Saturday, June 24, 2017

Talking About Money - and Death

It is important to talk about money, although most people refuse to do so.

A friend recently took me to task, as she said, "All you ever talk about is money and death!"   And to some extent, she is right.   We live on a retirement island, and many of our friends are in their 70's, 80's and 90's.  Every day, the ambulance goes by, and like nervous cattle in the feed lot, we wonder, who it was this time, to leave the island feet-first.   Or who is found living in their own squalor, to be shuffled off to assisted living - their obituary being casually read many months or even years later.

Some think this is morbid.   And it is, but it is also liberating.   Once you realize that your life is finite, you are freed from tyranny.   What do I mean by this?   Well, my friend is caught up in the rat-race of the big city - much as we were - not realizing that 5/8ths of her life has expired, and maybe 3/8ths remains - the last 1/8th being anything but a picnic.   If you see this, you realize that life is very short and should be enjoyed to the fullest.   If you want to do something with your life, do it now, because there won't be many tomorrows left.

When you are working and living in the city, or worse yet, the suburbs with all the other cubicle dwellers, you may be lead to believe that what is important in life is what is on TV, what happened at the office today, or what your kid brought home from school.   It is easy to live too much in the here and now and not realize that this piece of artwork that is your life will eventually be finished, whether you like it or not.

So many people in the US are not prepared for the inevitable.   They lurch toward retirement, laid off at an early age, without enough money to pay for their own upkeep.   It seems like a logical thing that you would want to be able to support yourself in your old age, when your body and mind start to fail - and it happens sooner than you think.   Oh, sure, we can "keep active" in our 70's and 80's.   It doesn't mean we can keep working, unless we own the company and they can't fire us.

It is a logical thing.   People think emotionally.   And for many people, so long as their parents are alive, they kid themselves into thinking that I don't need to save up for old age as I'm still a kid!   There will be plenty of time "later on" for that sort of nonsense.   Might as well enjoy ourselves today!  Let's get a Starbucks and go off to Whole Foods!

And yes, that was me, 20 years ago, when I lived in the big city and had the high-paying job.  We spent money and didn't even look at prices of things.   If we wanted to go out to eat at a restaurant, we never thought about the cost of whether we could afford it.

Now, being retired, and early-retired at that, we have to think about how much money we have left and how much things cost.   To my friend, this is buzz-kill.   Why not just go and have fun?   But the reality is, if you think that way in retirement, you'll end up broke.   So you look for ways to have fun on a budget.   There is a happy hour the retirees go to with $3 drinks and $5 appetizers.   It is as much fun as the fancy hotel with the $10 drinks and the $18 appetizers.   But you feel better about yourself the next day.

"But I have plenty of money!" you say.  And lottery winners say the same thing - and end up broke as well.   Even Billionaires have to have a budget and watch their money.   In fact, how do you think they became billionaires in the first place?  Not by spending willy-nilly.

Many if not most people don't like to talk about money, and this leads to a lot of trouble.   For example, we all assume the "other guy" is making more than us and we resent it.   But the "other guy" maybe heavily in debt - mortgaging his future to put on the appearance of being wealthy.   And if he knew how much you made and vice-versa, maybe he wouldn't feel the need to "keep up" with his neighbors in spending.   Of course, this often backfires, in companies where everyone's pay scale is known to everyone else - people resent those they feel are "overpaid".

And it would be helpful if people weren't ashamed to admit when they are snookered in a deal.   The crooked players in the marketplace succeed in life because they know that most folks won't own up to being conned or taken advantage of, unless of course, they want to play the victim card, and hope someone starts a gofundme page for them.

But my friend is right, once you are retired, you think more about money, as you don't have an unlimited potential to earn it.   That paycheck isn't coming in every month, so you have to think carefully about where it goes. 

And since you are looking at the second half, or even the final quarter of your life (and since life is non-linear), you think about what you want to do before the final checkout.   A year for me is less than 1/50th of my life.  When I was 10 years old, it was 1/10th.   Time is not only running out, it flashes by faster and faster as I go.

You can say that is morbid or sad or depressing or whatever.   That doesn't change the fact that it just is.    Your life is finite whether you want it to be or not.   So make the most of it, and don't delude yourself that your life or your checking account balance is endless.

What Ever Happened To Virtual Reality?

Why is this not a "thing" already?  South Park already did an episode about it back in 2014!  Maybe because it won't become a thing - or not much of one.
What are the most interesting things about investing over the last 20 years or so has been the rise of the "Next Big Thing!"   It seems that people these days are no longer content to invest in companies that make profits and pay dividends.  Rather they feel the need to get in on the ground floor on something hot and make themselves billionaires.

Maybe it is started with Microsoft back in 1980 or so.  As I noted before, Bill Gates signed a very lucrative contract with IBM and essentially transferred the entire wealth of International Business Machines Incorporated to that of Microsoft.  IBM went from the 600 lb gorilla of the computer world to a small enterprise software company.  Microsoft ended up becoming one of the most valuable computer companies on the planet if not the most valuable, all based on one product, an operating system.  And not a very good operating system, either.

The mythology quickly spread that if you only had known in advance this was going to become a big thing and had invested on the ground floor like Paul Allen did, you could end up the richest man in the world. From Rags to Riches nearly overnight.  Well, maybe not overnight, but over a period of years.  But the reality of this was, no one could have foreseen that this license agreement would be so lucrative, particularly in the years before the IBM PC when Microsoft was just a marginal player in the software Marketplace.

In other words, it is a bullshit story, and people like to show pictures of shaggy-haired Microsoft employees circa 1978 with the caption, "Would you have invested?" - the underlying premise being that you should invest in whatever the latest half-assed thing is coming down the pike.    But that would be a false analogy.   Even the people who invested in Microsoft back then had no idea that this IBM contract would turn out to be such a lucrative deal.   Never confuse getting lucky with being brilliant!

But in the last 10 to 20 years or so, it seems like this get-rich-quick mentality has taken hold in the tech world.  If only we had known the smartphone was coming out, we could all have bought Apple stock when it was cheap.   If we all had invested in this Facebook thing we all would be billionaires.  And so on and so forth.  However, what this neglects to mention is that many of these companies really aren't making much of a profit and some in fact are just hemorrhaging cash.  Of the bunch only Apple seems to have a rational P/E ratio and is cranking out profits and dividends on a regular basis.  And Facebook?  Only the insiders are profiting in a real way.   People who bought the stock retail might be doing "OK" but are not becoming wildly rich.

We've trained a lot of investors to act like Pavlovian dogs, drooling for the "Next Big Thing" -  the next big tech breakthrough, the next must-have handheld appliance or device, or whatever.  As I noted before, Motley Fool was hyping 3D printing as the next big thing.  And it turned out that 3D printing was just a thing.  It's an interesting thing, it's a thing that's been around for a very long time in the form of urethane printers, but is now gone more mainstream.  But it wasn't a sea change or a new paradigm and it didn't "Put China Out Of Business" or any of the other claims were made by the hypsters and the hucksters.

The Apple Watch was promised to be the "Next Big Thing!" but never really went anywhere. Wearable computing was supposed to be the must-have appliance for everyone.  Everyone would have to have a Fitbit and so on and so forth.  It didn't quite work out that way, although quite a few products were sold.

People thought that if Apple made a lot of money selling one product then they would make a lot of money selling other products.   They didn't learn the lesson from Microsoft that a lot of these tech companies are Johnny One-Notes, and fail miserably in any area outside their core competency.  And I suspect you will see this happen again, as some computer company or cell phone company starts to believe they can build self-driving cars.

The "Internet of Things" we were told was going to be the Next Big Thing.  All of us were going to buy a "Nest" thermostat so we can control our house temperature from our smartphone, or open our garage door, turn lights on and off, or look into our refrigerator to see whether we had any food, or all sorts of things which sounded really cool, but most people didn't want to actually pay for.   Most folks, like myself, thought their thermostat worked OK, and didn't really need to access it from a smart phone or have it hacked by Russians.   When I go away, a neighbor stops by and checks on the house - a lot cheaper and easier than dicking around with WiFi enabled appliances.

The difference between the smartphone and the smart refrigerator is that the smartphone became a must-have appliance for nearly every American and sales skyrocketed.  Not so many people need a refrigerator with a camera in it.  In fact most people just want the simple plain refrigerator.

And the problem with smart phones is, well, they are a commodity item now, sold on price, not exclusivity.   You pay more for data access than you do for the device - and even data plans are dropping in price.   There is no real headroom left on smart phones, just as PC prices (and profit margins) came crashing down once everyone had one.    When an item becomes a commodity, prices plummet - which is why the car business is murder and has tight margins.

Virtual Reality was touted as the Next Big Thing after all these other Next Big Things, and it seems to be stalling as well.  Oculus Rift made a very loud announcement about their VR headset and then delayed quite a long time and introducing it.  Once it was introduced, sales were less than expected and there were some management troubles at the company.  Worst yet, other companies were producing VR headsets that are basically just headpieces that mount on the standard smartphone, undercutting the cost of the standalone Oculus Rift.

Facebook bought Oculus Rift and Zuckerberg claims it will be "The Next Big Thing!"   But I suspect like Microsoft's forays into smart phones, gaming, MP3 players, and so forth, it may end up being a distraction for the company more than anything.

Unlike a smartphone, a virtual reality headset really isn't a must-have item.  And in fact a lot of people just really don't want it, or are just not interested in it, or just really don't even know it exists. Sure, it generated a lot of buzz with online gamers and whatnot who would enjoy the alternative reality aspect of it.  But the rest of us are not so interested in walking around with something clamped onto our head.  Most of us feel we spend way too much time using smartphones, tablets, and computers as it is, and would rather experience more reality than virtual reality.

Compounding this are some technical glitches with the VR headsets.  Unless the frame rates can keep up with reality, when the user moves his head the image on the VR headset is slightly delayed due to the processing time needed to render the images, as well as inaccuracy in the headset tracking position software.  As a result, the user's inner ear signals to the brain and the visual signals from the eye are offset. This produces a condition very much akin to sea sickness - actually the same condition -  where your inner ear is giving you one message (rocking motion) but since you're inside a ship it appears the walls and ceiling are stationary.  Power-vomiting can ensue.  This is not a good selling point.

Some are arguing that augmented reality is the wave of the future.  I find this very interesting is I recall that IBM used to run a series of ads more than two decades ago that showed a guy sitting on a park bench with some sort of Google Glass type of device on his head and he was manipulating a spreadsheet by reaching out into space.  He could see the numbers overlaid over reality, an augmented reality application decades ahead of its implementation.  It was sort of like those AT&T ads from the past promising all sorts of great things in the future.   Many of them came true, too - just not from AT&T, who turned out to just be an ISP.

Augmented reality promises to reduce or eliminate the "Vomit Comet" aspect of virtual reality, but obviously cannot deliver on the ultimate virtual reality experience.  Of the two, I will put my money on augmented reality, particularly if they can make that Google glass thing kind of work.  But it seems that since Google Glass (another Next Big Thing) failed miserably in the marketplace nobody has been interested in eyeglass wearable computing.  In fact the entire wearable computing things seem to sort of flop too.

This is not to say that any of these things I mentioned above won't eventually become successful, as they will.  It's just really hard to predict when they will become successful and how.

So how do you pick the right horse?  The answer is you can't.  Sometimes it's just best to sit on the sidelines and watch these things play out rather than try to jump in, particularly jumping in too soon before the market has settled out and the weaker players have gone bankrupt.

You don't have to run in every race.  You don't have to invest in everything that comes down the pike. It's better to run in races you think you can win and overall have a winning record, then to try to do everything and lose more often than you gain.

Leave the "Next Big Thing" to the Venture capitalists and people who can afford to lose Millions and Billions.

Friday, June 23, 2017

How Leveraging Crashes Markets

With leverage, a small action can cause a huge reaction, particularly when it comes to finances.
As I noted in an earlier post, one of these new crypto-currencies crashed the other night when somebody tried to withdraw millions of dollars all at once. The currency has since recovered somewhat, but it illustrates how these currencies can be very volatile, especially if they are not widely exchanged.  Volatility rarely works to the advantage of the small investor.

When the individual tried to cash in a huge chunk of this new crypto-currency, there weren't enough buyers interested in purchasing the currency and the price dropped precipitously.  The law of supply and demand kicks in.  However that alone doesn't explain why the price dropped so suddenly.

Many people had invested in this currency instead of using it as a trading or exchange medium.  And often these investments were leveraged, based on futures-type options.  Thus, if the price dropped below a certain level, their investment was set-up to automatically sell once it reached that price level. The same thing can happen with ordinary stocks and bonds, as people trade on their future value.  They are forced to cash-in to protect themselves, as they are investing using borrowed shares.

When the market crash of 2009 occurred, a very similar thing happened. Stocks across the board went down in value after repeated bad financial news was received. Once the stock prices reached certain threshold points, automatic trades were triggered which flooded the market with even more of these stocks.  As a result, supply exceeded demand which depressed price even further which triggered even more automated sell-offs.

I mentioned before that trading futures is sort of like trading the derivative of the stock price, and in fact these types of contracts are often called derivatives.  If you never took Calculus, I can try to explain it in very simple terms.  Think of three forms of physical measurement, distance, speed, and acceleration.

Speed or velocity is the first derivative of distance over time, dx/dt where x is distance and t is time. Acceleration is the change in velocity over time or dv/dt or the second derivative of distance.  In calculus, we can integrate these values to determine their underlying data values.  Thus, for example you can use an accelerator to find your position by double integrating acceleration, although it is very tricky to do. That's how an inertial navigation system works, although today we tend to use GPS more.

But as you can see, the more levels of derivation involved, the flakier the data can become, and the more wild the swings in value that can occur.  Let's say, for example if you're driving your car, the measured distance you travel and any given moment doesn't change very rapidly.  But your velocity can change very suddenly if you floor the gas pedal or slam on the brakes.  Similarly your rate of acceleration can change dramatically as well - even more so - in a matter of seconds, rather than minutes or hours.

The same is true for derivative investments, which is why most people say these should be left to experts and people with deep pockets.    Over a year, a stock price might not change too much.   But it may change in small amounts very rapidly in a short period of time.   These can trigger a sell-off in the market, if automated trades take over.   This in turn, could tank the stock price, or the crypto-currency price, for a very short period of time.  As the example from a few days ago illustrates, the price recovered very quickly, but not before a lot of these margin traders lost their shirts when their shares will sold off when certain trigger points were reached.

The problem for derivative traders is that you can lose more than you invested.   For you and me, the stock or bond investor (not "trader") the most we can lose is what we have in the game.   I put $5000 into GM stock and lost it all.

That's bad.   But suppose I spend $5000 betting on the price of GM stock?  I could lose my $5000 and end up owing $50,000 to make up for the shares I thought would go down in price, but instead went up.   You can literally bankrupt yourself overnight this way.

It is, quite frankly, like borrowing money to invest, only worse.  At least with that half-assed scheme, the total amount you can lose is what you borrowed.   With derivatives, the sky can be the limit.

So not only are these a shitty investment - or at least a wildly risky one - for the small investor, they do on occasion bite us all on the ass when too many people are speculating on stock prices rather than investing in companies.   When a market moves from "investment" to "trading" too far, it can become wildly unstable.  And instability rarely benefits the small investor!

Barriers To Entry, Again

Some businesses are easy to get into, but very competitive.  Others are very, very hard to get into, without a lot of capital, or an original idea.

Several articles recently appearing in the news illustrate why some of these start-up companies might not be such a great investments.  People are all agog about Uber as being the next big thing in ride-sharing and saying that it will take over the world.  However there are a number of competitors to that service including many in foreign countries that we don't hear about here in the USA.  In addition, many car makers are promising to build autonomous self-driving cars and offer them in a ride sharing type environment.  Nissan/Renault is the latest car maker to throw their hat in the ring.

What happens when there are five or more ride-sharing companies out there?  There are little or no barriers to entry in this business, and it is doubtful that Uber can protect their business model through patents or other means of monopolization.  Uber has aggressively tried to dominate market share, which is the model used by many companies, particularly the dot-com kind.  The theory is, if you go big quickly, you will take over so much of the market that other competitors will be pushed out or wil not even bother trying to move into your space.

And maybe for a company like Amazon, which has extensive physical infrastructure including warehouses and processing centers, as well as banks of computers and ordering software, going big make sense.  It prevents others from trying to enter the space, as the amount of capital they would need to compete with Amazon would be difficult.  However, Amazon still has to deal with Walmart which is number two in online sales, and number one in brick and mortar.   And as it has turned out, going big in brick and mortar has prevented others from entering Walmart's space, and one by one they've taken out other brick-and-mortar retailers.

But ride-sharing?  That's more of just an app.  A teenager could come up with the software over a long weekend.  And car companies are probably more likely to be able to develop self-driving cars than the company that Uber is.  Uber for some strange reason is trying to develop self-driving car technology even as a host of other companies are already doing this. Since they don't have automobile production capabilities, they will have to partner with an automaker to produce self-driving cars.  And since most automakers already have their self-driving technology divisions under way, it is remains to be seen whether any of them would want to partner with Uber.

First to Market is often last in the marketplace.  Uber made a big splash with ride sharing technology. However the next level, perhaps with self-driving cars, might belong to a different competitor. The first company to make it big in any business usually ends up going by the wayside very quickly.  This is a long-standing and predictable pattern.  We don't fly on de Havilland aircraft anymore, we fly on Boeings.

Similarly, we are hearing more and more about other forms of crypto-currency these days.  I've counted at least five or six different crypto-currencies being hyped by the financial media.  Some are even claiming that Bitcoin is now a thing of the past, although I think that might be a bit premature. The question arises, if there are five or six or eight dozen different crypto-currencies, which one do you use? And maybe when there are so many of these currencies - and problems with some of them - people will start to lose confidence in the entire concept.

Again, the barriers to entry for crypto-currency are not very high.  No one is even really sure who came up with the Bitcoin concept and developed the Bitcoin mining technique that is used for the crypto-currency.  This would suggest that almost anybody could come up with a similar currency without too much effort.

As more and more people try to get into this business, you can end up developing all of these currencies and also causing people to lose faith in them, as some of them no doubt will fail.   If there are 100 crypto-currencies out there, it will cause trouble for many or most.

Barriers to entry in the marketplace serve to keep out competitors, which can sometimes be a good thing or a bad thing.  For example a valid patent or other intellectual property portfolio can be used to prevent others from moving into your business space, at least for someone limited period of time. This at least allows you, in theory, to develop your business and achieve market share while forcing competitors to catch up to play catch-up.

In other industries which require a large amount of technical expertise and capital equipment provide steep barriers to entry for new competitors.  The car making business is very difficult to break into, as Elon Musk is finding out.  Building an automobile which will meet Federal safety standards, emission standards, and gas mileage regulations is very, very difficult.  Moreover, since automobiles are dangerous, it is inevitable you eventually be sued by someone who gets into an accident in one of your cars.  If your company is very thinly financed, you cannot survive such a suit, particularly if dozens, hundreds, or thousands are hurt due to a defect.  The car business is a classic case of go big or go home.  Small competitors just not going to make it in that business, or if they do it's a Herculean effort.

So what does this all mean?   Well, if someone tells you the "next big thing!" is some form of crypto-currency or some sort of "app" or website, ask yourself if low barriers to entry will fail to prevent others from moving into this space if the product or service starts becoming successful.    If something is wildly profitable, others will copy the idea, and unless they can keep competitors out, they first to market may be forced out - particularly if the competitors have deeper pockets and are better capitalized.

Similarly, when someone announces a new "investment" like the Elio 3-wheeled car or the Tesla electric car, you have to ask yourself whether the company in question has the capital to dive into the very capital-intensive automobile production business.  Tesla has done OK so far with limited production (by automotive standards) of its roadster, model-S and model-X (the latter having some teething problems as it is unnecessarily complex - the "gull wing" doors remind me too much of the Bricklin and the DeLorean).   But the mass-production of the model-3 is taking a lot of capital and is turning into a real struggle for them, and the market for such cars may be limited.   The first-adopter and hobbyists will all buy them - and then what?

Then what is the fact that ever major car company on the planet, who is far better capitalized that Tesla, already has an electric car or one in the works.   Nissan just introduced Leaf 2, and GM has its Bolt.   Oh, don't be confused by "market cap" articles which say Tesla is worth more than Ford.   I've already debunked that notion.   "Market Cap" doesn't represent how much capital a car company has at its disposal, but rather how much the stock is worth, in theory.   For companies like Tesla, it represents how much the founders can cash out of the deal, if they had to.

I am not "anti-Tesla" or "anti-electric car" - only trying to be realistic, here.   One massive recall and safety problem could bankrupt Tesla.   Ford and GM are able to digest things like exploding gas tanks and ignition keys that shut off - and hundreds of similar issues.  Tesla may succeed - it may be the rare start-up car company that takes off and stands on its own.   But the track record for such companies is spotty.   I think down the road, some other car company that wants to jump into the electric car business may buy Tesla, if Tesla hits a rough spot.   How do you think GM was formed in the first place?   Consolidation is the name of the game in the car business.

As for Elio - well, they need a staggering amount of money to even start building an assembly line in their factory, and they are hundreds of millions in debt.   It won't be until the wreckage settles to the ground that we find out what crashed that Hindenburg.

Crypto-currency is all the rage (keep chanting:  Blockchain!  Blockchain!  Blockchain! - even if you have no clue what it means).   But I suspect that a stable crypto-currency may be a perpetual oxymoron.  And I more than think the articles for and against particular currencies, in the financial press, are just attempts to affect the markets for these currencies - for the personal profit of the author or someone out there.   Who knows?  Maybe this "Elysium" currency will replace Bitcoin - illustrating that first to market is often last in the marketplace.

We'll have to wait and see - on the sidelines.

Thursday, June 22, 2017

Profit Taking

Sometimes it is OK to sell something that is doing well.

I sold half my interest in Berkshire-Hathaway today.   50 whole shares of class-B, as I am a big-time investor.  I bought this stock a couple of years back for $8000 and it remained flat for a while.  Today it is worth $16,000.   So I did OK.   I am selling half of it to lock in my gains.

The temptation is, of course, to say, "Keep it!  It will double again in value soon!" and that is the logic many people use to "ride it all the way down" with a stock.   But I have qualms about the "Oracle of Omaha" for a number of reasons.

First of all, he is getting old and will die some day, and no apparent successor is in the wings.  There was one, but he got bounced.   And when Buffet dies, well, the stock will take a nose-dive until the succession thing settles.  He could die tomorrow, for all we know.  It may rebound, of course, but be prepared for a bumpy ride.

Second, was a piece in the news that Buffet is investing in troubled Canadian mortgage company.  If you've been astute, you've heard the rumblings about how the Canadian real estate market is getting overheated and the denials from everyone that it is a bubble.   Having been down this road before, one sure sign of a bubble is articles (usually from Real Estate agents) saying it isn't a bubble.

People also like to say, "Well, if it is a bubble, why doesn't it burst?"   Bubbles are elastic, and they tend to overshoot a market due to hysteresis.  Hence they are bubbles.  If housing prices tracked reality in real-time, there were never, ever be bubbles - nor in the stock market.   People get ahead of themselves.

I got out of the Real Estate business in the USA in 2005.  The bubble didn't burst until 2008.   My timing was off, but better two years early than two years too late.    What kept the bubble going was funnier and funnier loans, culminating in the "payment optional" buydown ARM liar's loans that went toxic in a matter of months.   The low payments made the houses "affordable" but the terms of the loan insured eventual default.

Time will tell whether this company Buffet is investing in is the next Countrywide.  You remember Countrywide.  Bank of America thought it was "smart" to buy that troubled mortgage company (are there any other kind besides troubled?).   It blew up in their face and nearly bankrupted BoA.  It also gave them a black eye as people blamed the bank for the shitty loans than Countrywide made.   If anything, Bank of America was another victim in this scenario - being sold a bill of goods like the rest of us.

Funny thing is, the financial press is silent on why this Canadian company is "troubled: because they misreported some issues about mortgage fraud.    I have written about this before, and most people don't get it, so I wrote about it again.  It is not fraud against the borrower, but against the bank.   So $2 Billion in bad loans are made, the criminals paid by the loans (sellers of homes with padded prices) take the money and run.  The bank is stuck with a home worth less than half the value of the loan.  This to me is another sure sign of a bubble-in-the making.  It is Ft. Lauderdale, 2008 all over again.

By the way, the complexities of mortgage fraud and people's unwillingness to learn about it and unwillingness to even understand it when explained to them is why I say never invest in something you don't understand.   And we don't understand much in this world, as the press reports things at an 8th grade level, if that.   Details are deemed "boring" and "messy" and will turn off readers and viewers.   You still sure you want to get your info from the financial press?

But the third reason is profit-taking.   It is OK if you've made a lot of money in something to sell it.   When I made a staggering sum (for my investment) in AVIS, I quickly sold half of it.  And indeed, over time, the stock has dropped somewhat (from a high of a 7000% gain to "only" 2400% today).   When my friend's bank stock doubled in value - I sold half of it.   And when it doubled in value again - and again, and again, each time I sold half.

Should I have kept that stock and earned even more profits?  Well, if I had a time machine, I could go back and do that.   But the time machine conundrum again - using backward-looking statistics to invest is a really shitty idea.  Coulda, woulda, shoulda is a horrible way to invest.  "I could have made a lot of money if I had held on!  Next time I'm keeping that stock!"

But next time, the stock tanks.  History doesn't repeat itself - exactly, anyway.

This leads to the fourth reason - diversifying.   If I sell half this stock, I can invest in something else.   By doing so, I end up with a portfolio of different stocks over time.  And in fact, this account started with about four or five stocks and and has expanded to about 30 or so.   I used dividends to invest in different stocks (or bonds) over time, or I take profits and use the money to invest in different stocks (or bonds) over time.  I am less dependent on any one stock or bond or other investment going South as a result.

Security is more important than wild profits, particularly as you get older and older.   As a 20-something maybe I could afford to hold on to this stock and see where it goes.  As someone who is pushing 60, I need the money to live on, not gamble on.   So I take profits, invest in other things, and slowly over time move money into safer and safer harbors.

This insures that my retirement is secure and I won't run out of money.

Of course, if I was a stockbroker and gambling with someone else's money that would be a different story!

Manipulated Markets

One problem for the small investor is that big investors can manipulate markets and screw you.

A reader writes in response to a previous posting that many believe the collapse of the "urethra" crypto-currency market was the result of manipulation.   Of course, you invest in something called "urethra" you should expect to be pissed on, right?

The problem is, as I noted in that posting, that as a new currency that is not widely traded, it is easier to manipulate the price.   A sudden large sale depresses prices and you could then go in and snap up the stuff for far less than market value, since other holders sales (which are borrowed shares) are triggered by automated sell orders.   And as for your million-dollar sale, you don't have to worry, as you are buying your own crypto-currency back at the lower price.   You lose nothing.  At least in theory.

Manipulating markets isn't easy to do, even if you are mega-rich.  The Hunt Brothers tried this back in the 1970's with silver - trying to corner the market and drive up prices.  They drove up prices for a while, but then it all collapsed and they went bankrupt and no one felt sorry for them.  And other people have tried this with stocks, copper, and other commodities and investments - and in many cases, also lost their shirts.

The problem is, not only do these people lose their shirts, many small investors lose their shirts as well.   Since the market values are manipulated, unless you buy before they try to corner the market, and sell before it collapses (you need a time machine, once again) you risk losing a lot of money.   And typically what the clueless small investor does is buy after the financial media reports the price is going up when it is too late to get on the bandwagon.  They hang on until after it collapses and lose everything - or at least a lot.

Like Homer Simpson in the video above, you don't want to be holding pumpkin futures on November 1st.   But most of us are like Homer Simpson - we don't really understand the markets or why something is going up in value or down.   We hear about people who make money in the market, but no one talks about their losses.  Heard anyone admit to buying gold at $1800 an ounce?  Someone did.  It is like gamblers - they remember the big wins, but forget all those small (or not-so-small) losses.

Rather than trying to ride these waves of speculation a more sure thing is to invest in a company that actually does things - creates wealth - and makes a profit and pays dividends and then use time to make money for you.   Speculating on a company that is showing little or no profit on the premise that someday it might is just gambling.   Speculating on minerals or other commodities on the premise that the price might go up just because it you think it should is just gambling as well.

Dividend stocks overall tend to do better than non-dividend stocks.  One earns income, the other is often mere speculation.

Time has shown that dividend stocks tend to out-perform speculative stocks as a whole - which is not to say that just any old stock that pays a dividend is a good investment - you still have to crank the numbers.  And there other things to invest in besides stocks - bonds, government bonds, real estate, whatever.   The idea that you can "time the market" or get a "hot tip" and make it big is an illusion - usually an illusion fueled by people who want to take your money away from you.

The guy promoting the stock on the television or in the financial pages already bought his shares.   Once you buy, and drive the price up, he sells.   And apparently, this is perfectly legal, provided he doesn't lie about the company.  He's just sharing what he thinks is a good investment, right?  Caveat Emptor.

But this effect of cornering the market also illustrates why you don't want to be a minority investor in a thinly traded stock.   Say, for example, you buy stock in a company where 51% of the stock is owned by family members of the founder, or investment bankers, while only a small minority is owned by chumps like you.   They can control the company and make decisions - and manipulate the price of the stock as well.

Small family-owned companies are the worst, as they will pad the payroll with their relatives and take money out of the company and leave you with nothing.   Oh, yea, they have a fiduciary duty and all, but all that leaves you with is the right to sue.

IPO stocks are not much better.  Many of these famous dot-com IPOs of recent years sold off only 5-10% of the company.  Some even were so ballsy as to limit voting rights of IPO shareholders.   You are feasting on the crumbs at the table here, while the founders gorge themselves on roast beef.

"But Bob!" people say, "All those other people are getting rich!  I want to get rich too!"   But you won't get rich playing their game.   They make money selling this crap to chumpsters like you and me.   And they hype, in the financial pages, just enough stories about Johnny Lunchbucket striking it rich to get you to think, "Gee, that could be me!"

Casinos use the same strategy.   So do personal injury law firms.   So do a lot of rip-offs in the world.  Ever seen a billboard for a payday loan place, with the lady with the fan of $20 bills?   This, too, could be you!   No one talks about or advertises the down side.

Gambling is not Investing.   If you want to "Strike it rich!" then good luck.   But this blog is not for you.   Because that kind of mentality is the exact opposite of what I believe in.

And no, I'm not about to change my mind.

The Secret to Investing is.... No Secret.

Succeeding as a small investor means only that you should avoid swimming with the sharks.

Lots of people want to believe in the tooth fairy.  They desperately want to believe in something-for-nothing or easy riches and wealth.   After all, they read about "rich people" in the paper all the time, and surely they didn't work to get wealthy, right?  Movies reinforce this mentality - that in order to succeed in life, you have to cheat or do something underhanded.   And sadly, this mentality takes hold in American's minds.

And hucksters galore will sell you "the money system" or a seminar or something, because the rubes think there is a "secret" to wealth and that you can buy this secret.   But they never bother to figure out that if there was such a secret, no one would tell it to you or sell it to you, because, well, then it ain't a secret.

But there is no secret.   Yea, some people get lucky and make millions or billions.  Some work hard and get lucky and make millions or billions.  Most people who are "wealthy" worked hard, saved money, invested it in rational things, and did well over time.   Little people who get crushed by our financial system are the ones that gamble - literally in casinos, or figuratively in sketchy "investments."

The "secret" to getting ahead is not really a secret.  Spend less, save more.  Invest in rational, normal things.  Stay away from futures trading, commodities trading, stocks, IPOs, or any other huckster-type deal that is promoted on the Tee-Vee or worse yet, the Internet.   Diversify your portfolio so if one investment goes bad (and more than one will!) you are not wiped out financially. 

This is simple, basic advice that all the rational actors in the marketplace give free of charge.  Most folks take it - those folks you think of as "rich" follow this advice.   Others don't and get fleeced.

In this special report from Reuters, they mention offhand, the experience of this one farmer:
In three years of managing investments for North Dakota farmer Richard Haus, Long Island stock broker Mike McMahon and his colleagues charged their client $267,567 in fees and interest - while losing him $261,441 on the trades, Haus said.
McMahon and others at National Securities Corporation, for instance, bought or sold between 200 and 900 shares of Apple stock for Haus nine times in about a year - racking up $27,000 in fees, according to a 2015 complaint Haus filed with the Financial Industry Regulatory Authority (FINRA). 
Haus alerted the regulator to what he called improper “churning” of his account to harvest excessive fees. But the allegation could hardly have come as a surprise to FINRA, the industry’s self-regulating body, which is charged by Congress with protecting investors from unscrupulous brokers.
The story was about unscrupulous brokers.   But they don't bother to go into too much detail as to why a farmer from the mid-west is losing a half-million dollars in trading fees and churning.   That's more money that most Americans hope to save up for their entire lives.   The answer is, of course, that the "brokerage" likely cold-called this guy and told him they could make him tons of money.   And he didn't bother to investigate this too much or think to himself, "Gee, if these guys can make lots of money investing, why don't they invest their own money?  Why are they calling me?"

And they were calling him because they likely can't make a lot of money investing, but rather they make a lot of money churning other people's accounts.   And shitty deals like this abound in our free-market economy.   People tout gold bars on Fox News (I saw it in a bar last night - sound off, thank God).   People push and IPO stocks on the financial channels.   The shouting guy is still on the air even though he has been repeatedly exposed as a charlatan.

And yet, every day, another small-time "investor" jumps into the deep end of the shark tank and ends up as chum.   Why?  Because they don't know where to invest their money, so they look around and think about what could be the next big thing.   They want to "win" at all costs - in a game where they don't even know the rules.

And I say this from experience, as when I was younger, I thought, "Yea, I want to make big money in the stock market!" and proceeded to lose my shirt.   It was only a few thousand dollars, but it was an expensive tuition for a lesson well-learned.   I stopped looking for "the next big thing!" or the "big stock tip!" and started thinking about more prosaic, steady investments that earned profits and paid dividends, and over time went up in value almost uniformly.

You see, as small investors, we'd like to "win" of course, but we can't afford to lose.   Maybe a Billionaire venture capitalists can afford to throw a few million or hundred million at some "start up" company and hope to hit it big.   They don't have to worry about retiring on catfood.   We do.   We cannot afford to "lose it all" and start over.

Have I taken some big risks that paid off?   Yes, but in small amounts.   $750 invested in Avis on a whim went up several thousand percent.   If I had invested my entire portfolio, I would be a multi-millionaire.   I could not afford to invest my entire portfolio in a company that could have just as likely gone bankrupt.   I invested in a bank started by some friends.   That more than quintupled in value.  I did not invest much - not more than I could afford to lose.

I also did dumb things like buy GM stock before it went bankrupt, or Martha Stewart, thinking a cookbook and television show was a "media empire".   It was not.

I also learned that trying to time the market was nearly impossible.   Unless you have your hand on the pulse of something, it is very damn hard, using the same data everyone else is getting to understand whether a stock is going to go up or down.   Taking someone else's advice in this, is even worse.  I got out of Real Estate in time, only because I was immersed in that market and saw that it was going crazy.   People who didn't understand real estate kept buying, right up to the very end. 

Never invest in things you don't understand.  And when someone tries to sell you an investment and you are skeptical and don't "get it" maybe you should back away.  When the person trying to sell you such a turd condescendingly tells you that you just don't appreciate how it works, run away.

You are going to make money on some investments and lose money on others.   Overall, after 30-40 years, you will do OK.   If you try to "hit the jackpot" you likely will lose everything you've worked for.   You might as well just go to the casino and gamble - at least they give you free drinks there. 

Stay in the shallow end.  The water is just fine.

Why Commodities Are Not An "Investment"

Gold has shot up in value fairly recently, after being stagnant for two decades.

A reader asks if commodities are a good long-term investment.  I think you need to look at the track record of commodities and understand what they are to figure this out.

For example, while the media hyped the snot out of gold after it went up in value, no one talked about it between 1982 and 2002 (20 years!!) when it stayed flat in value (see chart above) and if you adjust for inflation, lost value.   And I suspect gold might do this again, remaining around $1000 an ounce for many years to come.   But that's just my guess.   And guessing isn't the same as investing.

Sure, you can show huge "gains" with any commodity over time, and you can also show huge losses, depending on your start and end-points.   But overall, over time, commodities don't outperform equities, as even recent history shows.

As I noted in other postings, gold is no different than other metals, minerals, or commodities.   Gold-bugs chant "gold is different!" but it is no different than aluminum, zinc, or even ordinary dirt.   It is a commodity, plain and simple, whose "value" fluctuates based on supply and demand.   Commodities don't earn income but merely vary in price over time, upward or downward.

This is not investing, it is gambling.   You might as well buy Elvis Collector Plates - they are a commodity as well.

So why do people trade commodities?   Well the key word is trade.   People don't buy-and-hold physical objects hoping they make money over long periods of time.   They usually don't.   Whether it is collector cars or antiques or whatever, in most cases, these things rarely appreciate much faster than the rate of inflation.  Most people lose their shirts.

Like Bitcoin or indeed any currency, people often buy gold as a means of parking money or exchanging money (indeed the definition of currency).   But hanging on to it makes no sense at all, any more than hoarding dollar bills would make sense.

Investing means putting money to work at an enterprise where the money is invested and used to create wealth.   A factory is built, people are hired, raw materials are bought.  Manufactured goods are made, and they are worth more than the sum of the parts.   Profits are earned, dividends are paid.   It need not be a factory, it could be some other enterprise, a loan, a bond, or whatever.   The point is, the money earns money - it makes money.   Commodities just sit there earning nothing, their value changing only due to their perceived scarcity.

I used the example of aluminum before.   Before new processes were discovered to make aluminum cheaply, it was one of the most valuable metals on earth - far more valuable than platinum and gold.   Overnight, it became nearly worthless in comparison.  Indeed, we throw away aluminum cans by the side of the road today.   If you could travel back in time to 1850 with a six-pack of lite beer, you'd be a millionaire.   Or at least very rich, anyway.

Oil is another example, and right now we are seeing how its value has fluctuated just in a few short years.   I was told at GMI that by 2000 or so we'd run out of oil and it was scarce.  Then the Canadians started tar sands.  We started fracking.   Suddenly, the world is in an oil glut.   That is the nature of commodities - subject to the whims of supply and demand, in this case, a glut of supply.

Or take demand.  Another "virtual currency" crashed last night as someone tried to sell off a huge chunk of it on an "exchange".   Since the number of people wanting to buy the currency is limited, the price started to drop off as this huge sale went through.   And that can occur in a lot of markets - including stock.   Again, we like to say that Bill Gates is a "Billionaire" based on his Microsoft stock shares, multiplied by the current share price.   But what do you think would happen to the share price if this morning, he put it all up for sale at once?   This is why "market cap" is bullshit.

Anyway, eventually, demand caught up with supply and this "virtual currency" recovered somewhat.  But it illustrates how volatile commodities can be.   Whether it is gold, oil, bitcoin, pork bellies, soybean futures or whatever, prices can change dramatically.   And this makes "investing" in this stuff little more than gambling, for the ordinary middle-class investor.   Yes, a lot of people get rich buying and selling commodities, you are not going to be one of them.   Rather, you will be the one who loses his money so the smart guy makes money.   The way to get ahead in the world is not to try to out-smart the smart people, but to simply not play their game.

So why do people buy and sell commodities?   Well, as noted before, it can be a way of parking money (in gold) during economic upheaval.   It can be a way of transferring money (Bitcoin) usually for illegal transactions.    And it can be a way of hedging risk.   A farmer grows a crop and hopes to make money.   But he is at the mercy of weather, insects, plant disease, drought, and fickle markets.   He might actually beat all the former but fail at the latter.  He has a bumper crop of corn, but then again so does everyone else - the market is saturated and prices plummet, to the point he is losing money on each bushel sold.

He can sell off his crop before it is even harvested as a commodities future and let some gambler bet on whether crop prices will go up or down in the interim.   The farmer gets an assured price, the gambler might clean up in the market later on.   It is a tricky business and you have to know these markets intimately - have studied and traded in them for years and years.

Which is why it is so suspicious that Hillary got into commodities, made $100,000 in three months, trading on the advice of a former executive for Tyson's foods (who was trying to settle an environmental claim with the Arkansas governor, her husband) and then got out of commodities trading and never went back.   The odds are..... well, long, to say the least.   Maybe that's why she lost the election, in part.  But I digress....

Commodities are not for amateurs.   The financial media hypes things that go up in value suddenly, and amateurs figure, "Hey, it must be poised to go up further!" and lose their shirt.

Succeeding as an amateur investor means understanding that you are an amateur.   You are a little girl with a floaty, swimming in a shark tank.   Stay in the shallow end or get eaten alive.   No, you might not "make out like a bandit" but you can prosper and do well - and not end up broke, bitter, and depressed.    Small-time investors who think they can "strike it rich" are the types who end up living in a van and then railing against society.

Wednesday, June 21, 2017

New Technologies, New Crimes

Will new technologies help deter crime, or will criminals just find new ways to commit crimes?

A reader writes opining that perhaps new technologies, such as near-field, will cut down on shoplifting and reduce crime.   I am not so sure.  It seems each new technology might cut down on one particular kind of crime but often creates terrifying new kinds of crime that are even harder to suppress.

I wrote before about my debit card being stolen.  It was a fascinating trip down the rabbit-hole as I learned how a complex con was being put on, with my debit card being one cog in a giant wheel of deception.   And it involved the Internet, Western Union wire transfers, VoIP phone lines, and pre-paid debit cards - three of those technologies being relatively recent in nature.   The con, run out of Russia, would not have been possible in earlier days, as the criminals would have no way of reaching their victims.

The Internet, of course, has created whole new kinds of crimes - legions of them.  Everything from the basic Nigeran scam (which dates back to the days of fax machines and even letters), to Craigslist scams, to reputation blackmail, keylogging scams (to steal banking information) to ransomware, to - well whatever they've thought up this week in Russia or China, or Nigeria or wherever.   The Internet has created whole new classes of crimes that are nearly impossible to police.

Or take a simple technology like steering column locks.   In the 1960's car thefts were legion, and Congress passed legislation mandating steering column locks (something that was on the Model-A Ford!) to reduce theft and thus reduce insurance costs, which were getting out of hand.   Of course, thieves found ways around this (a simple dent-puller could remove the lock cylinder and you could start the car with a screwdriver).   So car alarms were next, and thieves found out how to disable those, or just ignored them, as people simply didn't pay attention to sirens going off in the big city.   Car disablement devices (common on BMWs) or "immobilizers" were next.  Thieves would just flat-bed the car away.

Of course, the easiest way around all of these theft-prevention devices is to simply carjack.   Put a gun in the owner's face and demand he get out of the car.   You drive away with the keys.   Of course, with car titles, it is harder to register and use such a car - or sell it.   But some thieves found that even VIN numbers could be swapped with an identical wrecked car bought at auction, as illustrated in the prologue of the 1970's movie, gone in 60 seconds.

Many thieves found that with expensive cars, it was more profitable to just "chop" them and sell the parts - and they parts were harder to trace.  Car makers put VIN numbers on fenders and doors and even window glass.   It made no difference - people would simply remove the stickers or grind off the numbers.   It is like a game of chess, one side makes a move, and the other a counter-move.

And yes, car theft is way down today.   But still people steal cars and drive them to Mexico to sell, and kids still joy-ride if they can either find and older car with an easier to defeat ignition.   Or they carjack.

And sometimes technology enables crime.   We were supposed to get a new air traffic control system decades ago.  Our existing system relies on radar to track planes, with each plane providing a "transponder" which broadcasts its identification and altitude in response to being hit by the radar beam.   A proposed new system, ADS-B would rely on GPS, with each plan broadcasting its position as well as altitude, speed, and other data.   It seemed like a good deal until 9/11.

After that, well, someone pointed out that it would not be hard to "spoof" the system by altering the ADS-B system on a plane so that it reported a different location, altitude, speed, or identification.   The system might not realize a plane was off-course until something very bad happened.   Changes have been made to provide redundancy and perhaps ADS-B will become a reality in the near future.  The point is, you have to think like a criminal - or a terrorist - to find the holes in new technology and find new opportunities for crime.

Even something as stupid as a $10 laser-pointer can be used to try to blind a pilot and down an aircraft.   Our massive Interstate highway system is a modern marvel of transportation, until a 14-year-old decides to drop bricks off the overpass and kills some Mother on her way home from work.   New technologies, new terrors.  And it has been going on for some time now.  Bonnie and Clyde wouldn't have succeeded as long as they did without the Ford Model A and the flathead V-8.  He even wrote a letter to Henry Ford, praising the car for its getaway uses.

In the UK they have cameras everywhere which helps them fight crime, or at least catch people once the crime has been committed.   We don't have so many of these in the US because of "privacy concerns" - apparently what street you walk down is a state secret here.   But terrorists are not deterred by police cameras - they only provide the horrific documentation of a terrorist attack, which actually helps their cause, as people are terrorized by such after-the-fact videos.   Suicide bombers are not worried about being "caught" unless it is before they can carry out their crimes.

The RFID and near-field technologies would seem to help deter shoplifting and crime.   The clever "stealth" shoplifter who conceals items on his clothing and slips out of a store - only to return the merchandise for cash or store credit, is having a harder time as I discussed.  Store cameras catch him in the act, and store security can tap him on the shoulder and detain him.

But that doesn't stop the "brute force" attack.   People grab armloads of goods and simply run out of the store.   Store security doesn't chase the thieves as if the thief knocks down a customer the customer will sue the store for injuries.  Or even the thief will sue.  So the "smash and grab" technique has become very popular with shoplifters.  Stealth and deception are out, brute force is in.   And all this high-tech doesn't deter brute force.

And I think some of this "tech" could backfire in a big way.   For example, some cell phones rely on your finger print to activate.   If someone steals your cell phone, they can't use it without your finger.   Of course, some thieves might just decide to cut off your finger or hold a gun to your head and force you to unlock the phone.   The same is true for ATMs.   Again, all the high-tech in the world might deter the pickpocket who uses stealth, but not the criminal who puts a gun in your face.

And of course, many if not most crimes are not for profit but crimes of passion.   Technology might help us catch such criminals, but not stop such crimes.  Someone shoots their spouse or lover or rival or foe, and there isn't much you can do to stop this.  You can only clean up after the fact, collect evidence, take witness statements and try to find the perpetrator.   Usually its the guy standing over the body with the gun.

Self-driving cars might put an end to speeders, reckless drivers, texters, drunk drivers, as well as reduce the number of accidents.   But again, thieves and terrorists will figure out new ways to spoof technology to create crimes or horror.   A terrorist could fill a self-driving car with explosives (or plant them under the hood) and set it off to a crowded destination.   Suicide bombers without the suicide.   And if you programmed 10 or 20 or 100 to go off around the same time.....

So how do you fix that?  Put cameras in the cars?  Motion detectors?   Would people stand for that?   Surely someone is thinking about these things.

A self-driving car could be used as a getaway vehicle, I suppose, but computers would have to be programmed to track the paths of cars (again, privacy concerns).   A bank-robber gets into a self-driving car and speeds away.  No one gets the license number.   How do you track it?  Under today's laws, you'd have to go to a judge and get a search warrant for Uber's data files, hire five programmers to go through it and find out where the car went.   By then the crooks are long gone.   And if they changed cars several times en route, well that could complicate things.

This isn't hard to do.

What about drones?  Couldn't the police use them to deter crime?  Sure they can.  And criminals and terrorists can use them to cause crime.   Drone-mounted guns are already a thing, and could be used to rob or murder someone by remote control.  How can you outrun an armed drone?  You can't.  You just hand over your wallet, perhaps to a second drone and hope for the best.  Terrorists are already dropping bombs via drones.   People are dropping drugs and other contraband into prisons via drone.  This new technology may create more crimes than it deters.

If technology is to deter crime it is in providing a better standard of living for everyone.   Crime decreases when people are better-off, which is one reason crime has dropped so dramatically since the 1970's in America.   But this also means we have to look at new technologies and think to ourselves, what would an evil person do with this?   And then figure out ways to prevent such technology from being used for evil purposes.

I am not encouraged.   The Internet today is used as a recruitment tool for ISIS and other terrorist groups.   For some reason, we are unable to police ISIS videos on the Internet, although we seem to be able to shut down other illegal activities such as copyright infringement, drug sales, and child porn.  I am not sure why a beheading video is protected "free speech" at all.   Maybe we are taking our "rights" a little too far.

And therein lies the rub.  Technology creates all sorts of human problems and the easiest way to curb these abuses is to limit our freedoms - our right to privacy being the first casualty, our right to free speech being the second.   That in turn ties our hands, as people get up in arms about "surveillance" as the NSA tries to track terrorists and other types of criminals.   To some extent, these concerns are valid, in other cases, less so.   To hear some people tell it, people have a right to commit crimes, provided they are not caught.   I'm not so sure I'd go along with that one.

How Point-Of-Sale Has Changed And Is Changing.

Automation is going to take away even more jobs at your local grocery store.
But not all of them.

Checkout procedures at grocery stores have changed dramatically since I was a kid.   Back in the 1960's and 1970's, young men and women, sometimes high school kids, would work at grocery stores "pricing" items.   A tape gun with pricing labels would be used to attach a price sticker to every item in the store, which was a tedious task.  And if one item was missing a sticker, the store had to do a "price check" and have some other clerk run back and see how much the item cost, so it could be rung up. ("Price Check" is phrase you'll never hear at Dollar Tree!).

It was a primitive system, with little in the way of controls.   You could only guess at how much product you sold, based on what you ordered and what your inventory was like after the fact.   How much you lost to shrinkage (theft) was anyone's guess.   You bought stuff, priced it, sold it, and hoped that there was more money in the till at the end of the day than what you paid for product, rent, labor, and utilities.  The customer's receipt was just a list of numbers and maybe category indications (grocery, produce, meats, frozen, etc.).

In the 1970's, they started putting little slices on the stickers, as shoppers realized they could peel off a sticker that said "$1.99" and put it on a product that cost $3.99 and then check out.   The new stickers would fall apart if you tried to peel them off.   This was high-tech retailing, circa 1975!

All that changed dramatically with the Universal Product Code or UPC with its numbers and bar codes.   Items didn't need to be "priced" but instead a label could be placed on the shelf telling shoppers what items cost.   A bar-code scanner at the register would then ring up the purchase, providing a detailed receipt of what was purchased, and also deduct the item from the store inventory on the computer.  The system could even be programmed to reorder items automatically, as they were purchased.   Now you could know, with precision, what you ordered, what was sold, and how much was being stolen.

It took a while for stores to buy the new registers with the laser scanners, as well as time for food producers to put UPC codes on their products.   For a long while, many grocers had to create their own UPC codes (and some niche retailers still do) for un-coded products, and manually place stickers on items, still.   The technology was around for a long time before enough installed base and customer acceptance occurred and it truly became a "universal" product code.

Of course, many people freaked out when price stickers went away.  How would you know how much something cost?   Some were outraged, but over time, people got used to it.  There was some bruhaha initially when some stores changed prices in the computers during business hours.   You would pickup a can of peas for 69 cents and by the time you got to the register, it was 79 cents.   Laws in some States put an end to this practice - today, prices are usually only changed overnight when the store is closed.

The new system stayed pretty static for a number of years.   But over time, retailers started exploring new ways of checking out.   And again, you may be reading about this stuff today and thinking it is all "high tech" stuff, but I was writing Patents on this crap literally decades ago.   The technology has been around a long, long time, but getting social acceptance and an installed base are keys to implementing such technology.  And sadly for inventors, often the Patents have long expired by the time some types of technology become commonplace.

UPC codes had other uses as well.  For example, you may see these "coupon printers" at the checkout, usually from Catalina Marketing - although they are pretty old-tech these days and falling out of favor.   Using the UPC data, the coupon printer could generate coupons tailored to the customer's shopping habits.  You buy cat food and the machine cranks out a coupon for cat litter.   Buy baby formula, it cranks out a coupon for diapers.   Hey, they know you'll need one, if you bought the other, right?  Shits got to go somewhere. 

Self-checkout was the next thing to come down the pike.   And again, many people resisted this and some still do.  I know people who vehemently refuse to use self-checkout, even if they have only three items and there is a line at the regular register.   They will wait 20 minutes in line at a register rather than use self-checkout.  These are the same people who can't be bothered to come to a full stop at a stop sign, because they're "in a hurry."    Of course, while they wait in line, they line-hump.  People are very selective about what they are in a hurry about, it seems.

Self-checkout doesn't eliminate the cashier, of course, but allows one cashier to monitor four to eight self-checkout kiosks, which reduces labor cost by a factor of four to eight (most stores have self-checkouts in pods of four, Wal-Mart is more aggressive, and usually has six to eight).   Between bar coding and self-checkout, retail stores have eliminated a lot of labor from their overhead.   They still need people to stock shelves and help customers (customer service, of course becoming scarcer and scarcer) and they still need someone to monitor the self-checkout stands.  And they need security to monitor shoplifting, although lately this is a dicey proposition as shoplifters have "rights" and shopkeepers have none - other than the right to be sued for detaining a shoplifter.

Scan-and-go was another idea from many years back that is starting to hit the stores.  Sam's club has an app for it.  I'm sure other stores do as well - or will.   Again, the roadblock to implementation wasn't the technological side, but the social.   Once smart phone implementation was near 100%, it was possible to enable these types of technologies.    Before then, not so easy.

The technology isn't difficult.  You use the "app" to scan the bar codes on items you buy as you put them in your basket.   When you leave the store, you just walk out and put the items in your car.  Your credit card or other payment option is debited by the amount you bought.   Like self-checkout, it is somewhat based on the honor system (although self-checkout scales tend to keep pilfering to a minimum).   But again, you have someone at the door who checks your purchases as you leave (as they do at most wholesale clubs) and you have store security keeping an eye on you as well - with numerous cameras throughout the store - welcome to 1984!

One problem with this model of scanning is that it is all-too-easy for shoppers to innocently "forget" to scan an item, and thus end up as unwitting thieves.   And I am sure that more than one shopper has forgotten this way, and if they are caught, made to look like shoplifters, when they did not intend to steal.  This could limit acceptance and implementation of this technology.

Enter RFID and "Near-field" communications, which are related technologies.   Again, a decade ago, my inbox was filled with this stuff - people wanting to use "near field" in retail checkout.  The technology isn't all that new - RFID (Radio Frequency Identification) chips have been around for decades.  Those metal loops at the exit of the store generate radio waves which are picked up by small antennas in these little chips.  They read a code on the chip and rebroadcast it to the antennas.  If you didn't "deactivate" (reprogram) the chip when you bought the item, an alarm will sound and you will hear that voice say, "Please return to the checkout area!" which is embarrassing.

I had a pair of sandals once that had these chips embedded in the soles.   Every time I went to Home Depot, the system would accuse me of being a shoplifter, until a helpful clerk "scanned" my shoes and deactivated the RFID chips!

RFID also allows retailers to assign a serial number to individual items.  So unlike bar codes, not only do you know what the item is and its price, but which of the ten items you have in stock it is.   I saw a young lady try to return an expensive faucet (without receipt) at Lowe's one day - many years ago - and the manager told her, "I can't take this back as our computer shows it is still in inventory!" - what he was saying was that the item was in fact, shoplifted.  He let her leave the store with the $200 faucet, but without $200 in cash.  As he put it, "It isn't worth it to prosecute, but when people realize they can't get cash for these shoplifted items, they stop shoplifting, at least here, anyway."

So this technology has been around for decades.   But only more recent smart phones have the ability to use this RFID or "near field" communications technology.  Supposedly my Galaxy 4 has some beta version of it, but I suspect I would have to buy a newer phone to use near-field apps.  Not only can this technology read RFID chips, but it can communicate with Point of Sale (POS) terminals to process credit or debit card transactions or other forms of payment.

Amazon has such an app, called Amazon Go.   And people think Amazon invented near-field or something as a result.  This technology is even better than the scan-and-go from SAMs club as it used the near-field data to automatically scan what you put in your cart.   Early Patents on this idea that I've seen had special carts with antenna and receivers, as back then, no one had smart phones much less smart phones with near field on them.   The idea never took off as the shopping carts were expensive and people could spoof them by damaging the antenna, and of course, people steal shopping carts, and if you have $200 in electronics on each cart, well that gets expensive.  Plus, you'd have to regularly recharge batteries on each cart, which would be cumbersome.

By the way, what happens when the battery on your smart phone dies in the middle of a shopping trip?   Just asking.  I'm sure it will happen - and be awkward.   It is like an incident a friend of mine reported - he was glad his flight was delayed as his iPhone battery went dead and his boarding pass was on his iPhone.   He was able to recharge the phone by the time the plane arrived and all worked out well.   For others, maybe not so well.   First-world problems!

Again, the idea has been around for a decade or longer, it just took the installed base of near-field phones to come along to make it practical.  And along the way, a number of Patents have been issued on these various technologies.   A lot of people don't understand how Patents work and think that, for example, "Apple has the Patent on the iPhone!" when in fact there are hundreds, if not thousands of Patents on various components and arrangement of components, and even things well-embedded into software, firmware, or hardware that are so subtle that you might not even be aware they exist.

So I am sure Amazon has a few Patents on near-field - as do a number of other people.  Whether any one player in the marketplace can lay claim to owning this concept remains to be seen.   What usually happens is that one or two players try to make this claim and end up in court and no one really wins.  It does keep the smaller competitors out of the game, of course.   And of course, a patent troll will file a claim against the winners in the marketplace, hoping to score a quick victory and run off with a few million dollars - as someone did with bar codes.

Will the checkout-less store be the wave of the future?  Perhaps, and in the very near future.  Amazon Go is only open in one store, as a Beta test at the present time, and only Amazon employees can use it.  Like Amazon's vaunted "drone delivery" it is more press-release than reality.  So apparently it is not ready for prime-time as the Sam's Club scan-and-go app already is.   And I suspect there will be teething troubles with both applications, as well as those from other parties.   Like I said, near-field is the buzzword today, or more precisely was the buzzword about five years ago.  Blockchain is the buzzword today - eat your media kibble and stop complaining.

Near-field will also be able to do weird, creepy things that, like bar codes and the demise of pricing labels, will alarm many people.  If you walk by a retail display, your phone may read the near-field code of an item, and based on some complex algorithm, vibrate your phone and display a virtual coupon or some other incentive.   So for example, the company "knows" you buy brand X toilet paper, but when you walk by brand Y, a coupon for it will appear on your phone.  Brand Y, of course, pays the grocer to do this, hoping for a "conquest" sale.

And of course, this means that moreso than even today, computers will keep track of everything you buy or even everything you look at, pick up, examine and even put back.   The phone can keep track of where you pause in the aisle.  Cameras can track your eye movements.  It starts to get a little Big Brother in a real hurry, which alarms a lot of people.

But of course, this presumes that "brick and mortar" retail will continue to thrive for years to come.   Some prognosticators are bloviating that "Amazon is putting traditional retailers out of business," even as Amazon represents about 1/4 of the sales of Wal-Mart.   Sears isn't going bankrupt because of Amazon.  The main reason is Wal-Mart, which is driving a lot of retailers under.   And no one weeps for the demise of overheated malls with overpriced stores and harassing "mall rats" either.

I am skeptical that "shopping" will die off entirely.  As one analyst put it, the death of malls may "de-gentrify" retailing, opening up opportunities for niche retailers and mom-and-pop stores.  On our little island here, we have a small shopping district that sells resort wear and other notions.   People still like to go into stores and "shop" for things like clothes and souvenir t-shirts.   And if you are in the need of a beach umbrella and suntan lotion, you can't wait for Amazon Prime to deliver it to you by UPS.  And no, drones are not going to bring these things to you at the beach.  That's a nice fantasy and nice ad copy (e.g., clickbait articles), but it doesn't represent a practical and economical way of delivering things.  Bear in mind most of these drones have ranges measured in feet and minutes, not miles and hours.

And people will still want to buy food in-person, even as home delivery grocery "apps" have flourished.  A friend of mine in Northern Virginia reports their neighbors have some sort of food delivery through Amazon or Whole Foods (Peapod was another such endeavor).  They are, of course, the kind of people who never leave the house and have their curtains closed all the time.   I am not sure that agoraphobics are a large enough market to sustain this business model, as others have noted.

People still like to thump cantelopes and be exposed to different products in a store.   It is hard to "shop" online unless you know what you want ahead of time.   And if Google-type algorithms are used to steer your shopping habits, well, like with my knitting experiment, once you click on "pork rinds" you will be lead to believe that that is all the store has in stock.

In short, things are changing, but also remaining the same.   The hyperbole in the financial media that a "sea change" is at hand and that fresh kale will be winging its way to your home via drone, are more than a little overstated.  What ever did happen to the Washington Post, anyway, and why did they go all Dan Rather on us (Democracy Dies In the Darkness!  Courage!).   According to the Post, the reason why the Democrats are losing elections is that they aren't liberal enough.   I have stopped reading the Post as it no longer makes any sense.  But I digress.

I guess the point is, once again, to ignore about half the things (or more) that you read in the press, particularly the financial press, as most of it is utter bullshit.   The Washington Post hypes Amazon because it is a trendy "tech" company and liberal-friendly.  They hype Whole Foods because that's where yuppie left-wing journalists buy their asparagus water.  They disparage Wal-Mart because it is run by anti-union Republicans who know how to make a profit in the traditional business of retailing.   It is all about heroes and villains, damning and shaming.  It isn't about reality and what is really happening in the world.

And that, to me, is kind of sad.

UPDATE:  A reader reminds me that Jeff Bozos the founder of Amazon also owns the Washington Post, a fact they usually mention in their articles.   Seems lately, his private newspaper is now a private megaphone for his business.   Sort of a Trumpy kind of thing to do.