Why Smart People Make Big Money Mistakes

October 19, 2007 Leave a comment

Why Smart People Make Big Money Mistakes - Book CoverDespite my general inability to get past page two of nonfiction books on topics like personal finance, I recently finished reading Why Smart people Make Big Money Mistakes: and how to correct them by Gary Belsky and Thomas Gilovich.

For brevity’s sake, and because time is short, I will refrain from a full review of the book. Rather, I will provide a few quick highlights that I found most personally relevant, and encourage you to read full reviews or even pick up a copy if you find these compelling.

To give quick context, the book is written from the perspective of behavioral economics, which studies the sociological and psychological reasons for our economic decisions. It makes a strong case that while many of us may think that we are financially savvy, that we in fact make many financial decisions due to social and psychological pressures rather than purely objective, rational ones.

The book outlines several fallacies and important lessons:

  • All Dollars are Created Equal: If you spend your bonus check or tax refund more easily than your regular salary, or if you invest your inheritance, retirement or education savings more conservatively than the rest of your portfolio (and are several years from needing these things) you are likely losing money.  A dollar of inheritance money has the same buying power as a dollar of your salary or a dollar from your lucky lottery winnings – so they ought all be spent or invested by the same criteria and consideration.
  • Loss aversion and the Sunk Cost Fallacy: Do you sell your “winning” stocks in order to lock-in the gain, but hold your “losers” in hopes that they will rebound?  Are you throwing good money after bad?
  • Bigness Bias: Would you not spend an extra $50 on your $200 domestic plane ticket to fly a specific airline, but don’t mind spending $100 extra to fly your preferred airline if its a $900 international ticket? Extra charges look smaller when they are wrapped into big purchases, but still cost you the same amount of money.
  • Ego Trap: Do you think that you can outperform the market with your smart stock picking techniques? Do you think that you’re doing pretty well with your investment return in the last year, but not actually know how much the overall market grew in that same time? You may not know as much as you think you do – the law of averages will beat you more often than you likely want to know.

See good reviews at Get Rich Slowly and The Simple Dollar.

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Air France and Delta Trans-Atlantic JV

October 17, 2007 Leave a comment

The International Herald Tribune reported today “Air France and Delta forming joint venture for trans-Atlantic flights.” This is yet another development in the airline industry as different players line up to take advantage of the impending change in regulation controlling flights between the United States and the European Union.

Many airlines are jockeying to take advantage of the “Open Skies” deal, which will allow airlines to fly from anywhere in the European Union to any point in the U.S. as of March 30.

The effect will inevitably play both to the favor of customers and airlines.

Customers will benefit from lower costs and more direct-flight options as more operators are allowed to cross the Atlantic, and to fly between markets which were previously not connected. Perhaps some intrepid airline will begin flying from San Francisco to Riyadh and make my life easier (yes, I realize Saudi Arabia isn’t part of the EU… yet).

With more possible destinations, airlines will be able to operate internationally at much lower cost (by, for instance, flying into London Luton rather than Heathrow or Gatwick). As different airports become viable options, airlines should have improved bargaining power when negotiating prices on landing slots and gates.

Could this be the way that US airlines break free from there historically abysmal profit levels?

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New Insights In the Quest for an All-Business-Class Domestic Airline

September 16, 2007 2 Comments

Virgin America InteriorIn the time time since writing an earlier post, “Domestic US All-Business-Class Airline?,” I have stumbled across some additional, interesting insights about the prospects for an all-business US airline. To quickly reiterate, in that post I proposed that a company like EOS or Silverjet, which offers business-class-only flights over the Atlantic, could be successful flying domestically within the US.

First off, I failed to point out in my previous post that some airlines have taken a similar, if not identical approach in the past. Midwest Airlines is effectively an all business class domestic carrier, and airlines like JetBlue and Frontier have tried to position themselves as premier economy airlines, with leather seats and seat-back entertainment systems.

Second, it is important to note that the recent boom in transatlantic business class airlines is likely to not only continue, but to increase in light of the upcoming March 2008 opening of the transatlantic market to new competition when the Open Skies Pact goes into effect. This will likely distract much attention from the domestic US market for the next year or two, as the existing business-class players focus their investments on expanding service between new, previously unserved markets.

Third, Richard Branson appears to have really set his sights on the US domestic airline market. Virgin is expected to enter the all-business-class fray with a new transatlantic option, competing with EOS, Silverjet, and the others. This, only months after Virgin American began service from San Francisco offering a new premium domestic option. Its flights are split like most traditional airlines with both economy and “first class” sections, but many new service innovations such as on-demand meals, custom MP3 music playlists, and a seatback entertainment system that even allows electronic chatting with fellow passengers.

Virgin American appears set to fill a niche for low-cost premium service, but doesn’t eliminate the attractiveness of a truly upscale business-class-only option, since that configuration offers advantages in terms of lightening-fast boarding, lower risk of screaming babies, and smaller planes that can fly to less congested regional airports.

Finally, I should point out that I am not the first to have thought about this. Steven Livett and Stephen Dubner over at Freakonomics wrote about this very opportunity just a few months ago. Similarly, Scott McCartney at the Wall Street Journal, author of the Middle Seat column, generated some interesting discussion on his forum a couple months ago about domestic opportunities when he wrote about L’Avion and Silverjet.

Have others already tried?

While I still believe United PS is the best example of the type of routes and target audience such an airline would target, MidWest Airlines (formerly Midwest Express) is an interesting case study. It offers a single, “premium” class of service that is close to traditional “business class” on most domestic carriers. They even bake fresh cookies onboard!

The airline is rated “tops” again and again by customers, and demonstrates that a niche player can indeed be successful in the airline industry. It recently fended off a hostile takeover bid by AirTran, whose efforts were blocked partially through grassroots objections by its customers.

But Midwest Airlines is still relatively small and doesn’t compete in all US markets. Interestingly, it doesn’t compete for most of the long-haul domestic routes like LA to New York and Seattle to Miami where I believe a business class airline has the greatest prospects. If a proposed purchase of the airline by private equity giant TPG Capital and Northwest Airlines goes through, however, this sort of move and expansion between more US airports might very well be in the cards.

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Earn My Tweets

September 15, 2007 1 Comment

Pyramids_Mitch I am falling in love with “status messages” and “tweets.” These handy little messages tell me what my friends are up to, in a simple, usable way. It’s the best way for me to stay up to date on the day-to-day life of my friends and family (yes, even my mom is on Twitter). Plus, they help me keep track of where on earth all my friends are at any given time. This weekend, for instance, while in Cairo, I discovered a fellow Georgetown alum and colleague was also visiting for the weekend because of his Facebook Status message.

The shame of the current system of status messages is that they are incompatible. I have at least three places where I could / want to update my status – Facebook, Google Talk, and Twitter (most of you probably have 6 or more), but have to update each manually. Why don’t these services talk to one another? I should be able to set an automated import of my twitter messages to Facebook the same way this post will be imported as a Facebook “note” when it is published. My Google Talk status message should change every time I change my Twitter message, but if I update Google, Twitter should change.

Two players stand to benefit most from an increasingly “open” system of status messages (in my world, at least): Facebook and Twitter. Twitter is already wide open (For instance I can import my twitter messages via RSS into my personal blog at mitchellwfox.com) and is the natural host platform. If status messages are like ripples in my social network pond, spreading quickly to all networks, Twitter is well positioned to be the “stone.”

Facebook stands to benefit because status messages will be ever-more current, and more constantly changing. Because of the network effect of social networking, Facebook is the obvious place for me to go for “one stop shopping” of status messages. My profile will be more current, and my friends might even spend an extra second or two on Facebook before logging off to read what my status message is. Multiply that by hundreds of friends…

Anyway, I may be way behind the curve here. Is there already a way to do this? If so, tell me what it is!

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The Gluten-Free Niche

September 5, 2007 1 Comment

GlutenTwo years ago, my friend told me she couldn’t eat bread or drink beer, but that corn-tortilla-wrapped tacos were just fine. I did my best not to look at her like she was crazy.

Then last year I met a coworker with a similar ailment, and then just this summer, a new flatmate. That trend is telling, and apparently in-sync with the growing trend in diagnosis of “Gluten Intolerance” throughout the United States. As with any ailment, increasing prevalence or diagnosis of previously inexplicable symptoms leads to new business opportunities for those willing to customize their service and products to cater to the afflicted.

In July, The New York Times wrote about Risotteria, a descriptively-named restaurant in Greenwich Village with a menu that caters to the needs of the gluten intolerant (“For the Gluten-Averse, a Menu That Works“). The success of that restaurant would seem to be a harbinger of opportunity for restaurants and food-product manufacturers looking for a new niche audience to target. Indeed, many producers have already started to move to the scene.

It has become a popular dietary villain. Gluten-free foods are popping up on grocery-store shelves and restaurant menus, including those of national chains like P. F. Chang’s and Outback Steakhouse.

The diagnosis of Celiac’s Disease (the scientific name), an autoimmune disorder wherein sufferers have an adverse reaction to Gluten, a protein found in wheat, rye, and barley (read: bread and other baked goods, beer, and a whole host of things that use wheat flour as a thickening agent) is on the rise in the United States. The New York Times wrote in May about this trend, comparing it to the similar rise in lactose-intolerance in previous times (“Jury Is Still Out on Gluten, the Latest Dietary Villain“)

The prevalence in North America was previously estimated at about 1 in 3,000, but several studies published in the last three years indicate that it is closer to 1 in 100 — and 1 in 22 for those with risk factors like having an immediate relative with celiac disease.

Two or three restaurants and a few packaged foods, however, would seem to barely touch the surface of the trend that could lie ahead. Wrong Diagnosis puts the disease’s prevalence rate at 1 in 250 Americans, and according to the University of Chicago’s Celiac Disease Center, prevalence among otherwise healthy adults may be as high as 1 in 133.

Businesses can cater to the gluten intolerant through a variety of means. For the majority of the restaurants in the world, the option will be as simple as ensuring one or two items are suitable for those with Celiac’s Disease, and labeling them appropriately in the same way vegetarian options often are. In places where populations where disproportionately many “alternative” or “healthy” diners reside, such as San Francisco and Chicago, or where a particularly aggressive diagnoser has a clinic, there is likely a large enough customer base to support a restaurant dedicated to gluten-free items. The place to start would be to contact local support groups and physician specialists to get a better feel for the size of the opportunity.

And best of all, especially for the friends of the gluten-intolerant, it turns out that the food can be quite tasty. I ate at Risotteria while in New York last year, and found my shimp, pepper, and spinach risotto to be excellent. The gluten-free beer made from sorghum, on the other hand, was another matter entirely.

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Previous Lives: Uphill and Down in San Francisco

September 4, 2007 Leave a comment

Today I was trying to remember the mailing address for Monitor’s office in San Francisco, and googled “Monitor Group San Francisco.” With a bit of amusement, I realized that a BusinessWeek article written about me (well, more like BY me) about a year and a half ago is the third hit that comes up.

I figure it’s worth linking to the article from here to say “yes, that’s me” and smile to think about how much has changed since then.

“Consulting is a fun job with a tough work schedule,” says this Georgetown grad, who bikes the famous hills to work each day

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Putting it Together: The Credit Crunch, A Weak Dollar, and Entrepreneurship

August 27, 2007 1 Comment

Dow Jones Down 56 pts, Aug 27I am writing today in response to an Open Thread on GigaOM.

The credit crisis will have an important impact on entrepreneurs, but must also be considered in the context of a weakening dollar and the risk of an economic downturn. The likely affects are three-fold:

  1. “Exits” through acquisition by an established industry player or private equity buyout will be less likely
  2. Consumer dollars may shift away from startup businesses whose products look a lot more like “luxuries” than day-to-day essentials
  3. Top qualified job candidates and new entrepreneurs may delay their entry into the market until conditions improve

Exits: If acquisitions become more challenging, startups will be pushed toward IPOs as the most viable exit strategy. Unfortunately, with an overall economic downturn in sight, investors are also less likely to be seeking high risk small-cap startup IPOs.

Overall, if entrepreneurs and venture capitalists cannot exit on their investments, the engine that powers Silicon Valley could slow down (note: I deliberately refrain from using “grind to a halt”). At first, if VCs are flush with cash to invest, they will continue to do so. As the burden of their growing portfolio grows, however, investing would slow.

Consumers: With home values dropping or plateauing in many markets, consumers will be cutting back on spending on luxury goods. And yes, Premium Membership at Flickr counts as a luxury good. The same goes for a weak dollar. Imported goods like electronics and gourmet foods, which become more expensive as the exchange rate weakens, could easily force consumers to shift spending away from new web toys.

While it is true that many web 2.0 businesses rely on advertising money more than actual consumer spending, it is important to remember that advertising is also linked to consumer behavior. In hard times, advertising dollars shrink.

Top Talent: If exits are hard to come by, it means that one of the great attractions (mind you, not only) of working at a startup, the chance for a big payday after a few years of work, is much less likely. Without that big carrot to lure in the brightest minds, the best job candidates may stray to other businesses with more secure, lucrative paydays like investment banking, consulting, and jobs in “industry.”

If recruiting the right people to fill important roles becomes difficult, growth at startups could slow, further depressing the situation in places in Silicon Valley.

At Least One Silver Lining: It would be inappropriate to conclude a post like this without an explanation of at least one of the potential benefits of the current credit crisis and economic situation.

This is starting to look like a good market for buyers. It will be possible for businesses to acquire other companies and consumer to buy houses at more reasonable prices, assuming they have the cash necessary to afford them. While this won’t be the case for all buyers, those which are well prepared will find the situation to be quite favorable.

As the saying goes, “buy low, sell high.” Sometime in the near future, conditions might be just right to make that home purchase you’ve been waiting on.

What do you think are the other potential upsides?

My Previous Posts on these topics:

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Off the Beaten Path: Tourism for Expats

August 26, 2007 Leave a comment

Camel During the first weekend that I stayed in Riyadh, Saudi Arabia while living as an expatriate consultant, I quickly realized that there was a significant untapped business opportunity to provide tourist services to expatriates in unusual locations.  Riyadh, and Saudi Arabia broadly, are not your typical destinations for tourists (in fact, there are no tourist visas), but there are, large numbers of expatriates who live within the country.  And there is very, very little to do.

Many of us benefit from expense accounts which compensate for having been pulled from our lives in places in London, Amsterdam, and Toronto to move to the desert in August.  Those accounts afford us the opportunity to explore the region every few weekends, but aren’t necessarily large enough to fly us home regularly, or even necessarily get us outside of the country (flights to most “destination” cities like Beirut or Cairo are upwards of $700 USD from Riyadh).  We can, however, afford fun, reasonably priced local activities that allow us to explore the cities and regions where we live – making the best of the opportunity while we are here.

The challenge, however, is that the tourism industry is substantially underdeveloped.  Beyond a large, good quality museum, Riyadh has little in the way of tourist attractions.  Some opportunities do exist, for instance, to take advantage of things that locals already do, such as ride ATVs in the desert, eat traditional foods, or smoke a hookah.  Others, such as visiting the local camel market, might result in the lucky coincidence of finding an enterprising rancher who will let you ride his camel.  By and large, however, it is a substantial undertaking the string together even a few interesting activities.  Some of us are young, adventurous, and enterprising enough to do it, but there are surely thousands who are not.

All it would take is formalizing a few key relationships with locals (e.g. the guy with a small fleet of ATVs, a camel rancher or two), creating some marketing materials, hiring a couple English-speaking guides/drivers, and you would be well on your way to having a lucrative local tour business.  The biggest challenge (and not a small one to overcome) would be finding someone who could manage and grow the business on the ground.

Taking it a Step Further:

Okay.  So, you could make a little money selling tourist packages to a few expats in Riyadh.  You could make a few bucks doing lots of things you say.  I think there is, however, a broader opportunity here.

The Middle East is not a typical tourist destination, but with business booming on the wave of high oil prices, the region is awash in money.  That money is bringing in a lot of skilled, highly paid workers who are eager to do something on the weekend, and are curious to see the world.

Expand Throughout the Region: I believe that this same opportunity is present in many countries in the region.  Bahrain, another country I have visited recently, had a number of activities which were available, but were poorly marketed and difficult to arrange.  What other cities might this work in?

  • Doha
  • Jeddah
  • Abu Dhabi
  • Others…?

Invest In Developing Your “Suppliers”: Because many tourist activities do not exist in these cities, you could become a co-investor in the development of several related businesses that would appeal to both locals and tourists.  These might be:

  • Go-karting
  • Up-scale local dining
  • Water sports (e.g. wave runners, parasailing)
  • Adventure travel (e.g. spelunking, climbing)
  • Cultural education (e.g. cultural etiquette courses)

As more people begin to venture into the Middle East (and the boom in Dubai alone is enough to ensure that will happen), the opportunity will only grow.

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Blog Action Day: Collective Action for the Environment

August 22, 2007 Leave a comment

Blog Action DayAvid reader and comment-extraordinare Tony sent an interesting link this morning: Blog Action Day. I’ve signed up and committed to writing a post on The Strategy Fox on October 15th about exciting business ideas related to the environment. If you have any ideas or know of any exciting startups that aren’t well known, send them my way.

Bloggers can participate on Blog Action Day in one of two ways:

  1. Publish a post on their blog which relates to an issue of their own choice pertaining to the environment.
  2. Commit to donating their day’s advertising earnings to an environmental charity of their choice.

Simple enough. I’m happy to do my part.

Filed under Business Ideas

Why Wal-Mart’s DRM-Free Tunes Will Change the Way You Buy Music

August 21, 2007 1 Comment

DRM-Free Music from Wal-Mart Great news was announced today for music fans, and from an unusual source: Wal-Mart. A time when we can purchase our music online and do what we like with it (share it, copy it, play it on whatever device we like) is finally about to become a reality. From Reuters:

Wal-Mart, the world’s largest retailer, said its new MP3 music catalog included thousands of albums and songs from major record labels like Vivendi’s Universal Music Group and EMI Group without copy-protection software, known as digital rights management.

Wal-Mart said it would sell the “DRM-free” MP3 downloads of music by artists like the Rolling Stones, Amy Winehouse and Maroon 5 for 94 cents per track or $9.22 per album. It said the new format let customers play music on almost any device, including iPods, iPhones and Microsoft Corp’s Zune portable media player.

The news from Wal-Mart is going to mean a big change for the industry, and for two important reasons:

  • Wal-Mart is such a powerful competitor, it virtually guarantees that other music retailers (e.g. iTunes) will have to follow suit and reduce their prices on DRM-free music in order to keep customers
  • Wal-Mart drives such sales volume, Sony BMG and Warner Music will soon realize that they are missing out on a large number of potential sales by not offering their music in DRM-free format as well, putting pressure on them and their artists to come to an agreement to join Universal and EMI

Until recently, the buyer of digital music was given fewer rights for the use of his or her music than the buyer of a traditional CD. Recording companies required that digital music be protected in Digital Rights Management (DRM) software, in an effort to combat the online piracy of music. This created the frustrating situation wherein music bought on Apple’s iTunes store [by far the largest with 80% market share in the US] could only be played on one type of MP3 player: the iPod. Apple justified this by saying that its DRM software would be compromised if it was shared with other hardware manufacturers.

The first major progress toward giving music buyers back their rights came several months ago when Steve Jobs and Apple advocated that music should be available to consumers in a DRM-free format, resulting a few weeks later in the advent of “premium” iTunes downloads without DRM for an extra $.20 per song. It was a move in the right direction, but many songs remain unavailable without DRM, and paying more for the identical song just to get the same rights you had if you had bought the CD seemed unfair.

Soon we will quickly see both a drop in the price of DRM-free music and the unlocking of music from more recording labels. Thanks Wal-Mart.

Read More:

[And thanks Engadget for the graphic!]

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