Thursday, September 30, 2010

4 Things You Need to Do After Getting Your New Kindle

1. Get a Kindle Lighted Leather Cover (if you hadn’t already).

You'll eventually need something to protect your precious, new toy with, anyway -- so you might as well get one of these covers from Amazon. It seems ridiculously expensive at first glance; I mean, who in his or her right mind would pay 2,600 pesos for a gadget cover? But believe me, as cheap as I am in most other things, I sincerely believe that this thing's worth the sticker price.

Why do I love it so much? Well, apart from providing top-notch protection to my Kindle, it also makes reading more convenient, even with the additional bulk and weight. Actually, that's one of the things I don't like about this latest-gen Kindle -- it's so thin and light that I sometimes have a hard time holding it on its own. The cover makes this less of a problem as the combo provides more space for your hands.

If that's all there is to it, then the cheaper, basic cover would probably do. But the more expensive version comes with a built-in light that does not need any batteries (like magic, it draws power from the Kindle itself!), making it very convenient to read in the dark. 

2. Get free e-books.

The best things in life are free, indeed.

You don't have to pay $10-up per book to enjoy your new Kindle; high quality, free e-books abound online.

Project Gutenberg has a diverse collection of classics like Sherlock Holmes, Pride and Prejudice, and The Art of War, among others. Don't make the mistake of buying these novels from Amazon, even if you think they're a "steal" at $2.99; these out-of-copyright works are legally distributed by Gutenberg free of charge (and rightfully so), even in Amazon's own Kindle format, so really $2.99 is infinitely more than what you should pay for.

If you have no scruples about intellectual property, there are handy online tools and websites that can help you get what you want. You can easily find contemporary e-books with, a search engine that indexes file hosting sites like 4shared, Rapidshare, Mediafire, and others. Also, some online forums like Symbianize host e-books shared by members; all you need to do is sign up. Some of these sites will even require some proof that you're Filipino, but if you know the answer to something like "Ang ap oy ay nakakapa so. Ta ma ba o ma li?", you won't have any problem registering.

Scribd is another good source of hard-to-find e-books. Unfortunately, some documents require some kind of paid access. If you find something you really like (or need) in Scribd, I suggest you just get a $5 one-day pass and download as many e-books as you can.

Of course there's always the bittorrent alternative, but in my experience, that's more troublesome than the options I mentioned above.

If you know other, convenient sources of free e-books, maybe you'd like to share them with us.

3. Manage your non-Kindle e-books with Calibre.

Apart from Kindle Books bought directly from Amazon, Kindle also natively supports TXT, PDF, and non-DRM MOBI files. But sometimes, free books are available only in unsupported EPUB or LIT formats, so you'll need a way to convert these into a compatible format. And while Amazon does offer free, remote file conversion (if you have WiFi access), it's not really very user-friendly.

Fortunately, with great thanks to the open source community, Calibre is there to solve our e-book management issues, for free.

With Calibre, you can easily convert unsupported documents into Kindle-friendly formats like MOBI and TXT. You can even convert a PDF with too many words per page into a free-flowing format to make reading on Kindle friendlier.

4. Buy Kindle Books.

If there's one thing I don't hesitate spending on, it's books (how does subject-verb agreement work on this kind of sentence?). Before getting the Kindle, while I did try to minimize what I spent on books by getting cheaper second-hand copies of not-so-important titles, instead, I did not hesitate to spend 1,000 pesos or more on a "must have" hardcover release. Now that each new book will just cost me around $10 or 450 pesos, there's no reason for me to think twice about buying these essential titles from Amazon.

I actually already bought my first Kindle Book: Steven Erikson's Dust of Dreams, Book 9 of Malazan, Book of the Fallen. Some of the books that I'm looking forward to buying and reading in the next few months include:

  • George R.R. Martin's A Dance with Dragons, Book 5 of A Song of Fire and Ice (You have to start reading this series before the HBO series comes out. I've been waiting for this installment for five years.)
  • Steven Erikson's The Crippled God, Book 10 of Malazan, Book of the Fallen (The last chapter in the series.)
  • Robert Jordan's Towers of Midnight, Book 13 of The Wheel of Time (Completed by Brandon Sanderson because Jordan died in 2007. The first book in the series was released in 1990.)

Can you imagine how someone who reads several of these 1,000-page tomes in a foreign land without a permanent place of residence will manage his books without the Kindle? Some of you will probably say, "Yes, there's an iPad for that." Then I would reply... nah, it would be better if you just read this article on your own.

Tuesday, September 28, 2010

10 Exercises: A Fitness Manual for Random Walkers (Part 1)

STUFF I LEARNED FROM Burton G. Malkiel's "A Random Walk Down Wall Street"

1. Cover Thyself with Protection

"Disraeli once wrote that 'patience is a necessary ingredient of genius.' It's also a key element in investing; you can't afford to pull your money out at the wrong time. You need staying power to increase your odds of earning attractive long-run returns. That's why it is so important for you to have noninvestment resources, such as medical and life insurance, to draw on should any emergency strike you or your family."

I have a friend whose family wealth was almost completely wiped out by hospital expenses when her father got terribly ill. Preparing for an unfortunate situation like this is perhaps the most important reason why we should take control of our finances as early as possible.

There are two simple ways of protecting our families from unforeseeable emergencies and disasters: setting up an emergency fund and getting insurance.

An oft-quoted rule of thumb for an emergency fund is six months to one year's worth of living expenses in safe and highly liquid assets like bank accounts and money market funds. If you are covered by medical or disability insurance, you can reduce the amount accordingly.

For insurance, just make sure that everyone in the family has some form of medical coverage, and that breadwinners are covered by basic term life insurance plans. Most employment compensation packages already include these benefits; some plans can even be extended to members of your immediate family at lower cost, so if you're employed you can verify the details of your coverage with your HR manager.

2. Know Your Investment Objectives

"Every investor must decide the trade-off he or she is willing to make between eating well and sleeping well. The decision is up to you. High investment rewards can be achieved only at the cost of substantial risk-taking. This has been one of the fundamental lessons of this book. So what's your sleeping point? Finding the answer to this question is one of the most important investment steps you must take."

In choosing among available investment alternatives, investors need to know (or decide) how much risk they can bear (or want to carry) since generally, riskier investments provide higher potential returns. We have already talked about this in several posts in the past, but Malkiel's ingenious use of the relationship between risk and losing sleep makes it worthy of another look. The table below, patterned after the one used in the book, presents the "sleeping points" of widely available investment instruments in the Philippines.

Sleeping Point
Type of Asset
Typical Return
Risk Level
Semicomatose state
Commercial bank accounts
up to 1%
No risk of losing what you put in. Deposits up to 500,000 pesos are guaranteed by the PDIC. Risk of losing purchasing power with inflation is high, though.
Long afternoon naps and sound night's sleep
Commercial bank time deposit accounts
2.5 to 4%
Same as above, but less inflation risk.
Sound night's sleep
Money market funds
3 to 4%
Very little risk, but the principal is not guaranteed.
An occasional dream or two, some possibly unpleasant
Corporate bonds, bond funds
5 to 7%
For individual bonds, very little risk if held to maturity. Moderate to substantial fluctuations can be expected in realized return if bonds are sold before maturity.
Nightmares not uncommon, but over the long run, well rested
Diversified portfolio of stocks, equity funds
9 to 15%
Moderate to substantial risk. In any one year, the actual return could be negative (loss of principal). A good inflation hedge over the long run.

3. Dodge Taxes Whenever You Can

"One of the best ways to obtain extra investment funds is to avoid taxes legally."

Unlike in the US where they have tax-exempt investment and savings plans, in the Philippines there's not much wiggle room to "avoid taxes legally." The best thing individual investors can do is include tax effects in estimating the returns of available investments.

Source of income
Tax rate
Interest on bank deposits and trust funds
5 years or more - Tax-exempt
4 to less than 5 years - 5%
3 to less than 4 years 12%
Up to 3 years - 20%
Cash dividends
Capital gains from sale of stocks
Not over 100,000 pesos - 5%
More than 100,000 pesos - 10%
Capital gains from sale of real property

Small business owners and self-employed individuals can actually deduct some expenses from their gross income, which can result in substantial tax savings. If you estimate savings to be greater than the fee charged by an auditor, you might as well get one to make sure your documents and books are in order.

4. Be Competitive; Let the Yield on Your Cash Reserve Keep Pace with Inflation

"As I've already pointed out, some ready assets are necessary for pending expenses, such as college tuition, possible emergencies, or even psychological support. Thus, you have a real dilemma. You know that if you keep your money in a savings bank and get, say, 1 percent interest in a year in which the inflation rate exceeds 1 percent, you will lose real purchasing power. In fact, the situation's even worse because the interest you get is subject to regular income taxes. So what's a small saver to do?"

In the Philippines, the best way to keep the purchasing power of your emergency fund more or less intact without sacrificing liquidity is by parking it in an inexpensive money market fund like BDO's Money Market UITF. It's cheap (it has no "load" or sales commission and the management fee is only 0.5% per year) and efficient: in the past 5 years, the fund has been able to generate an annual net return of 4.73% per year, outperforming other similar funds in the market and pretty much keeping pace with the annual inflation rate.

5. Investigate a Promenade through Bond Country

"Small wonder many investors view the bond as an unmentionable four-letter word."

A bond is a form of debt security, in which the issuer (also referred to as the seller or borrower) promises to pay the holder (also buyer, lender, or investor) periodic interest payments called "coupon" payments and pay the principal at a predetermined date called "maturity." A variety of bonds is widely available to both individual and institutional investors: Treasury bonds are those offered by the government and corporate bonds are ones which are issued by big, established enterprises.

Like stocks, bonds can also be publicly traded in financial markets like the Philippine Dealing Exchange or PDEx. Bond prices are primarily determined by prevailing interest rates: when interest rates rise, bond prices fall, and vice versa. This causes fluctuations in the price, and expected return, of bonds prior to maturity.

Bonds are still generally perceived as safer investments than stocks, even if bond holders are actually exposed to many different kinds of risk. There are two main reasons for relative safety: one, coupon payments are compulsary and take precedence over dividends; two, in case of bankruptcy, creditors get first dibs on the remaining assets of the firm. Since it's safer, a bond would typically provide a lower return than riskier assets like stocks.

If you're interested in buying bonds, you can check out the website of PDEx for outstanding issues and approach an authorized bond broker or dealer (usually any one of the more reputable commercial banks) to buy the bond that you're interested in. You can also approach you chosen broker if you want to subscribe to new issues.

An alternative to buying individual bonds is to invest in a bond fund like a bond UITF, which is invested in a portfolio of bonds and other fixed-income securities.

To be continued.

Thursday, September 23, 2010

Earl's Dilemma


Dear Investor Juan,

Good day! I'm a "newbie investor" and I would like to seek your advice with regards to something that is related to this post. I started investing in BDO Equity Fund last year (Sept. 30) to be exact. After that I placed additional investments in January, February and May of this year. I now have accumulated a total of 365.5601 units bought for a total of Php60,000.00. Presently, the daily NAVPU continues to rise and if I redeem my investment right now I would have a profit of almost Php30,000.00. 

Do you think now is the right time to cash out my investment or wait a little longer to see if the NAVPU will continue its upward trend? I am planning to buy that entry level DSLR with my profit... :).


Earl B.

Dear Earl,

Wow, what an enviable position you're in right now; what I would give to have your "problem."

Having said that, I also need to emphasize that I am in no position to tell you what to do. All I can do is give a few things that can help you come up with a "good" decision, one that is arrived at more systematically and methodically.

First, define your objective. Do you just want to have enough cash to buy that DSLR camera, or do you want to maximize your earnings as much as you possibly can? Knowing what you really want is an important first step in determining your best course of action.

Next, identify all alternatives that are available to you. Remember, you're not just limited to selling everything now or holding on to everything: you can always take the middle ground and just sell enough to fulfill your cash requirement. For example, if that camera that you're pining for is worth 30,000 pesos, you can just sell enough units (around 123 at the current NAVPU of 244.729) to cover that amount, essentially just taking your profit while staying in the game; or, you can pocket the principal and just "play with house money," as they say in gambling circles.

Finally, you have to have some opinion about how stock prices in general will behave in the next few weeks, or months. If you think the run has not reached its peak yet, then the best move would be to stay; if you think otherwise, then sell. But if you're just as unsure as the rest of us (don't ever believe anyone who tells you that he or she knows what's going to happen tomorrow), the best move may be to play it safe, sell enough units to buy that camera (or cover your ass), and hope for the best for your remaining units.

Whatever you decide, what's important is to gut up and stand by your decision: there's no point in beating yourself up just because the PSEi goes up a few points after you decide to sell some shares. Like I said at the beginning of this post, I completely envy your position, since you managed to enter the market at almost the perfect moment; the worst thing you can do now would be to try to "guess" the perfect moment to exit.

Enjoy your new DSLR. Share your first few shots with us, why don't you?

Monday, September 20, 2010

Gokongwei’s Cebu Pacific to Go Public (For Real, This Time)


Six months after its original plan to go public was sidelined by a public relations nightmare, local budget carrier Cebu Pacific finally gets the required approval from the Philippine Stock Exchange. The planned sale of almost 215 million new shares, or 35% of the firm, to the public is seen to generate around 32 billion pesos of additional capital, almost three times the proposed amount in March. The IPO is set to become the biggest in local stock market history.

The move takes advantage of soaring investor confidence in the market amid the current bull run, so it's turning out that the delay in March was some kind of blessing in disguise. Since that time, the public has heard nothing but good news about the firm from local media: from regular seat sale announcements, to the opening of new destinations like Brunei Darussalam and Beijing, to continued fleet and personnel expansion. Also, the recent labor related troubles of fierce competitor Philippine Airlines helped boost Cebu Pacific's standing in the industry and in the minds of the public.

The listing is scheduled on October 26, so start calling your brokers to subscribe if you're interested.

Saturday, September 18, 2010

Of Billionaires, Rock Stars, and the Price of Happiness

Last month, we spent a few moments imagining what it would be like to be a (US dollar) billionaire, although it turns out that one of us has been thinking about it more seriously than the rest. Jumping off from that theme, we sampled the effectiveness of this online tool which supposedly gauges one's potential to be wealthy.

In case you have already forgotten, the last question in that online questionnaire goes

Who would you rather emulate? A man known for throwing extravagant soirées in his art-laden mansions around the world, or man whose idea of a wild party is playing bridge online at the home he bought for $31,500 in 1958.

Of course we all know now that the first choice pertains to Nicholas Cage, who, in a blink of an eye, managed to burn up the millions he earned over the years as a big time celebrity, and that second choice pertains to legendary billionaire and investor, Warren Buffet. According to the questionnaire, choosing Buffet's simple lifestyle will bump up your chances of becoming wealthy by a notch or two, and choosing to live Cage's rock star persona will be the surest path to financial damnation.

All this talk about riches and lifestyle got me and my friends into asking: What would you rather be, a billionaire or a "rock star" (i.e., someone who has boatloads of cash or someone who just has enough money for basic comforts and boatloads of all the other stuff like sex and rock and roll)? I know that some of you will point out that the choices aren't really mutually exclusive and that a billionaire would easily have enough money to be both, but this was a topic discussed over one or two drinks and you have to understand that the dilemma is more philosophical than economic. So if you completely understand the point of the question, what would you rather be: a billionaire or a rock star?


On a related note, last week I bumped into this TIME article about a study by one of my favorite scholars, Nobel Laureate Daniel Kahneman, and his associate Angus Deaton, on the "price of happiness." According to the study, the price of happiness for Americans would be $75,000 per year; putting it another way, with an annual income of $75,000 per year, Americans would start to think that money is not an issue anymore. Of course, the study goes on to imply that money, all 75,000 US dollars of it, is merely a necessary but insufficient condition for happiness and that, of course, there are other factors at play.

Still, $75,000 looks and sounds like a plausible and attainable figure that can serve as an initial target for any financial- or career-planning exercise. But how do we translate that into Pinoy terms? Yeah, it's easy to google "75,000 USD to PHP" and get 3.31 million pesos, but that won't do since the cost of living in the Philippines and in the US are oceans apart. To bridge that gap, we can use what The Economist calls the Big Mac Index, which reflects both foreign exchange rates and cost of living differences (measured by the price of a Big Mac). Using the latest Big Mac Index, we can compute for the equivalent "price of happiness" in the Philippines, which is roughly 2 million pesos.

Now for some perspective. A gross annual income of 2 million pesos would mean a mothly income of around 154,000 (if you consider 13th month pay). Do you know anyone earning that kind of dough in the Philippines? If this figure is accurate, can you imagine how may people are unhappy in a country where the average annual household income is 172,000 pesos or just 8.6% of the price of happiness benchmark?

Maybe it just means that $75,000, or the Big Mac-adjusted 2 million pesos, does not apply to the Philippines; maybe it simply takes way less than that to make us happy. Over the years, we've seen reports like this one and this one of how Filipinos have ranked highly in international happiness surveys, despite our admittedly miserable circumstances. But I would tend to be a bit skeptical of these results, since I do see first-hand that a great many of us are far from being economically or even socially satisfied, much less happy. So, if we turn to more extensive and structured surveys like this one, we'll see how the Philippines sits in the middle of a global sample (72nd of 146) in terms of happiness, or "satisfaction with life," as the survey eloquently defines it; we are right there but not quite, unsurprisingly falling behind our neighbors Hong Kong, Taiwan, China, Indonesia, Malaysia, Vietnam, Thailand, and Singapore.

I would tend to believe this last survey more, just as I see $75,000 or 2 million pesos per year as a believable price for happiness. The fact that Filipinos with average incomes would only be moderately satisfied with their lives, especially compared to peoples from "more developed" countries, makes sense to me, mainly because I believe that money has a lot to do with happiness, or satisfaction with life (although I would also be the first to say that that's not all there is to it).

So I guess that rock star lifestyle would have to wait until I earn my way to happiness. Again, the issue is more philosophical than economic.

Monday, September 13, 2010

UITF Head-to-Head: BDO vs. BPI

Let's take a second look at the UITF comparison we made several months back: BDO vs. BPI vs. Metrobank.

If you're like most of us, the choice pretty much boils down to BDO vs. BPI, mainly because most of us already have accounts, and "relationships," with either or both of those banks. The only reason some of us have Metrobank accounts is that it's our employers' choice for payroll accounts; if it were just up to us, we would rather open accounts in the two other banks, mainly because of convenience. Both banks are best in terms of convenience: as far as I know, BPI has the most number of ATMs, at least in the metro, and BDO can be found in virtually all SM malls and have longer business hours, to boot.

Taking another look at the side-to-sides of the UITFs of BDO and BPI, we see that BDO has an edge in several criteria, like minimum required investment (except for the money market UITF), minimum holding period, and the management or trust fee. The first two criteria may not really matter much to you, like if you have more than the required minimum and you don't really need to redeem your shares soon. The difference in fees may or may not matter: for the money market fund, BDO is lower by 0.25% per year, and for the balanced and equity funds, the difference is 0.50% per year.

So if you're choosing between BDO and BPI, which bank's UITF would you invest in? Why don't we take a look at the actual performance of the funds to see which bank has the better mojo.

Money Market

Past 12 months' return
Peso return on a 100,000 peso investment

In the last 12 months, the BDO money market fund has outperformed the comparable UITF of BPI by 0.57%, or 570 pesos on a 100,000-peso investment. The difference may not seem much, but remember this fund is the least volatile of the lot, and therefore provides the least returns. A 0.57% difference is actually 17% in relative terms, so that may be big enough to some people.

Bond/Fixed Income

Past 12 months' return
Peso return on a 100,000 peso investment

Here's where things really start to unravel for BPI. How can it explain an almost 50% difference in return?

Let's skip the balanced fund, shall we? And head on straight to the equity funds of the two banks.


Past 12 months' return
Peso return on a 100,000 peso investment

Okay, before you arrive at any premature conclusion, let me first emphasize that the ginormous returns you see here are mostly due to the overall performance of the market, in general, as you see with the orange curve for the PSEi in the graph. The key in evaluating the funds is to look at performance in relative terms and not on absolute returns--always.

Here we see, again, a BDO UITF outperforming a comparable BPI fund by a significant margin. Perhaps it's also relevant to point out that the BDO equity fund also managed to outperform the PSEi over the course of the past year, even after taking into account all relevant taxes and fees (remember that quoted NAVPUs are net of everything); unfortunately, the same cannot be said about BPI.

What does this all mean? Clearly, it's not just about the difference in fees, although that also plays a role, albeit a small one, in this... massacre? The only reason I can think of is that BDOs fund managers are "better" than their BPI counterparts. What do you think? 

This one time, I'm not going to dilly-dally and make a half-assed recommendation like I always do: if I am going to invest in a UITF or similar instrument in the Philippines, I am going to invest in one of BDOs UITFs. This has actually been clear to me even when I wrote that original post months ago: in almost all aspects, BDO simply kicks the asses of the other guys. The choice of fund--money market, bond/fixed-income, balanced, equity--is all up to you, on how you handle risk and your other financial circumstances. I just had to show some specifics and some more numbers to make the choice even clearer.

But in the end, remember that small caveat that I mention over and over again: past performance is not indicative of future results. A 40% return this year does not guarantee a similar return next year. Nevertheless, I'm still convinced that BDO, on top of other things that make it the better alternative, will continue to deliver better returns than BPI in the UITF arena. I'm so convinced, in fact, that I'm willing to put my money where my mouth is.

Full disclosure: I am not in any way related to BDO or its affiliates. I actually abhor SM. But that's neither here nor there.

Thursday, September 9, 2010

10 Stock-Market Myths That Just Won't Die

IN THE NEWS from The Wall Street Journal

With the PSEi closing today at an all-time high (lending credence to this little prediction I made six weeks back), investor interest and confidence on the local stock market continues to roll. The six-month return on local stocks is now at a staggering 23%, even as more developed markets in Hong Kong and New York remain stagnant or continue to flounder (see image above). Perhaps now, more than ever, is the perfect time to take a closer look at some of the things our so-called experts, stock brokers, and financial advisers say about stock investing and make the most out of this potentially rewarding situation.

1. "This is a good time to invest in the stock market."

It may run counter to what our instinct tells us, but maybe the best thing to do in a situation like this is get out and sell. That is unless you believe the index is going to double in the next few years, as some of these geniuses insist.

2. "Stocks on average make you about 10% a year."

This is based on some past history--stretching back to the 1800s in the US--and it's full of holes. Think about how different the past ten years is from the ten before that, what with our Internets, Googles, iPhones, and iPads. Now imagine how the collective "we"--investors, listed companies, and market dynamics--are different from "them" some 100 years ago. And after all, we all do agree that past performance does not matter, don't we?

3. "Our economists are forecasting..."

Forecasting is, at best, a calculated guess. Even if the person doing the forecasting (i.e., the economist) asserts that he knows what he's doing, actual results tell us that it cannot be done consistently accurate. Show me one person who was able to predict this market high (e.g., me), and I'll show you a hundred others who bet on the opposite.

4. "Investing in the stock market lets you participate in the growth of the economy."

I look at the Hong Kong economy now and the performance of its stock market in the past year, and I only see inconsistency, which is the same thing I see when I think of the way things are in the Philippines and this overwhelming stock market performance. This incongruence happens because economic performance is built on fundamentals, unlike stock market performance, which sits on top of the unpredictable whims and behavior of market participants.

5. "If you want to earn higher returns, you have to take more risk."

At its essence, this is something I still subscribe to; anyway, it all depends on how we define and measure risk. Just remember, it does not make sense to invest in something that exposes you to a significantly high chance of losing principal, since that does not necessarily equate to higher returns.

6. "The market's really cheap right now. The P/E is only about 13."

Two things we have to remember about using the P/E ratio to gauge the value of markets and individual stocks. One, earnings or, in other words, accounting income, can easily be manipulated. Two, the attractiveness of a certain P/E is in the eye of the beholder: for a guy who's used to 30x P/Es in China, a 15x P/E in Hong Kong looks very cheap and tempting, indeed; but for someone in the US, for example, who's used to multiples of 13x, 15x P/E stocks may look just a tad expensive.

7. "You can't time the market."

Haven't you heard me say this time and time again? But forget what I said--it can be done. You just need a couple of cojones and a bit of luck. And now's the perfect time to try it. Sell... n... o... w.

8. "We recommend a diversified portfolio of mutual funds."

Putting all your cash in just one kind of mutual fund or UITF, be it equity or fixed income, may not be diversification enough. To really reap the benefits of diversification, you'll need to invest across asset classes.

9. "This is a stock picker's market."

Again, stock picking is more an art form than skill. Maybe now's the best time to show how investing in a passive fund which tracks the market index, now with a 35% year-on-year return, is a tough act to follow, much less beat.

10. "Stocks outperform over the long term."

This passage from the article is just too beautiful to change:

"Define the long term? If you can be down for 10 or more years, exactly how much help is that? As John Maynard Keynes, the economist, once said: 'In the long run we are all dead."

Sunday, September 5, 2010

How Credit Card Companies Make Money

Credit card users may be classified into two major types: revolvers who usually only make minimum monthly payments, and transactors who always pay the total amount due. Revolvers are at the heart of the credit card business and are the favorite customers of credit card companies, who make a bundle by charging around 3% interest per month on unpaid balances (and new transactions, read the fine print). In contrast, by paying the total balance every time, transactors avoid paying interest and benefit from the use of "free credit."

As consumers become more and more financially informed and savvy, more and more credit card users shift from being revolvers to transactors. Does this spell the end for the credit card industry, as we know it? Do credit card companies really get nothing out of these free-riding transactors? See the infographic below to find out.


Thursday, September 2, 2010

The Price of Free Stuff


Did some groceries a while ago, and hadn't noticed that I picked up a heck of a lot of peanuts until I plopped the contents of my basket down in front of the cashier. 6 bags of peanuts? Really?

So I feigned surprise and discarded the other 2 bags. Didn't have to though, as cashiers tend to not get surprised at how eccentric people's grocery lists can be. Take the lady behind me, for instance, buying both cat, dog and bird food. Does she own a small zoo or something? Or the old guy buying several packs of condoms... wait, is that my dad?!


Got a new watch today, came by mail. Apparently, my credit cards love me so much that they decided I deserved a new watch. I didn't deserve an expensive one, though, but I'll take it just the same. I tried filling up the warranty but it expired last year. So it's a cheap, old watch, with a battery life of anywhere from 3-6 months. But then again, it's free so I can't really complain, can I? I'll just wait till it's batteries conk out and replace them. Hopefully by then the credit card company would realize their mistake and send me a new battery. (fingers crossed)

So that particular watch now adds to that long-list of freebies that I keep getting from less-than-well-meaning marketing campaigns. 2 watches, 2 dozen or so coupons for a free fast-food meal, a leather-bound notebook, an air freshener, a bag full of computer doodads, a drip coffee-maker, a gym bag, a set of coasters, a flashlight, countless pens, a buffet dinner, and free one-day trials at a gym. I'm sure there's more, but that's all I can recall for now.

Working on the premise of a world where nothing is truly free, what have I had to suffer for 'freebies'? An almost insurmountable amount of credit card debt, years of subscription to magazines I have no time to read, countless afternoons wasted listening to a presentation by some sales rep, and filling up various surveys that I really don't care for anyway.

But was it worth it? After years on reflecting on this question, my answer is: it depends. You must think I'm pretty useless (and gullible), huh? You're probably right.

Take this new subscription I'm contemplating on, for instance. It offers a 3-piece luggage set upon signing in. I like that magazine, and despite probably not having enough time to read it religiously, I will get a few moments or so of good reading done. Now, as it so happens, I've sold the luggage set in advance to an officemate for the same value as that subscription, thus, I get a free subscription for something I will read probably once a month. Not too bad, I should say. On the flipside, there's this real estate company that promises a free dinner and overnight stay in a hotel if I show up for a viewing of their project. Seems pretty neat, doesn't it? But beware, because the buffet really isn't as good as you've imagined it to be, and the overnight stay at the hotel means they'll give you the crummiest room they could find. The worst part is that you show up at their viewing, and find yourself trapped there for a whole day, just nodding your head at some numbers and words they keep showing over and over again,and you exhaust yourself trying to come up with excuses why you have to think their offer over first. I'm telling you, it's not worth the trouble.

Going back to my new watch, is it worth it? Yes, only because it came as a reward for previous purchases by my credit card.

Anyway, if any sales reps are reading this, I'll be needing a new belt (brown, preferably), a new mobile phone, a stove-top espresso machine, or a pair of running shorts. Cash is always welcome, too.

For this and his other (mis)adventures, read Hap's blog, "A lot of nothing to say."
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