I Am a Bad Gym Member

gymSo there were a few new faces at my gym this week. I seem to recall seeing the same thing about a year ago and about a year before that. If you go frequently enough, and particularly if you normally work out at the same time of day, you notice these things.

Although no Charles Atlas, I’m a creature of habit and as regular as rain when it comes to exercise. Other than when I’m traveling, I can count the number of days a year that I fail to show up on the fingers of one hand.

So why is such a loyal customer a bad gym member? Failure to wipe down the equipment? Loud grunting? Hogging the Stairmaster? No, no, and no – it’s precisely because I show up so frequently. I didn’t think much about this before my old gym started facing financial difficulties and finally went out of business. It had been there for 15 years with its main competitors being a fancier but much more expensive gym in town and a similarly-priced but less personal chain in a neighboring town.

During the last year that they were in business a handful of new competitors opened up nearby – a fancy spinning studio, an expensive interval training chain, a cult-like group workout/prison-style gym franchise, and finally my current gym, which is basically a newer, shinier copy of my old one.

Just based on what I could observe, my gym seemed at first to be plodding along despite all the new entrants. My view was limited, though, to two types of members:

  1. My fellow cheapskates who only paid for the “floor” and not the more lucrative group classes or personal training sessions; and
  2. Members who exercise almost every day.

People like me, it turns out, aren’t doing the owner any favors by showing up religiously. Gyms, you see, aren’t very cheap to run. They open early, close late, take up a lot of space and pay high bills for heat, electricity, hot water and janitorial services. Their machines are expensive (several thousand dollars for a new stair climber or elliptical) and break frequently. Even after they raised prices a couple of times, I was paying, by my rough calculation, about $1.03 per hour spent at the gym. How many people like me would a gym have to pack in per hour to cover its overhead? Probably a lot more than it can comfortably hold.

Therein lies the answer to how gyms can stay in business with such daunting economic factors working against them: All those people I’ve seen the last couple of weeks but probably won’t be seeing in a month or two. Author Dan Davies explains in “The Secret Life of Money” that 75% of gym memberships are taken out in January as people attempt to fulfill their New Year’s resolutions but that the vast majority only actually go a handful of times.

In addition to these nearly perfect customers, the other segment of my old gym’s clientele that kept them afloat were those who paid extra for premium services like zumba classes, personal training, or $5.00 protein shakes with an 80% profit margin. It seems, though, that many of the members willing to pay a premium were lured away by the new offerings in town. By last summer, a month or two before my gym said it would close, it offered a month of free spinning sessions for “floor members,” presumably in the hope that we’d step up our subscription. My wife and I went a few times and were shocked to see how few of the bikes were occupied. One time it was just the two of us.

So there you have it – I’m a bad gym member. I shudder to think how crowded the facility might be or how much they would have to charge if everyone were like me. Even if they leave dumbbells lying around or fail to wipe off the elliptical, I won’t complain about the new January people again.

(This post also appeared on LinkedIn and on Cacophonyandcheese.com)

Heads I Win Voted “Best Read” for Advisers

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I’m honored that my book was just listed as one of the best summer reads for advisers by Financial Planning. It’s on the list with some great books such as Michael Lewis’s The Undoing Project,” Daniel Kahneman’s “Thinking Fast and Slow,” and a book called “Great Expectations” by some British guy named Charles Dickens whose name rings a bell.

“There’s great stuff in here to share with clients, particularly when markets head south. Good behavior is handsomely rewarded for investors with long-term time horizons. I quote from it often.” – reviewer Stephanie Genkin.

This was a great one-year “bookiversary” gift. I’ll be speaking this fall at the FPA’s Financial Fitness Workshop in New York and at the annual meeting of the American Association of Individual Investors in Orlando for anyone who wants to see and hear me discuss the book’s lessons in person.

 

A Bookiversary Gift for You!

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Yesterday marked one year of authordom and I’m in the mood to celebrate. The screenshot above was taken exactly a year ago with my book sitting briefly on top of the business book charts on Amazon.

While the sales momentum has slowed down just a wee bit, the topic is as fresh as ever. If you haven’t read my book yet or if you have and would like to give an investor in your life a copy, here’s your chance. All you have to do is answer a question without peeking in the book. Send me the answer at spencerjakabauthor at gmail.com. I will give away three signed copies to three randomly-selected people who get it right. Ready?

Imagine that you and your sibling both receive a large inheritance with the condition that the money be held in trust for 30 years. Your friend is an experienced investor but you aren’t. Your benefactor allows your sibling to invest as he or she sees fit, though only in actively-managed mutual funds and making as many changes as desired, while you have to put the money into a low-cost index fund (60% stocks and 40% bonds, re-balanced annually).

At the end of the 30 years you will almost certainly have more money. According to a 30 year study of investor behavior that I cite in the book, how much more will you have if your sibling is typical?

A. 25% more

B. Twice as much

C. Seven times as much

D. 50 times as much

Good luck!

 

 

Come See Me in Nashville

Neon Lights of Lower Broadway, Nashville, TN

Music, hot chicken, Vanderbilt, my sister and her family, more hot chicken – I love coming to Nashville. My next visit and first-ever speaking engagement in town will be on February 9th at 6:30-8:00 in the evening at University School of Nashville. The $25 fee goes towards an excellent cause: the USN scholarship fund.

The title of my talk is “Beat the Odds and Become a Much Better Investor.” I’ll also be signing and selling copies (at my cost) of my book, Heads I Win Tails I Win: Why Smart Investors Fail and How to Tilt the Odds in Your Favor.

Sign up here.

 

Least Likely to Succeed

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(This excerpt originally appeared as a post on my LinkedIn feed).

Whoever first said that “life isn’t a popularity contest” probably needed to get out more, but he or she had one redeeming quality: being a good investor. My new book, Heads I Win, Tails I Win, shows that most of us are lousy.

Think back to your high school. If it was anything like mine, the student body voted to decide which of their classmates was cutest, best-dressed, funniest and most likely to succeed, among other categories. The last of those was often the easiest to guess: a kid who had it all figured out and was well on his or her way to an Ivy League university followed by medical school or some other solid, lucrative path.

There isn’t a vote for least likely to succeed. The point of these contests isn’t to hurt people’s feelings, even if they sometimes do. But if there were then the recipient would be equally obvious: that good-for-nothing stoner who was late for every class and barely graduated or didn’t at all.

Now imagine being able to buy a share in the future earnings of Mr. or Mrs. “Most Likely” and “Least Likely” as if they were a company. The market prices would be sky high for the former and a pittance for the latter, with good reason. Everyone else would fall somewhere in-between. That’s exactly how the stock market works, though the vote occurs every minute of the day.

Whether you rely on conventional wisdom or actual surveys such as “America’s Most Admired Companies,” picking out the corporate crème de la crème isn’t hard. But investing in them exclusively happens to be a bad idea. In fact, the least admired companies on such lists tend to outperform the best ones as measured by stock market performance.

Think back on the high and low achievers in your graduating class. Some of the bad eggs probably turned things around and, while they may not be fabulously wealthy, are doing fine. Meanwhile, some super-achievers never really lived up to expectations. Likewise, we pay too much of a premium for respectability in the corporate world. Once a company is a blue chip, it’s priced not only appropriately but at a premium. Translated into stock selection, going with less popular, less obvious choices is likely to be profitable. Finance professors Meir Statman and Deniz Anginer combed through several back issues of Fortune Magazine’s ranking of respectability and created a “most admired” and “least admired” portfolio. Shares of the latter outperformed the former by nearly two percentage points a year.

Favoring Wall Street’s redheaded stepchildren can be done systematically. One way is to buy companies that essentially are being dumped by larger corporations. Unable to sell them or unwilling to pay a big bill to Uncle Sam in the process of doing so, companies frequently “spin-off” subsidiaries to existing shareholders in a tax-free transaction. The thing is, though, professional investors act strangely when these brand new companies land in their portfolios. Suddenly a fund that owned, say, a large bank, also has the same exact stake in a small or medium-sized insurance company. They already owned it before, of course, but it didn’t have its own name and stock ticker. In a value-destroying disservice to their clients (hey, what else is new) , they decide that keeping it in their portfolio is more trouble than it’s worth so they’re likely to sell their shares in the near future, putting downward pressure on its price early on.

Meanwhile, a middle-level corporate manager at the former insurance subsidiary suddenly finds himself as the chief executive of a listed company with his or her very own stock options and an even stronger incentive to do well. It may take a while, but the results usually are surprisingly good. The phenomenally successful value investor Joel Greenblatt wrote about his strategy of buying spinoffs in You Can Be a Stock Market Genius. Other investors have taken note. There are exchange traded funds that buy spinoffs exclusively. A $100 investment in an index tracking their performance has grown to $319 in the past year compared to just $170 in the broad stock market

Another long-running, well-known, yet still successful way to profit from what’s out of favor on Wall Street is to buy the “Dogs of the Dow” each January – the ten highest dividend-yielding stocks among the 30 Dow Jones Industrials. These usually were relatively poor performers in the previous year, allowing their dividend yields to rise (as price falls, yield rises as long as payouts are unchanged). A $100 investment at the start of this century in the Dogs turned into $313 compared to $233 in the broad market.

Far worse than investing in the most-admired companies is having a preference for the most glamorous or exciting ones. The very first investing book I ever read, Peter Lynch’s 1989 bestseller One Up on Wall Street, warned investors away from companies with flashy names. It specifically said companies with an “x” in their name were to be avoided.

It seemed like a throwaway line but it stuck in my head years later. Just for fun I decided to test it out for an investing column in 2010. The results were surprising. I found 109 stocks in the Wilshire 5000, the broadest U.S. stock index, that began or ended with an “x,” including a few that did both. Right away I could see that Lynch was onto something. Only 49 of them had been profitable in the previous year. Even weeding the money-losing ones out, the remaining stocks were far more expensive on measures such as price-to-book or price-to-earnings than the broad market and also a lot more volatile. In other words, they were both riskier and less desirable on average.

Why would there be a connection? As any Scrabble player can tell you, few words have an “x” so that letter, probably along with “z” and “q,” lend themselves to made-up, snazzy-sounding names. By my calculation, an “x” appears in company names 17 times more frequently than in actual English words.

The same warning could have been given about companies with a “dot-com” in their name 15 years ago. A quarter century earlier, in the swinging sixties, it was anything with the suffix “tronic” or the word “scientific.” Hot companies included Vulcatron, Circuitronics, Astron and the gratuitously snazzy-sounding “Powerton Ultrasonics.” In his classic A Random Walk Down Wall Street, Burton Malkiel tells the story of a company that sold vinyl records door-to-door. Its stock price surged 600% when it changed its name to Space Tone.

The fact that boring stocks are better seems to be a lesson that each generation has to learn anew. Superior bang for the buck from dowdy, out-of-favor companies was discussed as early as 1934 in Security Analysis, the investing classic by Benjamin Graham and David Dodd. Graham was the teacher and has served as the inspiration for the most-successful investor of all time, Warren Buffett, so it’s safe to say that his theories have worked pretty well in practice.

Each generation may make the same mistakes, but individual experience seems to matter. When my son’s high school had a stock picking contest I asked if I could see his classmates’ portfolios. The most popular choices were highfliers such as Tesla, Facebook, and Apple. Not a boring company in sight. Most of his classmates lagged the market.

A company called Openfolio that anonymously aggregates results and holdings from thousands of individual investors showed the same thing. Some 77% of Tesla shareholders were 49 or younger while 73% of Exxon Mobil owners were over 50. But younger investors’ love of flashy companies hurt them. During 2014 the portfolios of 35 to 49 years olds lagged 50 to 64 year olds by 2.3 percentage points. Those below 25 lagged the older group by a whopping 6.4 percentage points.

Maybe we do live and learn.