Going Long On Retail

Without going in to individual security selection, I want to touch on an idea that I’ve been formulating for a while. It first crossed my mind when Macy’s reported better than expected earnings last year and I thought it was a curious theory but then never pursued it.

Then Toys R Us declared bankruptcy. I thought back on the days when my parents took me to Toys R Us and the happiness I felt just walking the aisles even if I didn’t walk out with anything.

Then Sears filed for bankruptcy and while reading about the declaration and about what brought a once iconic American company over the edge made the idea come up once again, only this time stronger. Retail is a sector that has lagged behind the broader S&P for a while now and hasn’t really shown a promise rebounding. Amazon has taken over. Having worked for a startup that leveraged amazon’s platform, I saw first hand the dominance Amazon has in the marketplace of goods. Not only do they sell everything, they produce everything as well. From Amazon branded clothing to Amazon branded food, Amazon has gone from the little online book seller to the everything store.

But how much can their dominance grow and have traditional brick and mortar retailers felt the full effect of this? I believe so. While reading about Sears and the events that led to it’s fall, one of the major thing I noticed was the lack of spending on technology. Retail companies that have weathered the Amazon storm have a major characteristic shared among them. They invested heavily in technology over the last 5 years. It doesn’t matter if it’s Walmart’s acquisition of jet.com or Target enhancing their own online presence, brick and mortar retailers have found the secret ingredient to stay competitive and not lose any more market share to online only retailers.

Further reinforcing my theory is that online direct to consumer companies such as mattress startups Casper and Tuft & Needle have made the push in to retail stores. While these stores are limited, I believe that they have plans to expand their brick and mortar presence in an effort to give more consumers an experience and a place to test their products.

In my opinion going to a mall or store is an experience and a good reason to get out of the house. I know plenty of people that enjoy actively shopping and walking around which is, for obvious reasons, impossible to do through online stores. While my original thesis was that companies investing in technology can and ultimately will weather the storm I also believe that a push back in to traditional retail will bring back a resurgence in REIT’s that are heavily invested in shopping centers and malls.

While I am unsure about substantial growth coming in the form of new stores I would expect that same store revenue year over year will continue to increase for traditional retailers, regardless of their push into e-commerce or not. Consumer sentiment stands at 98.3 and consumer confidence is hovering around 137.9. Both of these numbers show that Americans are happy with their current financial situation and expect the good times to keep rolling. Heading in to this holiday shopping season, I would expect higher than last year spending, even with the recent volatility in the markets.

As traditional retailers adapt to e-commerce taking a larger percentage of market share I believe the focus will shift from products in the stores to getting customers in the door with the allure of an experience. Instead of investing in large stores that hold many products, giving customers an experience that will make them want to leave their house and forgo online shopping will be the key. Give me a shoe store where I can try on shoes and jump on a treadmill, show me a clothing store where I can find the best products for me and order them directly to my house. I’d rather go to a Teavana that is a cafe setting and then purchase the tea I enjoyed after casually tasting and exploring their selection.

A recent trip to a local mall showed one of our contributors how retail is changing first hand.  Gone are big box stores sprawling thousands of square feet with scores of goods.  They have been replaced with things like a Tesla retail store where you can purchase merchandise and sit in the most recent model.  Interested buyers can be set up a test drive and learn everything they want to know about the car without leaving the mall.  In another portion of the mall our contributor found a new Nespresso store which was centered more around having customers sample new flavors free of charge rather than pushing product to purchase.

With a lot of market research coming out showing that the expectation for the near term is “growing but slowing”  I expect the retail sector to stay in line with that. Overall, I am long on the sector in a 5-7 year outlook and have begun the process of looking for individual companies that show the potential to not only survive the storm but come out stronger.

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The Courage To Act

Overall score 8.2/10

The Courage to Act by Ben Bernanke

The Courage to Act by Ben Bernanke is one of the better economics books I’ve read. Recounting the events before, up to, and after the ’08 crisis, Ben Bernanke had a front seat to the entire situation as chairmen of the Federal Reserve. Bernanke brings a unique insider’s point of view from the crisis and objectively reviews exactly what happened and how different areas of the government, obviously with heavy emphasis on the Fed, reacted and tried to deal with the crisis and it’s eventual fallout.

I get it may not make the most exciting reading for someone just interested in personal finance but for anyone interested in macroeconomics and how the financial system works in the United States I highly recommend this book. Having graduated from college with a degree in economics I had plenty of classes that referenced and were even focused on financial crisis’, especially the Great Recession of 2008-2009 but not a single teacher could truly convey what Ben Bernanke so simply puts in his book. How close not only the financial system came to ruin but the United States economy along with it boggles my mind. The complete evaporation of credit may seem to have affected Main Street with higher interest rates and stricter lending criteria but had the Fed and the government not intervened there could have been a complete collapse of the very fabric of our capitalistic society.

I know that sounds like a doomsday prophecy and looking back from where we are now it seems hard to fathom the conditions that led to this crisis and the crisis itself. Personally I was too young to fully understand what was going on. All I knew was that a lot of people were out of work and my parents retirement accounts lost a lot of money. Now reading the chairman of the Fed’s first hand account of the crisis I understand why those accounts lost so much value and why people were looking for work.

Bottom line is this book will help you if you plan on studying economics in college. This book will help you if you want to understand markets better and the interconnection of our financial system. And this book will help you if you want to understand the recession. It’s a welcome glimpse into the brain of Ben Bernanke and you should take full advantage.

Blockchain and Bad Conversations

Guest post this Friday by a senior at Penn State! Read on to see what he has to say about blockchain.

At this point, you’ve probably heard the term ‘blockchain’ thrown around a time or two. In reality, you’ve probably been in a conversation where it’s been brought up, people start to discuss topics related to it, and you find yourself nodding along to everything they say, pretending to understand what they’re talking about and giving them the satisfaction of knowing they have an engaged audience. Before I say anything else, don’t hate yourself for it! We’ve all been there. What’s important is learning what they were talking about after the fact, so the next time you see this person, you can really nod your head to a familiar topic, not just words going in one ear and out the other. 

So what is ‘blockchain’ exactly? No, it’s not bitcoin, and no it’s not illegal. I know at least a few of you were thinking that. Blockchain is in fact a system of measurement. Just as banks keep ledgers of every transaction within their clientele and partnering banks, blockchain does this for cryptocurrency as well. The key difference between a traditional bank ledgering system and the blockchain is that every transaction that happens in the blockchain is public. Every transaction and its respective amounts and included parties are all recorded on this public interface. Transactions are sorted into blocks along this chain and published online, while remaining well encrypted. These blocks are mathematically solved with a certain amount of transactions, depending on the solution, and then placed on the chain. The blocks themselves are solved by miners; the individuals who actually derive each coin. They then take each transaction, and through a series of complex mathematical procedures, systematically solve each block; adding onto the chain. I know, mind blown. Now before any questions, I have to disclaim the hobby of mining by saying that not everyone can do this, even if you claim to be a mathematical savant. Crypto-mining takes a heavy set of expensive computer machinery, and a lot of time that most people don’t have. However, with that being said, it’s not impossible!

So aside from avoiding a confusing conversation, why is this subject important to our generation? Simple. The blockchain is going to become the most disruptive technology of our modern world. Aside from all that it has already done, the public ledgering system allows for instant data and information dissemination across multiple platforms, and business templates. In other words, people can share sensitive information instantly, with whoever they want to, in a very safe manor. In the next 20 years, the blockchain will revolutionize the ways in which businesses process data. Prospectively, this system will be replicated across every business and multi media platform, allowing for easier spread and analysis of data. 

So there you have it, the blockchain in a nutshell. Before you go buying all the mining rigs and cryptocurrencies you can find, it is important to have at least a base knowledge of the blockchainand the way it operates today. Something about .001% of the world could really explain well. Tell that to your IST and market trends professor.

Understanding Investing and Speculating

It’s time to break down the difference between investing and speculating. At different points in market cycles and throughout stock market history investing has been thought of as speculating and speculating as investing. With the latest boom and bust of weed stocks, last years run up of crypto and the resulting crash, the longest bull market in US history, and now movements in to correction territory it’s more important than ever to understand the differences.

We get it, diving into the world of investing can be tough. There are so many different ways to lose money and it’s easy to fall in to a trap. One of the many pitfalls that most new participators in the market come across, and one we all definitely fall prey to, is speculation. I made a lot of uninformed and rash decisions that I would never make now and lost, at the time, quite a bit of money. And while we still learn every day about the markets, this lesson of investing vs. speculating should be learned quickly and forgotten.

At the highest level I would say every market involves some sort of speculation. If you hold the S&P 500 through index funds (which is one of our favorite ways to invest) you are speculating that the US economy is going to continue to grow. If you hold treasury bonds you are technically speculating that the US government is not going to default on its debt and will have the ability to pay you back (which has actually come close to happening in recent years). There are people who purposefully make speculative investments and they have their own reasons for doing it. We are just here so you understand the difference and don’t accidentally speculate when you meant to invest.

Investors tend to seek to maximize their risk adjusted rate of return based upon fundamentals, through analysis, risk management, and due diligence. Speculators buy a security with the hope that someone else will buy that security from them at some point in the future at an even higher price than they payed for it. Burt Malkiel of Random Walk Down Wall Street fame presented this idea the best with his castles in the air analogy. Let’s dive into some examples of each:

Speculating

A great example of speculation are small cap biotechnology stocks.  The underlying businesses usually don’t make much money if any and are operating with money raised by issuing equity and grants they have secured for researching new drugs.  However, an FDA review of a drug they are trying to bring to market can either make or break the business. Speculators will buy up stock or short it (usually on margin) right ahead of these reviews seeking to create outsized returns.  While speculators can read all the company press releases they want the FDA approval process is extremely complex. No one really knows what’s going to happen and people make small fortunes or get burned all the time.

But you don’t have to take our newest high tech example to find speculation in the markets. Ever heard of Dutch Tulip Bulbs? One of the greatest financial bubbles and speculation crazes of all time. That’s right. Tulip Bulbs. People actually bought and sold flowers that costed more than their homes. And they bought them on margin. And as all speculation crazes do and all bubbles must, they popped. People lost fortunes.

Check out these other speculation crazes to see how ridiculous and irrational people can get.

Weed stocks, biotech, Housing, dot com bubble, savings and loans, south sea company, tulip bulbs.

Investing

A good example I like to use for investing is something that you can conduct research on and conclude that it will have positive expected returns with average or lower than average risk for many years to come.  

Take a large conglomerate that is in several industries.  It is a top player in the industries that it participates in and returns value to shareholders through either dividends, share buybacks, or capital expenditures.  An investor might choose to invest in this company to seek a modest return on the capital they put at risk as due diligence suggests that the business’s risk is relatively low.  Additionally, the investor might go ahead and purchase stock of similar companies to diversify their portfolio across industries and regions.

Remember that purchasing a share is not just owning a string of numbers running across your screen with the hope those numbers go higher. It is a ownership position in the company of whose share you bought. The value of your house is not told to you consistently throughout your day and you don’t care. Your investments should be the same. Even if you are not able to know the price you should be comfortable in your investments, and I stress investments and not speculative positions, that if you didn’t know the price at this very moment you would be happy to own a piece of that company.

Conclusion

We are not saying to not speculate. Some make their fortunes on speculation but many more lose fortunes because of speculation. It’s important to understand the differences and the risks acclaimed with both. Yes, investing has it’s risks and while they are different from speculating they are always present and represent hurdles that intelligent investors must learn to navigate.

Atlas Shrugged

Atlas Shrugged by Ayn Rand

The Modern Piggy Bank’s Rating: 10/10

If you saw Atlas, the giant who holds the world on his shoulders… what would you tell him to do? What would you tell him? To shrug”

Atlas Shrugged is one of, if not the best book I’ve ever read. I picked it up after learning of how many successful people attribute their success to the philosophy enshrined in this book and after finishing it I could completely understand why.

I won’t lie. This is a long book, it will take a long time to get through and it can be slow at times. But every page brings you a new insight into how the majority of people interact with reality and how badly you don’t want to be like most people. This is actually the first book that I went back to read passages and pages over again, not because I didn’t understand them, but because I wanted to absorb the words again.

Presenting her philosophy of Objectivism in story form, Rand creates characters we can all associate with people we know in our own lives. You’ll also find the ideal characters don’t seem so unrealistic and the way they live their lives so simplistic, you’ll wonder why it’s not common sense. Francisco’s speech on money, probably spanning 20 pages, is eye opening and will be sure to burn in your brain for a long time. Even though this book revolves around the storyline of good versus evil it’s about fundamental moral laws that all people should adhere to but so many just throw by the wayside.

It’s actually a struggle for me to write down all I want to say about this book because there’s so much to say and I don’t want to go on a rant. Feel free to email me at founders@themodernpiggybank.com and I’ll happily tell you everything I love about this book in more detail.

So let me finish by saying I don’t care who you are, what you do, or what level of success you have achieved, this book will change the way you look at the world. No, it doesn’t have anything to do with investing and personal finance per say but handling of money is as much of a mental test as it is anything else. In fact, a whole new area of study called behavioral finance is attempting to learn more and understand the connection between our thoughts and the way we go about money.

The very second I turned the last page in Atlas Shrugged I knew I was a changed person and I know you will be to. There is no denying it that Rand touched a long forgotten truth about the human condition and brought it to life through her writings.

Atlas Shrugged is a book I will return to time and time again to read over and over or sometimes just read certain passages and speeches. I’ve gone on to read another of Ayn Rand’s books: Anthem. And am currently making my way through Fountainhead.

Embarking on the journey that is Atlas Shrugged is a long one but not an expensive one. The paperback can be bought from amazon for less than $10. Just click the link below and it’ll take you directly to the page.

Atlas Shrugged

Make sure to let us know what you think! We welcome any discussion about this book or any others that you’re reading. As always we ask you to subscribe using your email so you can stay up to date on all the exciting things going on at The Modern Piggy Bank and follow us on twitter @themodernpiggy2.

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How To Use Your Cash Back Credit Card To Build A Rainy Day Fund

Cashback credit cards? Awesome. I’m personally so thankful that cash back cards are a thing because I utilize them to the full advantage. Or so I thought. Personally I have a Chase Freedom Unlimited card which gives me 1.5% back on everything I buy. Considering the fact that I graduated college recently and moved to a new city for my post grad life I got a lot of cash back during this move.

I try to use my credit card for every single purchase that I make because of the cash back feature. I know a lot of you will say this is irresponsible so let me quickly say I only expense things I can afford and will pay off every month. I don’t carry a balance and therefore I pay no interest on my card. So really, this cash back is just found money for me. When I was moving it was great because as I bought things that I would need in my new apartment my card gave me cash back to buy even more things I wanted but I didn’t consider essential to the apartment such as art or little knickknacks to make the apartment feel more like a home. Sadly, the plant I bought died but that’s neither here nor there. (I was devastated).

So getting back to cash back. If you are a responsible spender with your credit cards and not a frequent traveler I highly suggest going with the cashback option, but again you need to find a credit card that fits your lifestyle and personal spending habits. I know a lot of people around my age in cities like NYC or Boston that if they had excellent credit opted to go for the Uber credit card because of how it directly caters to those people who are very active in their social life. I also suggest checking out the Capital One Savor Card because of it’s great cash back on dining and entertainment.

I’ve talked to a lot of people about what credit card they use and why they chose that particular one. Most people take cash back and apply it to their statement balance so they owe less on their credit cards each month and I highly recommend doing this if you are carrying a balance from month to month. It will allow you to pay down your debt faster and get out of interest payments, if you have those.

Now that I carry a zero balance from month to month I don’t feel the need to apply my points right back into my credit card. Sure, I could go online and get some gift cards or apply them to travel but let’s be honest, I’m 22 and I don’t have time to go on crazy vacations and I try to curb my spending habits so that I can save more.

So I thought about this a lot. I wondered how I can best use my cashback. 1.5% sounds like nothing but it definitely adds up over the course of a year. As I was going through my options for my last point redemption it had an option if I would like to deposit the cash back into my checking account. Now I don’t keep my savings account with chase as you all know if you read my article on savings account, I use Marcus by Goldman. Some more digging allowed me to find that I can link any bank account up to my card and deposit the money there. Aha! A rainy day fund was created.

Sure I have my savings that I deposit a fixed amount in every month because I worked it into my budget, but I’ve never even thought about putting my cash back into a savings account. Even better, it’s an interest bearing savings account so basically I’m being handed money, putting it into an interest bearing account, and earning even more money on top of that. Think of it as a monthly allowance almost.

This is how I personally use my cash back but the more I thought about it the more I saw the wide range of possibilities this really has. Savings accounts offer low interest rates right now with the highest you’ll find hovering around 1.8% while the average market return year over year is 7%. So if you already have a rainy day fund and don’t feel the need to contribute more consider taking this cash back and putting it into an investment account, retirement or otherwise and letting it grow even more than a rainy day account ever would.

Make sure to subscribe to The Modern Piggy Bank using your email address and follow us on twitter @themodernpiggy2. As always you can email us directly at founders@themodernpiggybank.com with any comments or concerns you guys have. Have a topic you want to learn about? Shoot us an email and we’ll do the research.

Would You Rather Have Starbucks Or $700?

Choose right now… Starbucks or $700? Not Coffee or $700. Just Starbucks. Choose. Now.

Starbucks is in the news a lot. They are either opening their first store in Milan (highly suggest clicking on that link, the pictures are crazy), having trouble in Philadelphia, or boosting their stock price due to another great quarter. At one point there weren’t enough Starbucks stores in the United States to serve the demand for their coffee, and that was only last summer!

You’re probably saying that’s crazy because if you live in a major city it seems like there are multiple Starbucks on every block. You’d be right.

Now, we’ve seen a lot of the articles about how millennials could have so much more money or even be a millionaire if they cut out all their “trendy” food items such as avocado toast. A certain Australian millionaire even said the reason millennial aren’t millionaires is because of their avocado toast addiction. We saw some articles where the math was done and we even did it ourselves and found the idea a little far fetched. But it did get us thinking. Is there anything about our consumption habits that really do mess with our personal finances?

Absolutely. Besides the fact we rely so heavily on credit cards and think when something is on sale we “saved” money when in reality we really just spent less but our caffeine habits really do damage our personal finances. I’ll be the first one to admit I got Starbucks and Dunkin or whatever coffee was available to me in college almost every day. That was on top of my Keurig or Mr. Coffee (depending on what year I was in college) that I would make most days. Looking back, I wasted so much money on coffee.

I read recently that the average Starbucks order is $2.75 in the US and in NYC it’s $3.75. Most people I know stop for coffee at least once a day, usually on their way to work, every weekday. So 52 weeks in a year means 260 work days, we’ll be liberal here and say you get 15 vacation days you take full advantage of so 245 working days a year. We’ll go even further beyond that and say at least another 15 of those you’re running late and don’t get to stop to get your caffeine fix, now we’re at 230 days a year. Sounds like a lot but it’s pretty common for coffee drinkers to have at least a cup every day, specifically every morning, if not more than that. So some quick math of 230 days x $2.75 for an average order and you get $632.50 a year that you’re wasting on over priced, over roasted coffee.

Now I get it, if you’re addicted to caffeine like I am when you need coffee, you need coffee. Most likely your work has a coffee machine somewhere that you can get for free so let’s discount the entire working day and only focus on your mornings.

I personally bought a Mr. Coffee very similar to this one and use it every single day. The Mr. Coffee shown above costs $35.96 or just around 13 cups of coffee at Starbucks. Now for anyone who is going to say that they don’t have time to wake up and make coffee, I wake up at 4:50am and program this wonderful machine the night before to start making coffee at 4:45am, so not only do I have a fresh cup of coffee right when I wake up, I also get to wake up to the smell of freshly brewed coffee and honestly there’s nothing better than that.

I don’t even buy filters, my Mr. Coffee like the one I referenced above comes with permanent reusable filter that I just rinse out every night and put right back in. And you can pick something up like this Byron Stainless Steel Travel Mug for less than $10 and now you’re in business. Total outlay so far: $45.96 or less than 17 cups of coffee at Starbucks.

The last thing you’re going to need is coffee and this is where the real savings kicks in. You can do what I do and drink Maxwell House Original Blend Ground Coffee which sells on Amazon for $6.93. There is 240 6 fluid ounce cups in this thing! Conveniently happens to be just around the amount of cups we estimated the average person to need to go to work. That’s so much coffee. That’s less than 3 cents per cup of coffee! If you want to follow the famous Shark Tank Invest Kevin O’Leary you can take your $2.72 in savings and invest them.

Adding all this up that’s around $53 a year for your coffee addiction in the first year and it only goes down from there. Drink more than one cup a day at home? Raise your cost by $10 to $20 depending on what type of coffee you choose to order.

Some of you are going to say that all of this isn’t worth it. The daily expense is minimal on a daily basis and you don’t notice the overall sum you spend. I get it. Like I said before I have been there. But once I realized what was happening and how much I was spending my habits completely changed. The small daily expenses truly add up and turn into major expenditures. Don’t let this happen.

Take that extra $700 or more every year and invest that money or put it into your savings account and let that money grow. You’ll still be having your coffee fix every day, but you’ll be getting it in a way that allows you to minimize your expenses and optimizes your savings.

Make sure to subscribe on our website for all the latest personal finance and investing news and advice and follow us on twitter @themodernpiggy2. Have a question about personal finance you’d like answered or have comments or concerns or just want to chat? Email us at founders@themodernpiggybank.com