False Economies

Published on March 8, 2009

Most value investors I know tend to carry their hunt for bargains into day to day life.  I am certainly no exception.  I’ve been characterized as everything from “frugal” to “downright cheap”, and for the most part, I am proud of being economical.  However, my “frugal” nature has from time to time caused less than desirable consequences both in general day to day life as well as in the field of investing.

Here is a great example of a false economy.  On December 26, after suffering countless outages of my Comcast high speed internet service, I cancelled my service after waiting at home all day for a scheduled appointment only to have the technician not show up at all.  I cancelled on that very day to “prove a point” to the telephone representative I spoke to.  I did not bother thinking about alternatives given that my building is served by Verizon FIOS as well as a couple of small companies offering shared DSL. 

Well, Verizon had a four week wait for FIOS installation and I could not reach the smaller providers offering shared DSL.  But, lo and behold, I found a free wifi signal from a hotel right next to my building!  I simply connected, and the connection worked!  At no point did the connection ask for my personal information and I made no misrepresentations regarding who I am, so I felt no ethical breach, and who was it harming anyway?

I purchased a wifi adapter for $50 for my desktop PC and mounted it high on a window opening for maximum signal.  I was in business!  Until the signal went down.  What could I do at that point?  Call the hotel to complain? (I actually considered it!). 

After a few weeks of this intermittent “service”, I called the local provider offering shared DSL for $18.95/month, far less than the $42.95 cost of Comcast and well below FIOS as well.  A technician installed the service and I was back in business.  The only problem is that the connectivity was painfully slow.  Well, for $18.95/month and only $40 for installation, surely I could live with this given that FIOS starts at $50/month. 

It took a few weeks of this pain to get me to contact Verizon and schedule FIOS installation.  Last Friday, the service was finally installed at 10 mbps downloads/2 mbps uploads!  So, from December 26 to March 6, I suffered with unreliable “free” service and sub-par shared DSL service because I was too cheap to get FIOS to begin with.

Well at least I saved some money.  Or did I?  Wait a minute, the wireless adapter for my PC was $50 and I wasted $40 on the shared DSL installation.  That’s $90 for cobbled together internet service from December 26 to March 5.  FIOS would have run a bit over $100 for that period, so I saved a grand total of $10.

Those who are interested in investing must be bored to death by this point, but I have a point to make.  The same kind of false economies that led to my internet experience over the past two months can lead investors to purchase dead or dying companies that appear to be statistically cheap but have no prospects for the future. 

I am a fan on Ben Graham’s “cigar butt” investing style but I always try to differentiate between “cigar butts” that actually have a couple of puffs left in them and dead stubs that represent a dead business run by management intent on wasting whatever intrinsic value is remaining.  Unless you can obtain a majority stake in such a business, you are always somewhat at the mercy of management unless you can convince other shareholders to support your position.  It is far better to acquire businesses that have wide economic “moats” even if you have to pay a higher valuation than to purchase a dying business that is statistically cheap but where you cannot obtain majority control or otherwise influence  management.

False Economies
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