Monday, July 31, 2017

Why YOU Can't Make Money Gambling

This man is a high roller -  you aren't and never will be.

This fascinating article from the Atlantic, chronicles how a fellow named Don Johnson (not that Don Johnson) fleeced three Atlantic City Casinos for millions.  His secret?  He wasn't playing the same chump card game you and I would be playing.

He negotiated for special discounts on his losses - up to 20% - so if he lost $100,000 in a hand, he'd only owe $80,000.  But more importantly he actually got them to change the rules of blackjack for him:
He won’t say what all the adjustments were in the final e-mailed agreement with the Trop, but they included playing with a hand-shuffled six-deck shoe; the right to split and double down on up to four hands at once; and a “soft 17” (the player can draw another card on a hand totaling six plus an ace, counting the ace as either a one or an 11, while the dealer must stand, counting the ace as an 11). When Johnson and the Trop finally agreed, he had whittled the house edge down to one-fourth of 1 percent, by his figuring. In effect, he was playing a 50-50 game against the house, and with the discount, he was risking only 80 cents of every dollar he played. 
You read that right.  They changed the rules of blackjack to make it easier for him to win.

While the casinos were not happy to lose so much money, they do get a halo effect from stories like this.  The ordinary plebes believe that "you can beat the house" if you are "lucky" - not realizing that getting "lucky" for Mr. Johnson included changing the rules of the game - something you and I don't get to do.

But it is great publicity for the casinos, as it keeps the suckers, or gamers as they call them, rolling in.  But, as the article notes, there are too many damn casinos in the USA today, and not enough "gamers" - so they are seeing margins getting thinner and thinner.   And perhaps part of the "gamer" shortage is that people are wising up that playing games with your paycheck is idiotic.

Don't Believe Everything That You Read In The Newspapers

When did people stop being skeptical? Maybe a long time ago.

These three quotes about newspapers have one thing in common:
"Don't believe everything that you read in the newspapers." - Andrew Card.

"All I know is what I read in the papers." - Will Rogers

“If you don't read the newspaper, you're uninformed. If you read the newspaper, you're mis-informed.” - Mark Twain
. . . they may or may not have been said by the purported authors.   A lot has been attributed to Will Rogers and Mark Twain that they never in fact said.  Always take attributions with a grain of salt. Andrew Card was a member of Bush administration, but the quote attributed to him was common parlance when I was a kid growing up in the 1960's.  He may have said it, but I doubt he invented it.

Long before the Internet, we got our news from the television, newspapers, and magazines, and we were quite skeptical back then as to what was reported.  Yellow Journalism is a term that goes back a century or more.  And anonymous pamphleteering was something practiced as far back as the revolution.  You may think that Brietbart or Inforwars are over-the-top, but they pale in comparison to what was said by opponents (and anonymous pamphleteers) about Abraham Lincoln and a host of other politicians from a century ago.

In other words, this is nothing new.   What is new is that people seem more willing that ever to believe things online that fit their internal narrative.   They aren't fat, it's hormones.   They aren't broke because they spent all their money - the 1%'ers took it away!   They didn't lose their job because they went out on strike for six years, it was those damn Mexicans!

In fact, one easy way to tell if someone is lying to you is whether or not what they are saying is convenient or favorable to you.  I am less skeptical of bad news than good news.  I realize that people make money off me by telling me what I want to hear.  So when AT&T sends me countless letters saying "GOOD NEWS!  You qualify for a discount on Satellite TeeVee!" I am very, very skeptical that any sort of bargain is in the works.   When they send me a letter telling me about a rate increase, well, I certainly believe that, because I know how telcos and wireless companies work.  They rarely never do anything to my advantage.

Back in the day, the saying "Don't believe everything you read in the papers" was common currency.  We were always a little skeptical that what was said in the paper was the absolute truth.  And another saying from that time illustrates why - you don't understand how inaccurate the press is, until you read an article with you in it.    When the media reports on something that you are involved in, or where you have some kind of expertise, well, you realize quickly how wrong they get things all the time.

For example, I took The New Yorker - with its famous fact-checking department - to task because they wrote a fawning article about Las Vegas (which oddly coincided with an advertising supplement for Las Vegas) that mentioned someone had registered their Trademark with "The Attorney General of the United States".   It was a boner error - Trademarks are registered with the United States Patent & Trademark Office.  I pointed this error out to them, and they revised the article to say "registered with the patent's [sic] office".

Even the correction was wrong.   What was appalling to me was that a few issues earlier they ran a long piece about the New Yorker fact-checking department and how thorough they were - no fact, however trivial, was beyond their scrutiny!   But apparently that was back in the day, and I guess Conde Nast fired all those people to save money.

But it was jarring to me, and it made me realize that there were so many other things in the article and indeed every article that were also probably incorrect, wrong, off, or just plain made-up.  That the article accompanied (but was not part of) a huge advertising section for Las Vegas, of course, was the real tip-off.  This was not journalism, but blatant advertising.  The articles now are the ads.

We live in a new era of news.   Profit margins are razor-thin as online advertising pays bubkis.  So they cut back on staff - every major newspaper has fired dozens of reporters.  No one reports local news at all.   Everything is barfed up from one of the few wire services, or is taken from a tweet or Facebook posting, or god forbid, a blogsite.

In other words, the media is less accurate today than it has ever been.   In this era of security cameras and cell-phone videos, you'd think we'd get the stories right.  But no, we get lots of eye-candy video, and then a spin as to what really happened.

People are willing to believe just about anything, which is why "fake news" is a thing, and why some people believe fake news and then call real news, "fake news" - and by some people, I mean the President of the United States.  But a lot of people are like him - skeptical of one news source, but willing to believe anything another news source says.   Today, we have selective skeptics.

Reality, however, is like a rubber band.  You pull it back and distort it, and it snaps back and that can sting you.   The further you pull back on the rubber band, the more it is going to hurt when it snaps back.   Think about times in history when people believed in nonsense - the fascist era of the 1930's, the cultural revolution in China in the 1960's, the Khmer Rouge in Cambodia in the 1970's, the rise and fall of communism in the Soviet Union, the housing bubble of 2006 - or even the United States today.

When "harsh" reality kicks in, and we can no longer believe in fairy tales, things will get ugly in a hurry.

And the answer, I think, isn't to put a stop to yellow journalism, click-bait titles, poorly researched articles or "fake news" sites, but for people to become more skeptical about the information they receive.

When someone tells you you can get out of debt with no effort or cost, you should be very, very skeptical.  When someone tells you that you can get-rich-quick, you should be very skeptical.  When someone tells you that everyone can have free healthcare, free college, or even a free income, you should by wildly skeptical.  When someone tells you that all your problems are the fault of immigrants or the opposing party, you should just cry "bullshit!" and move on.

Sadly, human nature being what it is, people will continue believing in convenient things, until it blows up in their face.

Killing Yourself Over Money -Part III

Killing yourself over money is stupid.

In the news today, a tragic story about a middle-aged couple in the prime of their lives, jumping from a building to their death.   Still in their early 50's, they decide to "end it all" because they have debts from an overly lavish lifestyle.  "We've have a wonderful life!" their suicide note blares - but in reality, they didn't.   And thanks to them, their kids will have a traumatized life from now on.

(NOTE:  Some unscrupulous political journalists decided to make this all about health care, and put out false stories that the couple killed themselves over medical bills.  Again, in the age of Obamacare, it is hard to fathom how this could even be the case.  But as it turned out, it was not true at all.  Some folks thought they would use a tragic suicide to advance their political narrative).

It is funny, but I am not a high-flying Chiropractor in Manhattan with a fancy residence in the financial district.  Yet I could have written this couple a check right now and paid off all their IRS liens and his student loans.  Do you know why?  Because I am not a high-flying Chiropractor in Manhattan living beyond his means.

It is hard to describe to people who have never experienced it, but for the first time in my life, I don't worry so much about money.  I still balance the checkbook every day, and I watch our expenses, only because I don't like the idea of being ripped-off or spending too much.   But I never worry about a check bouncing, being late with a payment, or having to "struggle with bills" because I largely don't have many anymore.  I don't worry so much about money because I pay attention to it now.

I learned to live with less and live better.  It is sad this couple from Manhattan spent more per year for their daughter's high school education than the average amount most Students take out in loans for a four-year college degree.

And what is sad is that in their early 50's, they still had 15-20 years to start over again in America - perhaps moving somewhere less expensive and trendy and putting money aside instead of spending it in a gross display of wealth.   But that was not an option for them, apparently.  It was Manhattan or die.

Of course, there may have been a number of other factors involved as well. There may have been depression or other mental illness involved.  We may never know the full story.  But to kill oneself over money?  Seems kind of dumb to me.

You see, even if I lost everything tomorrow, there would still be life worth living, even if I had to live in a tent.  There are still things to do, places to see, people to meet, even if you can't buy everything you think you're entitled to.

I have discussed this before, in fact, twice.   And I think there is a pattern here.  The more you obsess about making money, and the more you make money the centerpiece of your life, the more vulnerable you make yourself.   When the money train stops - and it always does - you may think your life is ending.

But when you slim down your lifestyle and learn to live with less, you become empowered because you no longer "need" money so much and realize you can live on not a lot, if you had to.

It is funny, but I am only a little older than the couple in the story, and yet in my life at this stage, I find I want less not more.  I don't want a fancy car, they just break and break expensive.  I want less house than I have now, although I am content to stay where I am - for the time being.   As I get older, "things" and status mean less and less to me, and security means more.

And there are two ways to have security - one is to have a lot of money, and the other is to not need a lot of money.  Most folks try the former, and it never seems to work - the more money you make or have, the more you spend, and it becomes an endless treadmill and the money train can never, ever stop for even a moment, or your whole life turns upside down and jumping out of windows seems like a rational alternative.

I feel sad for this couple, not because they killed themselves (for nothing) but because they could not envision a happy lifestyle living in Jersey in a tract home and maybe having less, but at least having.

Sunday, July 30, 2017

College Bankruptcies

Is the college bubble finally bursting, or merely deflating?

Several years ago I wrote a blog entry opining that some colleges and universities would go bankrupt in a few years due to the staggering high cost of tuition and in decline in the number of students.

Smaller private colleges and less-well-endowed institutions would be vulnerable, particular liberal arts colleges or colleges that specialized in very narrow areas of education.  As the value of a college education continuous to decline in many areas, the cost/benefit analysis makes college far less attractive for young people.

But the main thing driving College bankruptcies is demographics.  As a noted in my earlier posting, the number of young people in the high school graduation pipeline has been declining.  Thus, there are fewer people applying for college, and that means something has to give.

Moreover since the cost of college is so steep these days, the student-consumer wants to see the maximum bang for his buck.  Going to a no-name or small name college might not be perceived as it worthwhile endeavor.

A recent article in the Atlantic seems to verify my theory, which appears also been a theory of many other people as well.  The basic law of supply and demand cannot be denied.

The author of the Atlantic article opines that the bubble in higher education is not bursting, but rather slowly deflating as the number of students declines.  Another article that came out today deacribes the University of Southern California rescinding admissions for over 200 students because of minor errors in their application processing. The University admits that the motivation behind this is that they over-enrolled their freshman class and have more students than they have seats in the University.

So what is going on here?  Are schools going out of business for lack of students, or being over-enrolled, or are both happening?  As a school with a good reputation, USC may find itself attracting more students whereas small liberal arts colleges may find themselves attracting fewer.

What we are seeing is the college and university industry shaking out into a few very large brand names much as the automobile industry or the computer industry has done.  It is the McDonaldization of higher education.  When young people graduate from school and apply for a job, they want the recruiter to recognize the name of their college.  They don't want the first question at their job interview to be "So what kind of school is Podunk University anyway?"

The author of the Atlantic piece believes that the higher education bubble will simply deflate overtime. He might be right about this, however it also may burst  As we saw in the housing bubble, it wasn't a precipitous decline in the supply and demand balance which cause things to collapse.  Rather only a small decline in the number of buyers caused a number of properties to remain unsold.  Those sellers then lowered their prices in order to attract buyers which in turn forced other sellers to lower their prices as well.  Panic sets in and other people sell their properties "before its too late!"  An avalanche effect is created and market prices drop drastically in short order.

It is the same mechanism which caused prices to rise so quickly in the first place.  They are 100 houses on the market and 101 buyers.  One buyer is going home without a new house.  So he offers a few thousand more to snatch a deal, starting a bidding war.  Pretty soon prices across the board go up.

This is the nature of markets and the law of supply and demand.  It doesn't take a 50% increase in demand to cause a 50% increase in prices or a 50% decrease in demand to cause prices to drop by 50%.  Rather, small changes in supply and demand can cause huge swings in market prices.

Again, the larger and more prestigious schools will be able to weather this storm very easily. They have large endowments which will allow them to survive even if they should end up losing money which they probably won't.  Because they are larger schools with good reputations and have multiple disciplines, they will continue to attract students, although they may have to sharpen their pencils to reduce tuition somewhat.

The real concern will be for small, thinly-endowed liberal arts schools.  We saw this with the near-implosion of my late sister's Alma Mater, Sweet Briar.   The school was rescued at the last minute by generous alumni donations (where were they in the years' prior?).  The perceived value of a liberal arts education has declined in this country, as there a lot of people with degrees in this area who are not finding jobs to justify the cost of the education.  Moreover, these small schools often have staggeringly high tuition rates. The combined effect is that the value proposition is lacking for the incoming student.

Lacking large endowments, the smaller schools cannot afford to cut tuition drastically in order to fill seats. They would have to cut expenses by reducing salaries for professors and staff as well as overhead.  Unfortunately, many schools are saddled with aging infrastructure which requires an awful lot of upkeep.  Alumni are more than happy to donate money for a new building with their name on it.  No one wants to donate money for the general fund or to repair the roof on somebody else's building.

Employees unions are often another part of the problem.  It may seem like a trivial expense, but your average college, even a small private college, has an army of maintenance people and various other support staff, many of which are often unionized.  Between the high salaries and benefits as well as restrictive work rules, the cost of non-professional labor can be staggering.

According to the Atlantic article, last year was the worst year on record for bankruptcies of colleges and universities.  Leading the way, fortunately, are the for-profit colleges which were never really "real" colleges in the first place in that they often provided a substandard education at a very high price.  No one is sorry to see them go.

The decline in more traditional colleges is much smaller, but nevertheless real.   And even for colleges that are not closing their doors, there are struggles to stay alive.  The Sweetbriar example illustrates how a college can wind down to nothing, if actions are not taken to increase the endowment, enrollment, and keep the curriculum current.   It also illustrates how a college can drop into a death spiral, as students and professors flee if they feel the college won't be in business for very long.   The resuscitation of Sweet Briar is nothing short of a miracle.  However it will be interesting to see whether they can sustain it for the long haul.

Other small schools are aligning with larger ones, in strategic alliances to share resources and also to bask in the halo of a larger institution.  For example, tiny Wells college in Aurora, New York, has a cross-enrollment agreement with Cornell University and Ithaca College, and is considered Cornell University's sister school.  This allows a small school to offer a broader array of courses, and also allow students the halo effect of the larger institution on their resume.

Will we see more bankruptcies in the future?  Perhaps.  One way many schools have been able to put "butts in the seats" - at full tuition, no less - was through foreign students.  Sadly, the current administration, with its xenophobic policies, is making it harder to attract foreign students, particularly from the middle-east.   I suspect that a few smaller colleges will merge or close in the coming years, as the pool of available students declines and as more and more students look for a "brand-name" education to enhance their resume.

When the Market Gets Emotional

Cutting the amount of nicotine in cigarettes increases consumption, not lowers it.

A reader writes that they bought stock in Altria (MO) the US branch of the old Phillip Morris company, after the FDA announced they were going to "regulate" the amount of nicotine in cigarettes.   The reader opined that the market was over-reacting - indeed even reacting to news, when it should be looking at fundamentals.

Take this "smart investor" from the "seeking Alpha" site, who sold out on the FDA news, who thinks the stock is "overvalued."  By the way, the "seeking Alpha" people tend to be the types who want to "beat the market" and usually end up getting beaten, or at the very least, not doing as well as the DJIA.  I find that site less than useful.

But let's look at this rationally, not emotionally.   And I am sure that many folks would not touch MO stock due to "moral" concerns - that smoking kills people and whatnot.   And if you want to invest with your conscious, so be it.  And maybe that is why the company's stock is so undervalued as a result.

Altria has a staggeringly low P/E ratio of 8.83.   You can think of this in a number of ways - in less than nine years, you'll make your money back on this stock.  Or taking the inverse of the ratio, it has a healthy profit margin of over 11%.   In dividends alone, it pays out at 3.65% - far better than any savings account or CD pays these days.   This is a company with healthy profit margins, to say the least.

But what about the future of smoking?   How can they survive in an era where smoking is so looked down upon as a white-trash activity?

And the answer is simple:  We have an endless supply of white trash.   Every day, some teen decides to be a "rebel" by not listening to his parents and teachers, but instead taking up smoking.   We call these people idiots.   Once they get hooked, they will spend a decade or more smoking before they quit - if they ever do.   And the poorer they are, the less and less likely they will ever quit.

Yes, smoking is evil.  So is heroin, cocaine, and a host of other drugs.   Want to get ahead in the world?   Don't do any of those things.   That's just good advice - and good advice is what people like to shun.   I'm not in the business of trying to "fix" people or cure them of their self-inflicted wounds.  Folks want to destroy themselves, there ain't much you can do about it.   If a friend is driving their car off a cliff, make sure you are not in the back seat.

That may sound cruel or harsh, but once you've lived a few decades, you realize that the people you try to "help" don't want to be helped and in fact will crucify you for pointing out their foibles.  Those "sainted poor" and "noble homeless" that people like to beatify will smash your head in or jam a knife in your back, not just to steal your wallet, but because of who you are.   It it hard to feel sorry for someone who would just as soon as kill you.  Trying to help the poor is a task fraught with peril.  They don't want your help, they want your money.  They don't want your advice on payday loans or smoking - and they are the most likely to vote for a candidate (Trump) who promises not to regulate either.   So why not give 'em what they want?

Smoking will be around for quite some time, even if nicotine levels are regulated.  And MO owns a roughly 30% stake in SAB-Miller, so it is not like the entire stock is leveraged on tobacco.   In fact, they are trying to diversify into other areas, which is a good sign.

But the FDA announcement is a classic example of the market reacting emotionally to the news.  "Oh, the FDA is going to regulate nicotine!  That means no more cigarettes, ever!" and they dump their shares.   The reader is smart to buy after such an emotional reaction.  Even dead cats bounce.

Cigarette companies have been offering "low tar, low nicotine" cigarettes for decades now - since at least the 1960's.   And they are a cruel joke.   You see, the body does get addicted to nicotine, so if you lower nicotine content, guess what happens?  Yup, people smoke more cigarettes.   If you lower the concentration of a drug in a product, people will consume more of the product - this is the theory behind "lite" beer.

Now granted, some studies claim that people will not smoke more and may be more likely to quit if nicotine levels are lowered to below the addictive level.  But even if this was done, I suspect there will still be a core group of people who will smoke, any way they can get it.   People have resorted to rolling-their-own cigarettes in some States where taxes are particularly high.  People find a way around the laws - they find a way to get drugs.  Look around you.

Also, it remains to be seen whether the FDA will follow through with this idea, in the Trump era of de-regulation.  If you read the actual press release from the FDA (and not the breathless reporting of the media) it says something different:
The FDA plans to begin a public dialogue about lowering nicotine levels in combustible cigarettes to non-addictive levels through achievable product standards. The agency intends to issue an Advance Notice of Proposed Rulemaking (ANPRM) to seek input on the potential public health benefits and any possible adverse effects of lowering nicotine in cigarettes. Because almost 90 percent of adult smokers started smoking before the age of 18 and nearly 2,500 youth smoke their first cigarette every day in the U.S., lowering nicotine levels could decrease the likelihood that future generations become addicted to cigarettes and allow more currently addicted smokers to quit.
In other words, the FDA is thinking about a regulation, not enacting one.  The rule-making procedure is not just a matter of someone in the FDA deciding it is so.  Federal Regulations have to be signed off by one guy.  One guy who has already halted enactment of any new Federal Regulations and also  has said that 70% of existing regulations should be repealed.

So what does this say to me?   First, that these regulations won't be enacted.  Second, even if they were, they would not significantly affect the tobacco industry for many years.  Third, Altria, even if it lost all its cigarette business, is already diversified into other businesses and would survive.

The market reacts emotionally.   When Sears announced they would list a few washers and dryers that were "Alexa" compliant on Amazon, the market went into full chicken-little mode, and Lowes stock dropped by 5%.   I bought it, and made a 5% gain in a matter of days as people realized that indeed, the sky was not falling and that Jeff Bezos was not omnipotent.

Following the stock market on a day-to-day basis and making trades based on fear is never a good idea.   On the other hand, if you have cash to invest, and you see other people running away in fear, it might not be a bad time to buy something you wanted to invest in anyway.

Saturday, July 29, 2017

Are People Getting Tired of Starbucks? Or Maybe They Can't Afford It? (I Can't!)

Starbucks earnings and sales are down.   Has the trend peaked?

The problem with being trendy is that you are at the mercy of the next trend.  Thus, you keep having to morph your business to catch the next trend or die.   And perhaps that is one reason why Starbucks has morphed from a gourmet coffee shop to an ice cream shop - selling coffee- and tea-flavored ice cream drinks topped with whipped cream and caramel - all with made-up Italian-sounding names.   I don't know what the hell it is they are selling these days, but it sure ain't coffee.

I gave up on Starbucks a long time ago.   When you log every purchase you make on the computer, it gives you time to think about how much you spend and spent.   And when you see a charge for $15 for a trip to Starbucks, you wonder why coffee costs so much.   And back in the 1990's, when Mark go there with his friends from the Real Estate Agency (one of whom would always "forget to bring their wallet") such charges were the norm.

The last time we went to a Starbucks was about a month ago.   We hadn't been in years, but there is one out by the Interstate in a truck stop of all places.   It was pretty much like all the others we've been to over the years.   You go into the place and immediately your anxiety level rises.   The menu is confusing and difficult to discern (by design) and while you are ordering, some Yuppie is trying to elbow you out of the way.   Total lack of personal space.

The clerk (and that's all they are is clerks, not "Baristas") acts like you ruined their day by entering the shop.   They act like making you a cup of coffee is some onerous chore akin to working in a salt mine.  Think about it - have you ever seen a happy and cheerful Starbucks employee?  The video above, which can also be found here, sort of sums up the Starbucks experience, and also illustrates that I am not the only one who finds Starbucks to be a mystifying and unpleasant place to order coffee.

But the cost is the real deal.   Mark likes a coffee in the middle of the afternoon, so we go on the way from the camper storage place.   For a simple "small" coffee, the charge was $2.49.   This may not seem like much, but of course they expect a tip on top of this bringing the total cost to over $3.   If we each ordered a cup, it would be over six dollars, and if one of us had a Latte or other fancy drink, the cost would be over $10.

I can buy a pound of coffee for less than that.

I have noted time and time again in this blog that the middle-class was not "robbed" by the 1%'ers  but rather gave all their money away to them by doing stupid things like buying status cars, status clothes, status shoes, status phones, status food, and status coffees.   I know many middle-class people in this country who would not think of waiting until they get home to have a coffee, but instead indulge themselves with a $5 drink at Starbucks.   And on the way home, they stop off at Whole Foods or some other "upscale" luxury food market because that is where people of their caliber shop.    Shop with those hoi polloi at Wal-Mart?   Never!  In fact, they've never been inside!

Perhaps this attitude is wearing off.  Or perhaps the "cocooning" predicted by Faith Popcorn has finally kicked in.  With so many people staying at home, working from home, or never traveling far from home, the opportunity to shop at a Starbucks has diminished.   If you have stopped going to the mall to buy shoes, but instead shop online, then the Starbucks next to the mall loses your business, along with the food court.   Some are calling this the Amazon Effect, but I would not be so grandiose.

Perhaps people are realizing that spending $5 a day at Starbucks, over a 45-year working lifetime, could mean $557,996.97 in your retirement account.

In any event, same store sales at Starbucks are off, and earnings are only holding steady because of increased business in China.   But of course, as every other American company has found out, once you start making money in China, they copy your business model, and then the Communist Party finds some way to accuse you of malfeasance, and your business is ripped out from under you.  GM should keep this in mind with its two-state solution (China and US) for sales.

The problem for Starbucks is that they are not selling oxygen.   They are not selling something that you need to live and thus are always at the mercy of the next economic downturn (coming soon to a country near you!).  As we learned from the last recession, the first thing people drop when the shit hits the fan is discretionary spending - things like entertainment, casinos, restaurant meals, and overpriced coffee drinks.

"Earnings Week" this month has been an interesting beast.  Many companies are reporting higher than expected earnings or at least meeting earning targets.   But with each report is that damn asterisk, noting one-time charge-offs, tax situations, or growth in other markets.   The Trump Recession will happen, not necessarily because of anything Trump does, but because business is cyclical and we are due for one.   But given what Trump is prone to doing, I suspect he will exacerbate the next recession, which does not bode well for the 2018 election, at least for the GOP.

Friday, July 28, 2017

Is Having People Wait on You Better Than Owning Things? Or Is There a Third Option?

It is possible to "prove" almost anything if you give people a false choice.

A recent idiotic article from the Associated Press, published in the New York Times, posits that having people wait on you is much better than owning things.  Apparently this study was performed where 6,000 people were given $40 and told to buy something for themselves. Another group of people were given $40 and told to hire somebody to do something for them such as clean their house or mow their lawn.

According to this so-called study, the people who had personal services performed for them were "happier" than those who merely bought things (and you can accurately measure personal happiness using a happy-meter which is sold on Amazon).  Thus, the conclusion of the author of the article is that you should have a maid clean your house for you, and if you hire people to do all the "drudgery" in your life, you will be happier.

Of course, no word on how happy that maid is, or the other people you hire to do this drudgery-type of work.   But hey, they're all Mexican so they don't count right?

Of course, it is a preposterous study.  And the reason why it's preposterous is that it doesn't take into account other options.   This is what is called a false choice or complex question fallacy, in that it offers only two alternatives - thus the "authors" of the study steer it to the result they want.  And no doubt many people will read this article and say, "Let's hire a maid and lawn service and sit around and sip cocktails while they do all the work!  The article says this is our best outcome!"

Besides this answer being false (doing things for yourself staves off learned helplessness and thus reduces depression) it fails to take into consideration other things you could do with money.

For example as a baseline, they should have had a third group of people who they gave $40 to and told them to invest it or keep it.  I have a feeling those people will be even happier than the person who hired the maid to clean their house.

And I say this from experience.  In my life, I've owned a lot of things - cars, boats, recreational vehicles, vacation homes, and whatnot.  And the study is right in that regard, things are fun and all but they don't really make you happy by themselves. The happiest I was with things was actually using things to do things.  So for example, an old car was fun because I enjoyed taking it apart and fixing it or driving somewhere and having a picnic.  Merely owning it was of no satisfaction whatsoever.  The brand-new car wasn't as much fun, as I had no "hands on" activity with it, and we often were too worried about scratching it to enjoy it fully.  The fact that the old car cost $27,000 less was also a factor.

And I can also say from experience of having a maid or other people to perform services for you is nice and all, but at leaves one with an empty hollow feeling.   Having someone mow the lawn for you is nice and all, but doesn't provide the satisfaction of doing it yourself.  The beer tastes better and colder when you have it on your front porch, after mowing the lawn, admiring your work.  Having a maid or a lawn service tends to make one feel worthless and useless, particularly if you were sitting around house while these people are working on your behalf.  Moreover it tends to make one become fat and slovenly.

And not only that, owning things and having people do things for you tends to drain your bank account.  So as a result, I had to go back to work that much sooner and make more money to pay for these people and things, which tends to make a person unhappy.  You no longer feel that your job is an interesting and fun career experience, but drudgery itself, something you need to do in order to pay for all these things in your life.  Moreover since your bank account is empty, you feel like you're never getting ahead no matter how hard you work.  And since you're going into debt to pay for many of these things and services, you feel that you are trapped in your job, which is never a pleasant feeling.

The third way was the last way I tried in life, and that was to have less things and have less people wait on me but instead have more security.  Rather than spend money on cars and boats and toys, I put money in the bank.  Rather than hire a maid or lawn service or even a barber, I invested money in stocks and real estate.  The net result was I became independently wealthy and no longer had to work. This is what made me happiest of all.

I no longer have to worry about losing a job or wondering what would happen if I did lose my job because I can survive without one.  I no longer have to worry about where the next paycheck is coming from because there isn't one.  With my lifestyle slimmed down, I can afford to live without having to work, and also have security.

And the way I got here wasn't by hiring maids and lawn services, but by firing them and putting that money into my investment accounts.   Once again, we have the media telling us to spend, spend, spend and never to save.   And they do this, because they want you to be flat broke and unhappy, so you keep consuming goods and services and watch their programs.   After all, if you are mowing the lawn or vacuuming the rug, that's cutting into your prime TV viewing time or obsessive smart phone watching, right?

I don't have to worry about how I'm going to pay the credit card bill because it never gets very high.  I don't have to worry about making the mortgage payment or having the house taken away from me because there is no mortgage payment.  And I have to worry about having my car towed away or it repossessed because I own it outright.

In terms of happiness, this level of security outpaces the other two scenarios by a factor of ten, a hundred, or maybe a thousand.  Not owing anybody money and not having to go to work is almost an orgasmic level of pleasure.  Daily.  Continuously.  Maybe having a maid clean your house might make you happier than owning a new pair of shoes.  But the incremental level of happiness is very, very, tiny.  We are talking comparing and happiness level 1.2 with maybe happiness level 1.0

Owning your home free and clear, having enough money to live the rest of your life, and not having to go to work everyday, that's happiness level 1000.

And that's why I think that article is stupid. It doesn't consider the most fundamental way of becoming happy.  Owning yourself.

What Kind of Company is Amazon, Anyway?

Amazon went from selling dusty old used books, to selling just about everything.  Today, they are trying to position themselves as a tech company competing with Apple and Samsung.

I recall Jeff Bezos appearing on The Daily Show with Jon Stewart (boy, that seems like ages ago that that show was on the air!).   He was pushing an early version of the Kindle, nearly a decade ago.   And back then, he was a bookseller, trying to branch out into technology to sell e-books, which was a new thing.   Today, it seems that bookselling is the least part of Amazon.   Who the hell reads books anymore, anyway, right?  The smart phone has killed off literature, replacing it with 140 characters of tweets and texts.

Amazon took off after that, and today you can buy almost anything that is legal to sell, on that site.   They haven't started selling cars yet, to my knowledge, but it is only a matter of time.  Oh, wait, they are doing that, too.[1]   But something has changed even since then, which tells me that maybe Amazon sees the writing on the wall with operating as a online merchant.   The mercantile trade is a business of margins, and Amazon, like "tech" companies, is not very efficiently run.  They can't compete with the penny-pinching of Wal-Mart, at least not for very long.

Today's earning report seems to verify this.  Analysts were expecting earnings of $1.42 share and yet Amazon delivered only $0.40.  This is more than just a near-miss.  The problem for Amazon is that retailing is a game of narrow margins and cost-cutting. There are no barriers to entry in the retail market, you just buy stuff and then sell it to people.  There no patents, there are no monopolies,  there is nothing preventing other people from getting in on the game. You can't just raise prices to cover your expenses. So despite all this hoopla on Amazon taking over from brick-and-mortar, perhaps Amazon might find that there's little profit in just selling things.

And Amazon has fallen into the trap of market share, much as General Motors did and many companies before it.   People concentrate on overall revenue (gross receipts) and not earnings (net profits).   Revenues are fine, but it is profits that keep the lights on and the place going.  Amazon's revenues are up, but earnings are down, which means they are facing tighter and tighter profit margins to go after greater and greater market share.   Selling stuff - and it doesn't matter what you are selling - is a tedious and capital intensive business whose profits are to be found in small savings here and there, which take an awful lot of work and talent to find, as Sam Walton discovered.

Retail isn't any fun, is it?   So it seems Amazon is morphing again, selling "Alexa" - its own personal assistant, much like Apple's Siri or Google's whatever.   You talk to "Alexa" and she plays music, starts your Kenmore washer, sets off the sprinkler, dims the lights, arms the alarm system, and programs your Roomba to spread cat feces all over the house.

And this is funny to me, as Amazon was not a tech company before, but now it appears to be trying to morph into one.   Next thing you know, they'll be selling their own format of smart phones.  Oh, wait, they tried that, and it failed.

In fact, Amazon has its fingers in a lot of pies lately, everything from health insurance to meal kits.   And some would take this as a sign of a company on the move - expanding to take over new markets and new conquests.   I see it as a sign of desperation, of a company trying to find something profitable enough to sustain it.  The share price is over $1000 a share and the P/E ratio is over 250, even with the stock losing value yesterday.

Do you ave 250 years to wait to make money on Amazon stock?   Do you think they can improve profitability by a factor of ten?  Not revenue, but earnings.    Amazon sells a lot of stuff, to be sure, but is there room for exponential growth?   Or will others jump into this space and also start selling "stuff" as well?

Much ballyhoo was made yesterday as Amazon's stock price peaked (before the earnings report) and based on the myth of Market Cap, Jeff Bezos was richer than Bill Gates - for a few hours, anyway.   Then the earnings report came out and, well, he's back to #2 position.   You see, Microsoft has a P/E ratio of 27, compared to Amazon's 258.   If both Billionaires had to liquidate their positions in their respective companies, who do you think would end up with the bigger pile of cash?

Bezo's "wealth" is based on the speculative idiots in the marketplace bidding up Amazon stock to over $1000 a share because they buy things on Amazon and listen to the financial press and are convinced Amazon is going to "take over the world".   But buying shit and selling it isn't really that big a deal.   Microsoft, at least,  has a worldwide monopoly on its operating system - at least for the time being.   And that's why they have a P/E ratio of 27 - they make serious money.   Amazon?   It is all based on hype and speculation.  Selling tchotchke on the internet just isn't that profitable a business. 

And that, in a nutshell is why Amazon is floundering about, trying to figure out new, more profitable ways, to make money.   Maybe in groceries, or in meal kits, or in health insurance.  Drones, perhaps?  Home automation?   Let's throw a bunch of shit against the wall and see if  any of it sticks!

In the meantime, they are losing sight of their core business - selling shit on the internet.   Not only that, but all these ancillary businesses require huge amounts of capital to start up - and many of them will pan out to be nothing.   As a result, this means earnings will decrease further and/or prices will have to go up - which means some other company, who does have its eye on the bottom line and is interested only in selling shit has an opportunity to undercut Amazon on price and service, and.... well Amazon has to hope they make enough money on Alexa or whatever to make up the difference.

I wonder if Amazon will split up, eventually, spinning off these new tech companies and other interests and leaving the warehousing and retailing business separate.   Because things like acquiring Whole Foods I don't see as an asset, but a distraction.   While the financial press, which lives on either coast in large cities, might think that $6 asparagus water is a great deal, the vast bulk of Americans are shopping in traditional grocery stores, where eggs are 69 cents a dozen these days - which is all most of us can afford.

[1]  But not doing it well.  The Amazon "Car" site lists every make of car ever made in non-alphabetical order.   You want to buy a Tucker Torpedo?  They have a check box for that make.  Good luck finding it in the non-alphabetical listing of over 200 makes.  A company that can't even HTML properly is going to "take over the world"?   Not yet, is appears.  Also, it doesn't appear they sell cars yet so much as they are steering "leads" to car company websites.

Thursday, July 27, 2017

What The Hell Happened To Snopes?

Snopes has morphed over time into something different and more trendy.

In the news today, a plea from Snopes online for money to keep the doors open.   Seems the Mikkelsons got divorced and Barbara sold her half of the company to some folks who run some sort of media company.    You can read all the dirt about it here.   But that's not what I'm talking about.

I find myself visiting a lot less and less these days.  The site has changed formats and changed content.   It seems today every new item is a click-bait question, such as "Is This Image of John Lennon and Che Guevara Real?"  If you are familiar with Betteridge's law of headlines, you know the answer is "NO".

It seems Snopes is resorting to click-bait titles more and more - as well as celebrity gossip and headline news. Less and less of the site is devoted to urban legends and debunking myths and conspiracy theories.  It is also painfully slow to load, as well, and you have to click through several pages to read about the latest internet rumors - no doubt by design, to get people to click more and linger longer - both of which result in higher ad revenues due to greater "engagement" by the viewer.

And maybe in part this is because myth and conspiracy theories are now mainstream news and what people today want is titillation, not truth.

Some say the company that Barbara sold out to is trying to gin up the revenue by making the site prettier and trendier - so they can sell out to a major media conglomerate.   Perhaps Fox News?   After all, they're fair and balanced, right?

However Snopes sorts out its money woes and discontent among the ranks (and from the looks of it, David Mikkelson has enough shares and votes to prevail) it seems the site has been permanently altered for the long-haul.

Like I said, I stopped checking it regularly, about a year ago.  It just seemed so much of what was on the site was stuff I had already seen debunked elsewhere days ago.   It used to be that stuff appeared on Snopes long before it appeared anywhere else.    Today, that is no more.  Plus, some of the ads on their site are a little, well, over-the-top.  It also appears that one of Barbara's last postings (it appears) wasn't so much an attempt to debunk an internet rumor, but to air personal grievances against GEICOThe posting has since been removed and even excluded from the Internet "Wayback Machine" as well.

The problem with "fact-checking" and rumor debunking is that indeed, everyone approaches these things with a certain prejudicial point of view.   Snopes has some mild bias in many of its postings.  Other sites that attempt to "fact-check" also tip their hands with their analysis.  It is very, very hard to be impartial and develop a reputation for fairness.  When you use your fact-checking website as a platform to air your dirty laundry with the insurance company, well, all bets are off.

Websites have a half-life of maybe 5-10 years, tops.   They become popular for a while, then people tire of them and move on.   This is the nightmare Zuckerberg has every night.   Sure, they have hundreds of millions of users (No, I don't believe the "Billions" part - so many accounts are dormant or fake, and they count those, of course).   But people have shown to drift away from even the most popular sites, channels, and programs.

And that is all these things are - websites. Whether it is my blog here, or Facebook, or even - they are all just websites on the Internet - easy to copy, mimic, and replicate, or improve upon.   They have a fan base, peak in usage, and then slowly decline until they reach that point of "Hey, remember when we all used to go on Gawker or Geocities?   What ever happened to those?"

Of course, people don't leave a site until they have somewhere else to go.  So eventually, something will come along that maybe will supplant Snopes.   Something with a better layout, fewer clickbait "question" titles, less celebrity gossip, and maybe an easier format to load - and of course, fewer ads.

And if that site has a reputation for impartiality, maybe people will morph towards that. Who knows?   Every site has its heyday.  So far in the history of the Internet, there have only been a few popular sites that have remained popular for more than a decade.   But even eBay has morphed over time.   Less and less a garage sale and more and more of a merchant platform.  Amazon went from used book seller to online merchant, and today to a tech company selling proprietary technology.

But more about that, later.

Recession Avoided or Merely Delayed?

No, Virginia, Earnings Week isn't another one of Donald Trump's "theme weeks".

Earnings are coming out this week, and analysts are surprised that earnings are higher than expected for many companies.   Does this mean the signs of downturn in the economy are overstated?   Is a recession avoided?   Or merely delayed.

Take Ford, for example, which beat analysts' expectations despite 16% drop in sales.   Ford isn't making more profits, but less.   By taking advantage of foreign tax credits for years of losses overseas, Ford cut its tax bill in half, which propped-up earnings.

The problem is, of course, this is a one-time deal, and you can't make profits out of losses.   The fact remains, Ford's sales - and that of the entire auto industry - are down across the board.  Even pickups and SUVs are only moving out the door with generous incentives - which translates into lower profits.

A lot of other companies are reporting similar results - beating low expectations, but often because of one-time charges, cost-cutting, store closings, sale of assets, and the like.   And this is a pattern I've seen before.  When sales drop off and markets go South, companies start aggressively trimming their sails.   Cost-cutting becomes the order of the day when the sales boom dies.  People are laid off, suppliers are squeezed on prices.

Boeing, for example, also reported earnings that exceeded analysts' expectations, sending the stock soaring 8%.   Boeing has done well in the last few quarters, but are they out of the woods yet?  One reason profits are up is that capital expenditures are down.   They just finished building the new wing assembly line in South Carolina, so capital expenditures are no longer needed.   Despite this, demand for the 777 has slowed, and Boeing plans layoffs.

This does not mean, of course, that this level of profitability is here to stay.  New capital expenditures will be needed down the road - in fact, almost continuously in the airplane business.   This is less about record profits than taking a breath between plane generations.

With a backlog of orders for the 737-MAX plane, which is in dire competition with the new Airbus A320 NEO, Boeing can crank out airplanes without spending too much money on R&D and capital expenditures.  But does that mean long-term profitability?   Perhaps - they will have to spend an inordinate amount of money on the next generation aircraft, as Airbus nips at their heels.  Meanwhile sales of the aging 747 have slowed to a halt.  After decades of losses, the Dreamliner finally appears to be making money for Boeing - illustrating the tremendous risk involved in building a new aircraft, as well as the large amount of time needed to recoup costs.

So this is all good news, but only for the short-term.   Ford can't keep making money through foreign tax credits.  Sometime, it will have to sell cars and trucks at a profit - which it will, just not at as fast a clip as in the last eight years.   And soon, Boeing is going to have to go back to hemorrhaging cash to develop a radically new plane - the so-called 797 with its oval cross-section fuselage.  And Boeing has to do this, before Airbus does.

Across the board, we seem to be seeing the same thing.  I am hearing earnings reports that are better than expected, but always with this asterisk next to the numbers, explaining some one-time charge, sell off, or whatever.  These are great numbers, but what happens next quarter or next year when these asterisks disappear?

Wednesday, July 26, 2017

Should You use Bathfitters?

From rusty old cracked tub to shiny-new, all in an afternoon!  For such a low price!  Should you use this type of technology?  Maybe.  Maybe not.

A few months back I was in a hotel room and on the television were saturation ads for Bathfitters.  The premise was that you could call them, and for not a lot of money they would come out and redo your bathroom for very little money.  Note that there are many companies offering the same or similar systems, so I am not picking on one company here, but reviewing the underlying technology.

What they do is cover up your old tub and tile with a plastic (acrylic) enclosure and then install new fittings.  It makes it look shiny and new and contemporary, in a very short period of time (often within one day).    No hassle of sledgehammering up old tile and backer, removing rusty old tubs, struggling with old plumbing, dealing with dust and mess.   And it seems so much cheaper, too!

But while you are paying a lot less, you are getting a lot less, too.  Merely covering up old tile and tubs isn't the same thing as replacing them.   You are basically forestalling the inevitable, instead permanently fixing it.  And if not done right, you might be just wasting money.

I was in another hotel room where the hotelier had tried to use a similar technology (I have no way of knowing whether it was Bathfitters or a knock-off).   The tub was covered with a plastic layer, and the tile had a plastic enclosure put over it.   The problem was, somehow water got between the plastic tub liner and the original tub, forming a layer much like a waterbed.  It was kind of creepy to stand on, and the idea that there was stale old bathwater under there kind of creeped me out.

It got me to thinking as to what would happen if water got behind the plastic on the walls.  It might cause the whole thing to fail, over time.

This video shows how the tub "liner" is installed, with adhesive and butyl tape.

There are cheap ways to improve the look of an older bathroom.   A neighbor of mine had his tile epoxy-painted, which made it look new.   It was for the guest bathroom, so it would not be used often.   Our guest bath is original 50-year-old tile and tub, and still looks new - as it was rarely used.   Those old tile installations were done properly.  They would put up chicken wire on the walls, put on a layer of concrete, and then install the tile.   Today, they put up tileboard, which is like waterproof sheetrock, and then tile over that.  It works well, but since it is not a solid as concrete, it may be more prone to cracking over time.

The problem with the bathfitters type solution isn't that the technology is bad, although an improper installation can be problematic as I noted above.   The problem is, the pricing.   Since overhauling a bathroom can be so expensive, this "solution" seems so much cheaper, because it is less than half the price.   But even at half-price, it may be far more than it is worth.

The other problem is, after 30, 40, or 50 years, it isn't just the tub and tile that are wearing out.  Odds are you plumbing is shot as well.  The water lines, valves, drain lines, shower head, and whatnot are all ready to be replaced.  And some of these things can't be replaced without removing the tub.

Odds are, too, that the vanity and toilet are probably ready for an overhaul, and the tile on the floor is worn and cracked.   So yes, these bathfitter-type solutions may work for your tub and enclosure, but still leaves the rest of your bathroom to overhaul.

And while it may cost more money to do a complete overhaul rather than a cover-up, I think the additional "value" a bathfitter-type cover-up adds to your house is minimal.   In fact, if I was a home buyer and saw one of these cover-up type deals on a tub and enclosure, I would wonder, "Gee, what's underneath this?"

Remodeling, as I noted before, at best returns 50 cents on the dollar in terms of resale value.   But I suspect a cover-up job returns nothing.   It may, however, make the house look more presentable and salable, of course, unless like with me, it raises questions as to what else is being covered up.

Would I do a bathfitter-type remodel of a bathroom?  It is hard to say.  I would cross-shop with other, similar companies (if you watch the YouTube video above, you will see there are competing companies videos in the sidebar) and beat them up on price.   A new bathroom might cost $30,000 to install. That doesn't mean these types of cover-up jobs are a "bargain" at half the price.  I suppose it might be a good way to update a worn-out guest bath.

What really would deter me, however, was the fact that these systems are advertised on television using saturation advertising.   TV ad time costs a lot of money.  There are no bargains advertised on television.   And anything hyped on TV is no real bargain.

Tuesday, July 25, 2017

Why is Chipotle Stock So Overpriced?

Why do people only look at share price when investing and not fundamentals?

The press has been gleefully reporting more setbacks for Chipotle Mexican Grill.  The latest is a viral video showing mice dropping from the ceiling of one location.   Earlier this month, at least one or two people were sickened by the Norovirus, usually something you see on cruise ships.

Coming in the wake of the major E. coli outbreak they had a couple of years back, you wonder why anybody would want to eat there.  I remember when a Chipotle first opened in Old Town Alexandria.  I believe at that time they were owned at least in part by McDonald's.  We went once, and never went back.  It really isn't Mexican food in my opinion, but rather burritos the size of your head.  This is what Americans think Mexican food is like.

You get this burrito thing which is almost the size of a football and it's on a plate and you have to cut it apart with a knife and fork.  You can't pick it up and eat it like a real burrito.  When you try to eat it with a knife and fork, all the stuffing comes out, and you're basically just shoveling this goop in your face - and it's not very appealing or tasty.  It's not even eating.  It's just fueling your body with stuff. But Americans like that kind of crap, I guess, and they've never actually been to Mexico so they don't know what food is like there.

But for some reason Chipolte stock has been really popular, particularly with amateur investors.  I'm guessing here, but I believe that the sort of people who sit on the computer all day and trade stock tips are the same kind of people who eat at Chipotle Grill.  You know, severely overweight IT types we're going to "make it big in the stock market" by stock picking, but for some reason, that never quite works out.

That must be the explanation, because I can't figure out for the life of me why Chipotle Mexican Grill stock has a P/E ratio of over 100.  And yes this is even after the stock took a nosedive after the mouse and norovirus incidents.  This is also years after the E.coli nightmare was cleaned up.

In case you were wondering, a P/E ratio of 100 is staggeringly high for a restaurant chain.  It means you have to wait over a hundred years to make your money back on Chipotle stock.  A pretty standard rule of thumb is a P/E ratio should be around 20 for most traditional Industries, this represents about a 5% rate of return on your investment.

The few exceptions might be in industries which are expected to grow exponentially very quickly, in which case the market is buying ahead of itself, predicting that the company in question has potential for huge growth.  Maybe some "dot com" company can get away with a P/E ratio of 100 or more, if it looks like they will expand by a factor of 10 in a few years.   A restaurant chain?  Be serious.

Given the crowded nature of the fast food and fast-casual dining, there's a lot of competition in this marketplace.  There are many other restaurants like Chipotle, including local chains and Mom-and-Pop shops.   We have a local chain here that is a clone of Chipotle, right down to the head-sized burritos.  The barriers to entry are low, and there is no protectable IP.  Anyone can make a burrito, there is no Patent on it.

In order for Chipotle stock price to make any sense, it would have to increase in size by a factor of five, and that doesn't seem likely even if we didn't have the e.coli, norovirus, and mice incidents.

Failing spectacular growth, they would have to increase the profitability by a factor of five.  Or maybe they could slash costs to the bone, pay their employees in burritos, and raise prices through the roof, to achieve a P/E ratio at least less than 50.  But it doesn't seem like the profitability of the company is going to increase anytime soon - certainly not by a factor of five.

Compare Chipotle's stock price to that of Mcdonald's. Or more precisely their P/E ratios. McDonald's has a P/E ratio that is somewhat high at 28, meaning you have to wait 28 years to make your money back. It also means that it's earning about 4% every year, which is pretty respectable, particularly compared to Chipotle.

Then consider dividends, or the case of Chipotle the utter lack of them.   They think their stock price is such a great deal by itself, there is no need to pay back shareholders:
Dividend Policy
We are not required to pay any dividends and have not declared or paid any cash dividends on our common stock. We intend to continue to retain earnings for use in the operation and expansion of our business and therefore do not anticipate paying any cash dividends on our common stock in the foreseeable future.
That's right, Chipotle pays no dividends whatsoever, whereas McDonald's currently cranks out about 2.44% in dividends and has a long rich dividend-paying history.  This means McDonald's is paying out more than half its earnings in dividends, which means the shareholders are being rewarded for the profitability of the company.

Chipotle is acting like it is some sort of dot-com tech company, instead of one of the most traditional of industries around - the restaurant business. Restaurants are businesses of thin margins, irregular profits, and unpredictable performance. Chipotle is acting like it is Uber and that growth alone will sustain it, and the need to make profits or pay dividends is secondary.  That strategy may be backfiring.

And you have to ask yourself, why would they do this, and why do articles appear hyping the stock price? Well, one explanation might be that some of the key employees might be paid in stock options, and thus have a motivation to keep the stock price sky-high.

So ask yourself this, if you are a Chipotle shareholder.  Where are you going with this?  What do you think is going to be the payoff for Chipotle?  Are they so flush with cash that the company is worth what the stock says it is?  Or is somebody else going to buy out the company and pay this outrageous price for it, even though it's not very profitable?  Or do you really think it's going to increase in profitability by a factor of five sometime in your lifetime?

Why would someone think this stock is worth over 100 times its earnings?  Oh, right, the financial press.  Online websites abound which offer stock "analysis" that amounts to little more than speculation.  Take for example, this "article" on "investorplace"
When I last discussed Chipotle, the technical expectation was bullish. The anticipation was that a smaller, first-stage weekly base would continue to hold support and resolve itself with a clean breakout above $500.

That was on May 8. As is apparent on the provided daily chart, CMG stock failed to comply.
Over the past few sessions, conditions have become increasingly grave for shorter-term traders as shares  broke below a fairly decent-looking hammer candlestick. [wtf?] More important in our view is the $425-$430 area — a critical support area for the current uptrend, and one that remains intact.
The highlighted words sound so technical and smart, yet they mean absolutely nothing.  The article is accompanied by a chart of the stock price, with lots of lines drawn on it.  No mention is made of profits, dividends, P/E ratios, or any other metrics.  Just stock price.   Read the entire article - it is gibberish.   What the author is saying is that the price should go up, just because of momentumOh, and because of a 2-for-1 burrito offer.

Note also, that this fellow seems to be suggesting leveraging yourself to make a "play" in the stock - using derivatives (going long and short).   This is very risky investing for the amateur.

People read gibberish online "stock reports" and bid up the prices of stocks into the stratosphere.    And in this case, that is exactly what happened to Chipolte stock.  In the last few years, the price has been bid up from $75 a share to $750 a share, for no apparent reason whatsoever.   And as the price has spiked so has the P/E ratio, form a more modest 29 to an outrageous 500, before settling down to the 103 we have today.   This looks like a classic example of a bubble, as it is too drawn out to be a pump-and-dump.

Granted, profits in the past were pretty good, but back then, the P/E ratio was at least rational.   The relationship between share price and profits seems disconnected.   And this tells me that people investing in this stock are not looking at anything but share price.

And sadly, this is how I invested when I started out, listening to idiotic advice like this, and trying to divine something about a company based on its stock price chart.   You have to look at the fundamentals.   You can't divine what a company is worth based on its price history.  A place that makes burritos is not a gold mine.

Or maybe you just bought the stock because you like the burritos, never really thought much about price-to-earnings ratios, dividend yields, or where the company might be headed.  And while it might seem there's a Chipotle on every corner near the tech sector of every large city, there really aren't as popular across the country as other fast food and fast-casual chains.

One of the biggest mistakes I made early on in investing was to buy stocks and companies because I liked their products.  And this is very typical, I think, of a lot of young people.  We buy stocks in things which were familiar with because it gives us a level of comfort.  But we don't think about the basic financial soundness of the company involved.  A company could make a great product and still be headed for bankruptcy, or at the very least, be overpriced.

It doesn't take but a few people to bid the stock price of any company through the roof.  This doesn't mean the majority of the market thinks the company is worth that, only that a few people are willing to pay that much, and  a few more are unwilling to sell.

And it first, a fast food company might seem like a pretty safe bet, as they are making products and selling them and thus are making profits and have very low risk of going bankrupt.  But as Chipotle has demonstrated three times now, unforeseen incidents can cause huge disruptions in their business.  The e.coli thing took at least a couple of years to die down - and profits really never recovered from that.  I think these latest incidents, particular the mouse one, will probably take at least 6 months to a year for sales to recover to even post e.coli levels.

And of course, it could just be that football-sized burritos are no longer a "thing" - the landscape is littered with the skeletons of fast-food chains that peaked and died, as people lost interest.  I miss Little Tavern.

But even assuming they could overcome these latest setbacks, the stock is still wildly overpriced.  It's P/E ratio is in tech territory, but it doesn't have the potential logarithmic expansion that some tech companies have.   Burritos are not tech. 

It just makes no freaking sense whatsoever.  And when things doesn't make any sense, one of two things is going on.  Either I'm too dumb to figure out what's going on, or maybe I'm smart enough to see that what's going on is idiotic.

UPDATE 2021:  It seems that the Chipolte hype was a precursor of the AMC and Gamestop bubbles of today, and like today, back then, Chipolte was hyped on the internet, including on Reddit.  After taking to about $200 a share, it went on a tear again - no doubt hyped by the same people as last time around. Chipolte still has a P/E ratio over over 100, has never paid a dividend (and likely never will) and still sells burritos the size of your head, to tech geeks who invest online.  You have to hope that the supply of chubby IT types never evaporates, or that they try to actually sell their stocks.   This is not investing, it is gambling.   And their burritos suck!