 0.

Never make an investment without knowing the interest rate you’ll be charged on any money you borrow.
Never make an investment without knowing the interest rate you’ll be charged on any money you borrow.
Never make an investment without knowing the interest rate you’ll be charged on any money you borrow.

Should we say it once more, underlining this time, or did you get the message?

Brokerages start with something called the “base rate”. E*Trade set its at 4.14% a couple of years ago, and it’s remained untouched since. If you have half a million dollars in your margin account, you get to borrow money at the base rate. (Put a million in your account, and they’ll take 25 basis points off the base rate.) But the less your ability to repay, the higher the interest rate you’re charged. That’s why unsecured credit cards charge so much, which you shouldn’t be paying interest on anyway. With that $2000 minimum balance in your margin account, you’ll pay a 430-basis-point premium on the money you borrow. 8.44%. You’re almost better off borrowing on that credit card. Almost. Here’s the list of interest rates, segmented by size of account balance:

Making money’s a pain, isn’t it? For a beginning-to-intermediate investor, better to find something undervalued and buy it long than search for something overvalued. The worst thing that a stock you perceive to be undervalued can do is fall to 0. A stock that you think is overvalued, but isn’t, can rise so high that you’ll lose your margin account, your house, your 401(k) and the respect of your friends and family. Now, who’s up for some trading?

*Technically, the name is supposed to be in all caps. They should consider themselves fortunate that we’re deigning to indulge even one of their typographic fantasies by spelling the company name with an asterisk. The asterisked name spawned an asterisked comment, adding to the confusion, a confusion that this asterisked comment can’t hope to resolve.

WARNING: Never mind the graphic images. Once this gal’s voice enters your head, it ain’t coming out anytime soon.

When your humble blogger was a Cub Scout, his pack watched an anti-smoking film that contained his first exposure to tracheotomy. The video featured a guy smoking a cigarette through a hole in his neck, which was followed by a helpful if nauseating cross-section diagram that showed how surgeons somehow detached the patient’s windpipe from his blackened larynx and had it connect to the outside world at a point of contact somewhere near his Adam’s apple. If the description nauseates you, you should have seen the video.

The happy result is that no one in that church basement ever lit up a cigarette.

Which of course is a lie. Most of those kids ended up becoming high school classmates, and several turned into pack-a-day smokers. One of the adults in charge of the Cub Scout meeting smoked during the video, never reasoning that a) maybe it’d have been better to have instead smoked after the kids went home and b) him lighting up in front of everyone sent a louder message than did the recorded image of a cancer patient.

This is a personal finance website, and this isn’t an anti-smoking screed: hell, the more you smoke the more elbow room the rest of us eventually enjoy. But there’s a point to be made.

Look at our cover girl, Terrie, 51. Doing a 180º isn’t going to make a difference at this point. She can lead the healthiest lifestyle imaginable: eat a whole foods diet, drink nothing but ionized water, run 5 miles every morning (notwithstanding that she now has the lung capacity of a web-footed salamander), and it won’t matter. Nothing’s going to regrow the hair, or the lower jaw, or the throat flesh. She’s a casualty waiting to happen, and might even be dead by the time you read this. People who are dumb enough to smoke, largely don’t care.

For another example, this one from personal knowledge, here’s a family friend who smoked himself to death. His house had more full ashtrays than ours has electrical outlets. The end came a few months after the picture was taken, but 3 years after he’d had the first lung removed. (They don’t remove a second lung.) A fresh start, such as it was, and this was how he expressed his gratitude to the surgeons who prolonged his life.

The same problem of exacerbation applies to finances, too. Making a $900 payment on the credit card you owe $19,489.34 on means next to nothing. It’s like coughing up something black one morning, seeing the face of God in the mucous, then deciding that from this day forward that you’re only going to smoke menthols.

Lot of help that is, jerkface. I already have a $19,489.34 balance on my VISA card. (But only $8,593.32 on my MasterCard! Why can’t you look at the positive instead?)

Depending on your attitude, you’re going to find the following advice either patronizing or useful: You won’t get your hand bitten off the 20^th time if you don’t put it in the leopard cage the 1st time.

Yeah. Habits start off annoying, and eventually become effortless. Whether it’s 20 minutes of yoga every morning, taking your dog for his daily constitutional, even something as mundane as brushing your teeth; you do it because you should, and soon enough you don’t think twice about it, to the point where omitting the repeated behavior becomes more of an inconvenience than performing it does.

You see what we did there? Substitute something negative (smoking, beating your kids, financing everyday purchases) in the list of habits in the preceding paragraph. If you habitually incur credit-card debt, or habitually squander a fixed ratio of your salary on gambling, it’ll feel awkward to start not doing so.

The number of 50-year-olds who overcame decades of financial stupidity to build lasting wealth is virtually zero. Gaining realization is something the younger and more impressionable folks do. So can you change? Probably not. But if you’re sincere about wanting to, the patented secret method is to simply do it. While financial trouble isn’t easy to dig out of, it’s at least possible to do so – unlike turning black lung tissue into pink.

If any of this resonates, or hits uncomfortably closely, congratulations! You’re a test case. Downsize. It’s only temporary, anyway. The luxury townhome you’re renting and can barely afford? Suck it up and take on a roommate. Don’t think of your lifestyle being cramped, think of the few hundred dollars a month you’re now receiving and weren’t before. Same goes for the Target “retail therapy” and peer pressure group dinner dates at restaurants you’d never frequent on your own.

No one wants to lay the foundation, but everyone wants to live in the penthouse. You can’t get there without the necessary intermediate steps. Building wealth, employing leverage, compounding your net worth – none of that works unless your net worth is positive in the first place. Otherwise you’re just making a bad situation worse.

You can cut expenses. Not like that kook at The Simple Dollar who counts the thousandths of pennies it costs him each time he opens his fridge, but rather in large and impactful ways. You can find masses of cash in your portfolio that are just sitting there instead of being put to work – e.g. the savings account that you could easily turn into a money market account or a mutual fund. What the hell is stopping you?

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