AskDong

Every few months, I get an offer from American Express for a Platinum card.  I’ve been a good customer of Amex’s for the last 10 years.  I started off with the Optima card, and found I had little use for it, and moved on to the Amex Blue.  I’m perfectly willing to admit, I went for the Blue because I thought it was a great looking credit card.  At the time, the Blue card also pitched itself as way to perform secureonline purchases via this device you hooked up to your computer.   I never got that device, but I have used the card for online transactions.  Though now if I transact with a vendor that does not have an established reputation I tend to use Bank of America/MBNA ShopSafe service to create a temporary credit card number for use.  

I keep hoping that Amex will offer me the platinum card with a waiver of the annual fee ($450) so I can try out of some the benefits.  The only benefits that I really care about are:

• Free Companion Tickets (upto 4 times a year)
• Complimentary Access to Airline Lounges 

I travel by air maybe only a half a dozen times a year, but traveling, especially international traveling, is one of the things I always want to do more of.   Also having had a job where I used to travel alot, and had access to the airlines lounges, I really do appreciate the benefit of waiting in comfort with free drinks and internet access over scrambling for a seat near an outlet.  In the past when I got the offer for the Platinum card, I would dismiss it out of hand given the high annual fee.   Recently, I heard from a friend that he has been effectively using the companion ticket benefit for travel with his girlfriend.  Most recently he used it to book a companion flight to Hawaii.  I had always assumed that in reality it would be difficult to book a companion ticket using the Platinum card, apparently it’s not quite as difficult as I had originally believed.   It’s not easy, but far from impossible.   He effectively payed for his annual fee by booking that one ticket to Hawaii.  Normally, booking two trips should be enough pay for the card.  I make at least two trips a year with my girldfriend, and I could wait around in the club lounge… Still that $450 sticker prevents me from taking the plunge.    Like any program, Costco included, the benefits can easily outweigh the cost as long one actively takes advantage of the benefits.

This month I had my biggest one month net worth drop since I’ve been tracking my net worth, even if the current rally sustains itself. The total drop in net worth across all my assets, retirement and non-retirement, is equivalent to about 4 month’s worth of salary. In either case, I’m an optimist by nature and looking to the silver lining in all this. The stock market has still managed to treat me well in my short investment life, the paper losses I’m taking right now were just a month earlier, paper gains. I’m in for the long haul. However, unlike some other people, I don’t think this is a pure opportunity to buy. While I have no plans for distressed sales, I do not believe all the excess in the market has been worked out. There are serious questions on how the current credit and housing crunch will affect the global economy. Until there is more certainty, I will let my uninvested cash remain parked in safer investments. I’m only comfortable with holding cash because I have alternative plans for that cash. I expect a housing downturn, and want to be ready to swoop in to either purchase a residence for myself or sn investment property. I would say if you don’t have alternative plans, it’s not a bad time to put together an investment plan. 

In the last couple months the swings up in my net worth have been much more attributable to swings in the market rather than any spending or saving on my part. In a market that’s moving up, this can lead to false sense confidence, and makes one forget how critical earning money outside of investing is. While investing needs to be important part of everyone’s money management portfolio, stable income for most people remains more important. It’s important to have source(s) of income that allows you to invest when the market is down. This is true of the stock market as it’s true for real estate. A stable income provides that.

I like to think of myself as relatively thrifty, somewhat frugal, and not very cheap (or at least I like to think). The relevant definitions of each from dictionary.com are as follows:

• thrift·y, - adjective, practicing thrift or economical management; frugal: a thrifty shopper.
• fru·gal, -adjective
  1.economical in use or expenditure; prudently saving or sparing; not wasteful
  2. entailing little expense; requiring few resources; meager; scanty
• cheap, adjective, stingy; miserly: He’s too cheap to buy his own brother a cup of coffee.

Dictionary definition hardly ever tell the whole story, and people will have their own notions about what not only what each word means, but have emotional baggage associated with each. Though universally, I think most people view being cheap as a pejorative. Cheap somehow involved taking advantage of someone else. Being both frugal and thrifty are more positively viewed.

From the Ven diagram above, I believe there’s overlap between thrifty and frugal. Cheap is it’s own separate territory, and there’s no reason ever to be cheap. I also think you can be thrifty without being frugal.

So what does thrifty, frugal, and cheap mean to me? I’ll use an example. Let’s say my friends were going out to dinner and asked me to go along if I were:

• thrifty: I would go and order the “cheapest” item on the menu that I still wanted
• frugal: I would pass on dinner and meet up later
• cheap: I would order the most expensive item on the menu, and then insist that we split the bill evenly

In truth when in comes to going out eat and drink, I’m hardly thrifty and definitely not frugal. As someone who keeps a personal finance blog, I value both thriftiness and frugality, but I hold thriftiness in higher esteem. Thriftiness means saving money and being environmentally conscience without having to make too much of sacrifice. It means being smart and efficient. I’m always happy with myself when I’ve acted in thrifty manner. When I’m frugal, I’ve denied myself something. Here are some other things I categorize as thrifty vs frugal.

Thrifty:

• Maximizing the interest rate on my cash holdings
• Turning off the lights (though it’s unclear I benefit)
• Reusing aluminum foil
• Building my tupperware supply from take-out containers
• Being on family plan for my mobile phone

Frugal:

• Not Having a landline
• Not replacing my TV with a new flat panel
• Wearing pants that have tattered ends
• Not having a proper (non summer) suit
• Not putting in window AC unit for most of this summer

You’ll notice on my list of behaviors that I think of as frugal, there’s a lot of “not.” A big part of my view of being frugal is denying yourself something that you might actually want. Being frugal by forgoing pleasures or items is often a good thing, but does have some type of emotional cost. My list of thrifty behaviors, on the other hand, have no cost other than some thought (and thinking is a good thing). My family has saves collectively over $60/month by being on one phone plan instead of three. I don’t need new aluminum foil to keep a dish warm when aluminum foil from the last time I need to cover a dish does just as good. I certainly don’t need to have the light on when I’m not in a room.

I opened an account with OptionsXpress earlier in the year as means to separate my investments from my trading/speculation. I opened the account because OptionsXpress is known as a broker that caters to more saavy investors who play in the options and future markets. In a fit of arrogance, I thought that I could be one of these saavy investor. In that time, I’ve done three trades.   Saavy I’m not.  I barely have enough time to decide to where to put my “investments” in, let alone try to speculate.  That and I don’t really know what I’m doing.  The advanced tools for options traders are far beyond the level sophistication I have.

The other day, however, I was in my account poking around and decided to look at some Futures.  A Future is a standard contract that obligates a transaction in the future, hence the name.  It has three basic components - the underlying asset, price, and date. So a Pork Future for 1 Hog for Mar 19, 2008 could be priced at $50. If I sold the future at $50, I have basically agreed to sell 1 Hog at $50 on March 19th 2008 regardless of what the price of that Hog might actually be on March 19th, 2008. All else equal, futures should actually be priced higher to reflect interest (ignoring storage and insurance cost for physical commodities).  Let’s say a hog future sells for $50, and is currently priced at $50, the Hog Future should price higher than $50. Otherwise, I could borrow a hog today, sell it for $50 and then earn interest on that $50 from today’s sale, and buy the pork future to cover the risk from shorting.

I expected to see the standard equity index futures, such as the S&P 500 and Nasdaq at OptionsXpress. What I didn’t expect to see were housing futures. I had heard about housing futures, but didn’t expect that they would be available in my brokerage account to trade. There are basically 11 different housing futures that track the 11 different local markets based on the Case-Shiller Metro Area Home Price Indices, and another that tracks the composite index. These markets are:

• CUS=Composite Index
• BOS=Boston
• CHI=Chicago
• DEN=Denver
• LAV-Las Vegas
• LAX=Los Angeles
• MIA=Miami
• NYM=New York
• SDG=San Diego
• SFR=San Francisco
• WDC=Washington, DC

The S&P/Case-Shiller indices are intended to measure changes in residential real estate using repeat sales pairs. The actual methodology is quite complicated.  The white paper is actually quite informative as it does not limit itself to just a discussion of the index construction but an overall discussion of the housing market.

Since I live in Boston, it was only natural for me to start off there. What I observed was that the future price was decreasing for each subsequent period. I took a quick a look at some other indexes, and each one I looked at showed the same thing, a clear downtrend.

The market that has showed the greatest downtrend is no surprise - Las Vegas. I find the view of market more credible than any statement made by National Association of Realtors who have only recently begun to acknowledge that we might be in a housing slump. The lower futures prices while not huge is another significant indicator that there still remains a great deal of pain to be felt in housing.  

Since my posts are not part of any specific outline, I thought this week I would move slightly towards the other tent in Economics, Macroeconomics, after convering basic supply and demand curves last week. We’ll talk about topic that is endlessly debated, but one in which most Economists (both left and right leaning) tend to agree more than disagree, Trade. Trade is generally framed as international trade, but at it’s essence international trade is no different than trading between two individuals. Just as the companies in Massachusetts import and export good to California, the U.S. trades with countries like India and China.

Adam Smith who set the ground for modern Economics with his book, The Wealth of Nations, not only recognized the value of trade, but was the first to quantitively to understand that value. He introduced the idea of absolute advantage as the reason for trade. For example let’s say we have two countries, Canada and the U.S. with 100 units of labor it can devote to producing Hockey Pucks, and or Beer. Canada produces Hockey Pucks at a rate 10 for each unit of labor, and Beer at rate of 5 can for each unit of labor. Without trade, Canada might choose to produce 500 hockey pucks, and 250 cans of beer. The U.S., on the other hand, can produce 10 cans of beer for each unit of labor and 5 hockey pucks for each unit of labor. The U.S. then might choose to produce 500 cans of beer and 250 hockey pucks. Canada has the absolute advantage in the production of hockey pucks, and the U.S. in beer because each country needs less labor than the other to make the product it’s absolutely advantaged in.

If we introduce trade, each country is able to take advantage of it’s absolute advantage in production of hockey pucks in the case Canada, and Beer for the U.S. Each country specializes and trades with the other to get the product it decides not to make.

As a result the total production of both hockey pucks and cans of beer is maximized for 1000 of each. If we assume that trade partners only engage in trade if it benefits them, we can assume that both the U.S. and Canada benefit with both more beer and hockey pucks. For simplicity’s sake let’s just assume that beer and hockey pucks are both worth $1 and trade effectively 1:1, the U.S. and Canada can both have 500 hockey pucks, and 500 cans of beer. Without trade neither of the countries had the ability to produce both products at that level.

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