“I Bought It On Sale” = I’m Probably An Idiot

Allow us the indulgence of quoting ourselves, since there are so few other personal finance bloggers worth repeating the words of. The man in this story sued Target because the store claimed that the $150 worth of luggage they sold him was discounted from $300, when in fact it was discounted from some smaller amount. In California, that gives you standing:

Hinojos is the philosophical descendant of every idiot housewife who came home with an overpriced and/or unnecessary handful of shopping bags.

“How much did that cost?”
“I got it on sale!”

That’s not an answer. Things cost what they cost, not the reduction by which they were discounted. 

Stating a discount is the least nuanced trick in the book, but it works. That’s why it’s lasted so long. It’s the equivalent of pretending to throw a ball while your dog turns around and chases nothing, except dogs don’t know any better and humans are supposed to be the masters of this dopey planet. Which of these 2 signs do you think will entice more customers?

 

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The one on the left will, because people are incorrigibly stupid.

Years ago, “I got it on sale” might even have been an acceptable defense, only because there was no universal standard, no platinum-iridium bar of comparison. This Curtis Mathis TV costs $1500, and the salesman at my friendly neighborhood Gottschalk’s store says that’s a $500 saving? Sounds good to me, I guess. What do I know?

People, it’s, as our grandmothers enjoy calling it, the Internet Age. You’re no longer at the mercy of an opportunistic merchant or a prevaricating advertising department to find out whether you’re indeed paying too much for your set of lawn chairs or set of lawn darts. Here’s a quote from some woman with a ridiculous job title (“retail strategist”) that makes us yearn for the day when almost everyone was employed in agriculture:

“The deal is not so special anymore,” says Alison Jatlow Levy, a retail strategist at consulting firm Kurt Salmon. “The deal has become the norm. And if the deal is the norm … it actually just trains the consumer to never buy at full price.”

Okay, that served the purpose of giving the USA Today writer a source for future use. But what does this it mean? Taken on its face, it means “deals” and “sales” are irrelevant. But do you know what metric does matter when you’re trying to determine the price of something? Here, we’ll give you a hint. Put your PRedICtivE powers to use and try and glean what it might be.

Price, and price only. Once again, layers of sophistry administered over the years have turned a simple truth into something complicated that needs to be unearthed, rinsed off and decoded. Even then, plenty of people still won’t get it.

So how do you determine the appropriate price of something, if you can’t rely on retailers’ capricious figures? EBay. The auction site is more than just a place to get rid of your miscellany. It’s a valuable tool in its capacity as the definitive price list for just about anything.

Here’s Cuddles My Giggly Monkey, a toy that indulging parents are giving their kids this Christmas:

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It costs $85 at Hasbro’s own site. It’s unavailable on FAO Schwarz. $65 on Toys “Я” Us’s site. $75 on Target’s site, but good luck getting one by December 24. Those prices give some indication of how much you should pay, but not enough of one. There’s still the matter of availability. The Target price sounds tempting, but the toy appears to be out of stock at every location we could find.

Onto eBay. We didn’t think this required direction, but here goes. Once you’ve entered the name of what you want to buy,

  1. Look at the Buy It Now prices only.
  2. Look at the auction prices, ranked by time ending soonest.
  3. Ignore the ones without any bids.
  4. Buy accordingly.

As of now, eBay has 102 Cuddleses for sale, 90 of them available for immediate purchase. Among those, the best price we could find was $85, including shipping.

There are 2 dozen Cuddleses available via auction, so the total isn’t 102, but hey, it’s eBay. They used to have a female CEO, so math isn’t their strong suit. Of the dolls available via auction, the one ending soonest (11 hours as of now) has 7 bids, the last of those $61.

It’s important to mention that most of the remaining dolls available for auction haven’t been bid on yet. That means you should ignore their listed prices. Why? Because those “prices” aren’t prices at all. They’re just dreams held by the sellers. It’s like when the media reports that tickets to the Democratic National Convention or gold iPhone 5Ss are going for $20,000 or whatever. Because one deluded seller on eBay insisted that bids start at that wildly inflated and unrealistic price. No one’s going to buy a late-model Xbox for $20,000, and no one’s going to buy Cuddles My Giggly Monkey for $125. No matter how badly the eBay seller who wants that much kicks and yells.

As the end of the auction approaches, the bids increase and the prices increase asymptotically. A lot can happen to that $61 high bid in the remaining 11 hours, and we’d be willing to bet that the high bid will surpass $65 long before then.

So buy from Toys “Я” Us and be confident you made the right decision. Should someone else offer the same toy for $70 and bill it as “30% off!”, you’ll know what to do and how disdainfully to treat that “deal.”

 

Thanks to Paula Pant at Afford Anything for indirectly inspiring this post. Unlike us, she hasn’t yet run out of ideas, nor resorted to modifying other people’s.

The Name “Affordable Care Act” is 33% Accurate

Adding a little kid to a bill signing makes it 236% more adorable and OH MY GOD WHAT IS THAT HIDEOUS ABOMINATION BETWEEN HARRY REID AND MAX BAUCUS KILL IT KILL IT WITH FIRE

Adding a little kid to a bill signing makes it 236% more adorable and WHAT IS THAT GROTESQUE ABOMINATION BETWEEN HARRY REID AND MAX BAUCUS KILL IT KILL IT WITH FIRE

It’s definitely an act, as opposed to a legitimate attempt to reduce bureaucracy and thereby reduce costs in what used to be a faintly uncomplicated sector of the economy. In fact, the bureaucracy the Act creates is staggering in its depth. It not only makes private health a public concern, but places the mandatory purchase of insurance under the purview of the Internal Revenue Service. Buy coverage or pay a fine. In other words, You’re going to be covered, and you’re going to like it. Do we make ourselves clear? 

How do an ostensibly free people get collectively subjected to such a mandate? Not without substantial effort on the part of a political class committed to see its social agenda enacted. In several steps:

1. Come up with a baseless allegation, quantify it, but do so in such a way that it can’t be disproven, e.g. “47 million Americans don’t have health insurance!”

Many Americans go their entire 20s without health insurance, because it makes economic sense for them. For the tiny likelihood of a young man or woman falling off a cliff and needing $500,000 in treatment, it can be a perfectly rational decision to forgo spending the few thousand dollars in premia.

Furthermore, the few policies available in the oligopolistic market offer little in the way of choice. It’s inefficient for insurers to offer perfectly individualized policies, which leads to semi-generic policies that include maternity coverage for single men with vasectomies. To say nothing of contraception for groups of exceedingly post-menopausal celibate women.

Pay for something and get add-ons that you not only didn’t want but have no possible use for? No thanks. After all, this is a society of people who have petitioned Congress to introduce bills that prevent cable companies from selling packages with superfluous channels. Yet there’s little momentum to prevent something similar in the insurance market. Americans would rather pay for unnecessary drug rehabilitation coverage than pay for unwanted Azteca America and RFD TV

2. Sell the allegation as a flaw in the status quo, a wrong to be righted, rather than the cumulation of personal choice.

It’s not as if most of those “47 million” have ever been prohibited from buying health insurance. They just choose not to.

Again, personal choice, if that isn’t an outmoded concept. Forcing health care coverage on everyone, and artificially flattening the prices, gives incentive to otherwise irrational behavior. As the Roanoke Times recently put it,

[Y]oung and healthy people must pay into a system that would otherwise be overburdened with the costs of treating the older, sicker population

Avoid the short-term decisions that will result in diabetes, heart disease, cirrhosis or something else life-threatening down the road? Why bother? An uninsured rational agent today has tremendous implicit encouragement to not be rash. The forcibly insured rational agent of 2015 does not.

3. Take the allegation to its logical extreme and appeal to emotion. “97-year-old Ida Cruikshank of Ames, Iowa has spina bifida and stage 4 lymphoma. You want to throw her out on the street?” If it means impoverishing the rest of us, sure, why not?

4. Stand economics on its head, and this is the complicated step.

Obviously, a little kid with hydrocephaly is going to cost tons to insure. There’s no way an insurer can make money off a policy underwritten for such a patient, so it makes no sense to offer said policy.

Begin with that moral imperative, that overarching objective - Health care coverage for all, at all costs (the dependent phrase there spoken softly) – and find a workaround. Here’s a conversation that doubtless happened between the ruling class and the heads of various insurers. We don’t have the transcript handy, so our reenactment will have to do:

Anthem CEO: We can’t write policies that we know will lose money.
White House: Yes, but you’re not going to lose money. Listen to this.
Okay, you’re going to lose money on a few policies–those of the uninsurable we mentioned above–by charging below-market rates. HOWEVER, what if we more than made up for it by forcing tens of millions more people, perfectly healthy people, to buy your product? Then…
Anthem CEO: [eyes light up]
White House: You can charge whatever you want, pretty much. Triple market rates, quadruple market rates, knock yourself out. You will have the power of federal law behind you. And don’t think we won’t enforce it.
Anthem CEO: This looks like the beginning of a beautiful friendship.

Don’t believe the journalists. Here’s the money quote from the Department of Health & Human Services’ own website:

[I]nsurers can no longer deny coverage to children because of a pre-existing condition, like asthma or diabetes, under the health care law. And beginning in 2014, health insurers will no longer be able to charge more or deny coverage to anyone because of a pre-existing condition.

Name another commodity for which this makes a lick of sense. The people who are going to consume the most resources will pay as much as those who will use the least (the department said in unambiguous language.) If there’s a fundamental difference between this and, say, a mobile phone service provider charging its international roaming customers no more than it charges the customers who never make non-emergency calls, we’re too stupid to find it.

What Makes A Lousy ETF

Putting your eggs in multiple baskets is the surest way to minimize risk and build wealth, right? You can add that to the list of homespun nonsense that sounds good but is patently false:

  • Wear a stupid wool hat, you lose 60% of your body heat through your head
  • The more you shave a particular body part, the faster the hair grows back
  • Standing in front of a microwave oven will bombard you with deadly gamma rays
  • Smoking is bad for you.

Behold the ETF (exchange-traded fund if you’re new here), a mutual fund that trades on a stock exchange. Like a mutual fund, it consists of the stocks of various companies, often numbering in the hundreds or even thousands. Unlike with a mutual fund, investors can buy and sell ETFs throughout the day. They have a ticker symbol and an immediately available price and everything. Mutual funds’ values aren’t calculated until the day closes and all their components’ prices have settled. Plus mutual funds don’t trade on exchanges, of course.

So what’s a good ETF to invest in? Let’s look atop the leaderboard. Never forget the 1st rule of investing, Past performance is a perfect predictor of future performance. 

(Kidding. The line about smoking was deathly serious, though.)

Your top 5 over the past year, regardless of market sector:

 

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Confused? Don’t be. The naming convention is standard: fund company, followed by description. Price is self-explanatory. That’s followed by performance since January 1 and performance since September 18 of last year.

Let’s take a look at the first one, iPath Long Extended Russell 1000 TR Index ETN. iPath isn’t a company, but rather a subsidiary of BlackRock. As for BlackRock, that’s an investment firm with a good reason for concealing its name. It’s owned by public charity case Bank of America, rate-fixing British bank Barclays, and PNC Financial Services (Pittsburgh National Corporation, the eponym of the Pirates’ ballpark.)

The ETF in question is actually an ETN, or exchange-traded note. The difference is that it’s composed of unsecured corporate notes, rather than stocks.

Extended Russell 1000 TR Index means that the ETN tracks the Russell 1000 Total Return Index. That’s an index composed of the prices of 1000 large firms that, according to Russell Investments, represent 92% of the U.S. market. As for Russell Investments, it’s a subsidiary of Northwestern Mutual, an insurance and financial services firm out of Milwaukee. And we are now 3 degrees removed from the subject at hand.

What about the worst fund in existence, defined as the one that’s lost the most money in the past year?

NUGT

Behold NUGT, the too-clever stock symbol for the Direxion Daily Gold Miners Bull 3X Shares ETF. That’s a name with enough qualifiers that we should deconstruct it:

Direxion. Investment firm founded in 1997, based in Milwaukee. Or as their impregnable website copy puts it,

We offer practical investment solutions to today’s market challenges with a broad suite of highly liquid, institutional-style alternative investment strategies.

Well, that said nothing. What they mean is that the funds they sell are supposed to complement your investments, not be them.

“Institutional-style.” Here are some more empty buzzwords, all from a single “About” page:

  • risk-adjusted performance through evolving market conditions
  • position portfolios opportunistically for near- and long-term market trends
  • access to strategies that provide exposure to multidirectional opportunities
  • innovative investment products and services

Innovative? Don’t flatter yourself, Jim. The last “innovative investment product” was the hedge fund. You’re not creating the cotton gin or the mp3 player here.

No wonder most of our recent college graduates can’t find jobs. They can barely communicate.

Daily, in this instance, means that the fund sets daily goals for itself. That alone should be a clue for an individual investor to step back and be cautious. You’re in this for decades, remember? Who gives a damn what an ETF does from Tuesday to Wednesday? We’ll skip over the next couple of qualifiers, get back to them in a minute.

3x. The aforementioned daily goal is to outperform a particular index, and do so threefold. In other words, if the index rises 1% in a given day, the Direxion Daily Gold Miners Bull 3X Shares ETF should rise 3%.

Gold Miners. The index in question is not the Dow, nor even the S&P 500, but something considerably more specialized: the NYSE Arca Gold Miners index.

Do we need to break this down even more? We probably do. The New York Stock Exchange’s most famous index is, of course, the Dow Jones Industrial Average. But that’s just one among hundreds that the NYSE calculates. (Arca, by the way, is short for Archipelago Exchange – a Chicago-based electronic exchange that the NYSE’s parent company bought in 2005. We have to specify “electronic” because unlike NASDAQ and just about every other stock exchange on Earth, the NYSE still, incredibly, conducts much of its business via open outcry. That is, ill-tailored traders yelling at each other.)

The NYSE Gold Miners index is a constant multiplied by the total of the prices of the stocks of 29 gold mining companies, as follows:

index components

 

As you can see, the index isn’t close to evenly weighted. By the time you reach the bottom, the companies are small. Golden Star Resources, whose operations consist entirely of 2 mines in Ghana, has a market capitalization of about $140 million. That’s still one more mine than Nevsun has (in Eritrea.) Anyhow, the Gold Miners index changes daily and Direxion tries to beat the changes with this particular ETF.

Finally, Bull. Because there’s a corresponding Bear ETF that tries to do the exact inverse: achieve a daily return 3 times the opposite of the change in the Gold Miners index.

So there you go, with a definition that necessitated a long discussion. Now, onto the question that 99% of ETF owners never bother to ask:

What’s in my fund?

Well, that depends. Seeing as NUGT tries to take advantage of daily price fluctuations, its holdings change every day. Direxion’s own website offers no help on this issue, listing a useless summary of price movements in lieu of a comprehensive list of holdings. This is 2013, we’re better than this.

The good news is that Direxion won’t let you buy its daily funds unless you’ve proven that you’re rich and experienced. But this isn’t just an academic exercise. You owe it to yourself, almost literally, to find out what’s in your mutual funds. We’re teaching you to fish here. It takes just a minute or two. For instance, the T. Rowe Price Value Fund is the most widely held in the world. Regular investors just like you own pieces of it. Google the name of the fund, find its relevant page on the investment firm’s website, find out what it’s composed of, and stop complaining.