Investing and Economics Musings from a Lexus Dealership
The car industry is the embodiment of a commodity priced item. People certainly look for various features, but the real determinant for a large portion of the market is price - that is, the bottom line in terms of monthly payments is all that the average American is probably concerned with when he or she is looking or a new vehicle. By automating the process, and refusing to make overly generous legacy promises such as the pension and health care plans that has devastated the Detroit economy, Toyota has a cost advantage that simply cannot be beat. This allows them to sell far more features for the same price as an American counterpart, leaving either more money, or more luxury for the price, in the hands of the hardworking consumers that include everyone from window washers and hotel maids to Supreme Court lawyers and hedge fund managers.
It underscores Benjamin Graham's point that when investing, the only safe place in a commodity type industry is with the low cost producer. That is because when prices crash, and other firms begin bleeding red ink as losses mount, the low cost producer can continue to be profitable, taking market share and really hurting the competition. Wal-Mart, for instance, has been so incredibly successful because of it's low cost status, something that is by no means guaranteed (the other night, I found myself refusing to buy a certain brand of coffee from the retailing giant because it was $9.95 and I knew another local grocery store carried the same product for $5.98 despite the fact that I am, by the grace of God, very well off! That's how powerful old habits can be and why Graham, over 80 years later, continues to be the authority on price and value.)
On one hand, as someone who is fortunate enough to possess a knowledge of investing and finance far above the average person, it makes me upset that we can't compete. On the other hand, I look at the cost-benefit passed on to the vast majority of citizens who are clearly better off because of the lower priced cars that have been produced for them and their families. This leads us to the question - is it really better for 98% of the country to have more money in its pocket even if it the cost is the destruction of a blue collar industry that served its workers well for the previous generation or two? Each time one of us purchases a car, we are voting with our dollars. That's how the democracy of capitalism works. (Now, in our story, to be fair, I should probably point out that Toyota has factories in the United States and employs United States workers so it isn't exactly a case of jobs getting shifted overseas so much as it is profits going to a foreign corporation instead of a domestic one.)
Maybe that's why I was a bit unpleased when one of the major Presidential candidates promised to bring auto jobs back to Detroit. Short of some enormous fundamental economic shift, it cannot happen because the economics are nearly impossible unless you erect trade barriers, which unfairly shifts to the cost to the other American workers - waitresses, cart-pushers, etc.. It sucks, I know. It really does. But you simply cannot compete on price alone with someone as efficient as Toyota. The only way we can begin building prosperity for our citizens is to begin accepting the reality of the new economy, just as our grandfathers and their great-grandfathers did when they gave up textiles and whale fat, shifting to new opportunities. It feels as if some of the candidates are using the working poor by falsely promising them something that just isn't economically feasible in order to get into office. That's not right, and it's not just.
Well ... actually, if the domestic car makers would actually produce something that didn't seem so cardboard cut-out this might turn out to be wrong. Of course, other than the reinvention of the Cadillac line, I haven't really seen anything that is noticeable. Have you thought about how totally forgettable most of these designs are? Don't they hire art students to draft the styling of these things? Why then, do they look so unattractive? This thought process isn't just a way to pass the time; it really can affect your portfolio because if you are able to come up with an answer to that question, you can make a lot of money betting on the direction of stock prices in the industry.
Still, despite all of these problems, I have no doubt that if history's lessons remain true, there is wealth to be made for those who are disciplined and invest their money wisely. I hope that's why you are here - to learn how to help build a better life for you and your family.
You strike me as a person who was born wealthy, and who has a good brain that allows you to learn financial concepts “far above the average person.”
Good for you. I bet that many of your readers would consider your health care plan just as “overly generous” as the ones awarded to auto workers.
If I may ask, have you ever considered taking a more humble approach to life? You can still acquire capital without being so condescending to those who are less fortunate or less intelligent than yourself. Buffett does it without appearing to be a spoiled twit.
You were not able to choose your IQ or social caste before you were born. This is also true of someone who is dumber than you or poorer than you. You need to learn this fundamental lesson before it’s too late. See “A Christmas Carol” ASAP.
Joshua happens to be my best friend since we were in high school. If you took the time to research his life, you’d find that he was born lower middle class into a family of four to a stay-at-home mom and a dad that managed a sporting goods store. During his elementary years, he lived in a 900 square foot house with two cousins, his grandmother, and the five other members of his family while they started a business.
He became obsessed with the stock market in 4th grade and by the time he was 25, retired to an office where he now oversees the companies he owns. He and I were two of the only people that attended the private university where we graduated from college that actually had to pay our own way, both on classical voice performance scholarships plus working (I took low-paying jobs at retail stores; he sat in Starbucks and traded stocks on a laptop.)
This man changed my life because he taught me how to analyze financial statements and invest my money, especially in American Eagle Outfitters before it skyrocketed 700% over a seven year period. Everything he has, he has because he worked his as* off for it. I can say without reservation that he is incredibly humble about being born into a stable family (albeit one that had to work 80 hours a week just to get by in the beginning) in the greatest capitalist system that has ever existed, but he has no tolerance for those who are too lazy to put the work and effort in to moving or changing careers. My guess it has to do with seeing his father work as hard as he did (does), never complaining but doing whatever was necessary to provide for his family.
Don’t talk about things with which you aren’t familiar. It makes you look petty and small.
Ryan,
Thank you for taking time to write. I hope you find the site useful.
For a number of reasons, I’m not going to get into my personal situation or upbringing. I’ve spoken about it on the site in the past, particularly in response to a great conversation some of my readers and I had about the role of Wal-Mart in our society (and portfolios / retirement accounts.) It’s not useful and not really going to do anything to solve the problems that face the country. My passion is helping you and the other readers understand how the financial markets can be used to build a foundation of wealth for you and your family. In fact, that’s why all of us Money & Business guides at About.com love writing content so much.
When I use the term “overly generous” by that I mean that the cumulative health and retirement benefits offered to employees so grossly exceeded the net income of the company that they now represents 400% to 500% the market capitalization of some of the old-line automobile makers. The fault lies with the management that made deals when profits were at cyclical highs and an accounting system that did not require pension liabilities to be fully reflected in the balance sheet at the time (that has since changed to some degree but there is a lot of room to go.) You cannot make $1 in profit and then turn around and offer the employees $4 to $5 in benefits and salary. The entire, sole existing purpose of a company is to “provide dividends for the owners” as the old saying goes. (That may not be literal cash dividends, such as the case with Berkshire Hathaway where the money was plowed back into investments by Warren Buffett and Charlie Munger, but the owners have nevertheless benefited from those “look through” earnings as Berkshire’s stock price has gone from $8 to $140,000 per share over 40 plus years.)
I’m always struck when people rail against “the corporation”. For example, Exxon Mobile made obscene profits last year – upwards of $40 BILLION – but the company is so old, that almost all of the shares are in the hands of pension funds and mutual funds. Who owns those? Average, American employees, each of whom may only have a few thousand dollars in their account. That’s what I think is not accurately taught because all people seem to notice are the few, Forbes 400 members that are abusive, not the fact that a vast, vast majority of the dividends and wealth created by these giants are going to small stakeholders through their retirement plans.
In short what is “overly generous” at one firm, say a manufacturing firm, could be “barely sufficient” at a Wall Street hedge fund because of one important metric: operating profit per employee. That figure represents the safety net, so to speak, that management has for new programs. For someone like Buffett, I’d argue that a $500 million bonus package wouldn’t be overly generous, but for a company losing money and running red ink, I’d say almost any healthcare package would be irresponsible if the goal was the long-term stability of the business. The unions, which were unwilling to make concessions on these bigger items (understandably – who wants to cut their paycheck when the guys at headquarters get six-figure and seven-figure incentive bonus payments and company limousines?) ultimately guaranteed that the jobs they were trying to protect were lost to foreign competition.
I believe that financial markets should be open, honest, and accessible to everyone. That’s the secret to the American system – there must be upward mobility, otherwise you get into French Revolution situations which ultimately causes everyone misery. My point was, if you read the blog entry, that I feel it’s unfair for knowledgeable, well-educated politicians to blatantly lie to regular folks who are just trying to provide for their families. To promise people in Michigan that the auto industry is coming back is a lie. It’s not fair to them. I’m a bit confused as to how a comment like that could be construed as controversial. Perhaps it’s because I’m a firm believer in Charlie Munger’s dictum, “Tell me the bad news. I only want the bad news. The good stuff will take care of itself.”
And my health insurance? You are correct – it’s very good. But I pay for every dime of it out of my own pocket, from my own investments. No employer subsidies. No fringe benefits. A direct statement, from my provider, and a charge made automatically to my American Express card. When I studied finance at a much younger age, I realized that most bankruptcies were medically related and health insurance could stop that so even before I had money, I made sure to maintain more than sufficient coverage, even if it meant I didn’t have a car.
I appreciate these responses, and since I was wrong about your upbringing and point of view, I apologize for my misled characterization of you. Also, you have a great best friend in Aaron. I do like your column and I am pleasantly surprised that you posted my comment and that you are a self-made man.
My personal philosophy is that even people who have no interest in the market or ability to analyze it and profit from it deserve the same basic opportunities, such as health care. The movie “Sicko” made a great case for universal health care (I know you probably cringed at that sentence).
As an investor I understand the empowering nature of investing and holding a piece of a company. However, I do feel that the distribution of wealth in this country is a little out of whack. I’m not a socialist, but someone has to step in and make sure the little guys get something (i.e. bring back jobs to Detroit even if it hurts the shareholders).
Shareholders are people investing with extra money. Poorer workers are people who require money in order to keep going. We cannot base every decision on what the shareholders need. There are ways to carve out portions of our economy in order to provide “the greatest happiness for the greatest number of people.”
“Distribution of wealth”? If you want wealth, you should earn it, be willing to sacrifice temporary pleasures for it. If the “little guy” has wants, then perhaps he should choose how to spend his resources (time and money) a more wisely. This doesn’t involve any great knowledge, it just requires a little discipline.
Look, I make roughly the same wage as a co-worker. But I save 5 times what they save through a 401 (k). How is this possible? I choose not to purchase (or lease) a new car every three years or so – my car is 13 years old. I bring my lunch to work everyday instead of ordering out. I drink tap water instead of purchasing water from the vending machine. We have the same opportunities and make very different choices. This same co-worker constantly complains that our company needs to offer 401 (k) matching. Yet they aren’t willing to make any different choices on how they spend their own money.
A good company (at least one I’d be willing to invest in) should make decisions with the needs/wants of the shareholders in mind. They are doing a disservice if they don’t.
And you can thank unions (particularly the, yes, overly generous pension plans) and lousy cars for killing the American car industry. On the other hand, so many “foreign” cars are built in the US and so many “domestic” cars are built in other countries, who really knows what is domestic or foreign anymore.