Monday, January 04, 2016

The $5 latte solution is not as radical as it sounds ! [ Yayy ! Got featured on the Business Times. ]

Today is a great day !

My classmate came up to me and told me that I am featured in the Business Times today. Naturally, I bought a copy and as it turns out, I was mentioned in one paragraph on page 12 of the Business Times in the BT-Citibank Young Investor's Forum in an article titled The $5-latte problem and a radically conservative solution by Cai Haoxiang.

The context of the article is to talk about the feasibility of a salaried worker becoming financially independent if one starts saving at a younger age. I thought perhaps I put in my own thoughts to build on Mr. Cai's article.

So, yes, it is true, I eschewed Starbuck latte most of the time in my 20s and 30s, but I bought latte whenever there was a Christmas special - I particularly missed the Egg Nog Latte which was discontinued many years ago by Starbucks. I even ordered a Pumpkin Spice Latte last year when I started to wonder what all that fuss was about.

I think the $5-Latte problem has a lot of traction because it is  quite easy to understand. But in truth, if you do the math of saving $4 of drinks everyday or sock away an additional $120 a month,  it would be hardly enough to really get you into the financial independence zone in your 40s.

For intermediate readers, we demand a more rigorous approach to classifying our wants so that we can meet our early retirement goals with higher probability. If you are a regular on this blog, it would inevitably require becoming more philosophical about your personal finances.

Let's take this to next level and think about three kinds of products that we tend to encounter. My inspiration came from a book entitled How Much is Enough : Money and the Good Life by Robert Sidelsky.

The first products are band-wagoner goods. You buy bandwagoner goods when everybody else buys them too. An iPhone is a bandwagoner good. If your kids come back from school and want you to buy something because all their other classmates has it, you can tell it's a bandwagoner good. An example of bandwagoner good which is more subtle is a watch like a Rolex or IWC, peers egg each other on to buy these watches even though I tell the time using my handphone. For the folks who play RPGs, if you buy something to prevent psychic damage being done to you because everybody else has it, it is a band-wagoner good.

The second kind of goods are oligarchic goods. Oligarchic goods are priced based on your relative position in society rather than on absolute cost basis. If too many people own an oligarchic good, it loses its value. A yacht is oligarchic because it is highly expensive and you have for a labour or services component which increases with time. This keeps yachts highly exclusive and meant for an elite few. Too many yacht owners dilute its prestige.

In my opinion, a subtle example of an oligarchic good is a mid-career law degree. The primary cost component of my JD is fours years of earnings which is quadruple that of an INSEAD MBA. If too many lawyers get admitted to the bar, the prestige and pay drops and a lot of very argumentative people then kick up a big fuss and the government gets into action. Needless to say, when I discovered that I had actually tried to buy an oligarchic good a few days ago, I had a mental orgasm which lasted days.

For RPGers, if you finally do manage to own an oligarchic good, you inflict psychic damage on everyone else.

The third kind of goods are just utility goods. You buy something because you really need to use it. My Economist subscription falls into this category. It does not deal or resist psychic damage.

[ This is a not a collectively exhaustive list of goods. Your economic texts mentioned other like Giffen Goods etc....  My D&D books do not fall into any category although I would say that they are useful for me to relieve stress and maintain my friendship with awesome geeks. ]

The solution to the $5 latte problem is as follows :

a) First you should develop an obsession for utility goods and avoid band-wagoner goods. 

Focusing on useful purchases which add value in your life and takes up some of your time so that you will not be distracted by conspicuous consumption. I play D&D and read a lot of books. In my IT days, I have a hobby of collective certification exams, which developed my willpower to overcome all three CFA exams in one attempt. It is cheap and freakishly useful for my career and personal finances considering the cost of an MBA in 2000s.

b) Second, you need to have the ability to meditate on the ultimate oligarchic good -  Financial Independence. 

Financial independence gets harder when inflation and lifestyle expenses go up. Stock selection based on fundamentals is a discipline requiring hours of intense study and then access to a Bloomberg terminal. Only a select number of salaried workers will obtain it within a small window of employability before ageism in the workplace kicks in.

I spent 15 years on this one oligarchic good and may spend more years maintaining it because I wish to secure my wife's financial future after I pass on !

( When too many people become financially independent, there will be no workforce to support the companies giving out the dividends so it is not exactly universalizable. )

c) Do not mistake a band-wagoner good for an oligarchic good.

The job of a marketer is to promote a band-wagoner good and create the impression that it is an oligarchic good. The marketer will try to tell you that if you own an iPhone, you must be more amazing and intelligent than anybody else. Wow, an Rolex or IWC on your wrist, you must really know a thing or two about luxurious living !

If you can recognize something as a bandwagoner good, I think it loses its exclusive value and people are buying it because everyone else is buying it.

Anyway,  I think this blog has come a long way.

In the past, after writing a book, I had to seek out a journalist to tell my story and sell the idea of working and saving hard for an early retirement which would have been a really boring and conventional idea is you think about it given that forex trading gurus are promising their trainees that can leave the rat-race yesterday.

Now, thanks to the support of the folks who support us financial bloggers with eyeballs, journalists are taking the initiative to write about us financial bloggers.

If any reader knows Mr. Cai Haoxiang, please let him know that I am grateful for being featured in his article, and I hope to buy him a nice big Venti Latte if he is willing to meet me for coffee.

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