e-mail investment advice

[Shannow]

Got this last night...interesting

Last night, watching Maxed Out, I realized this statement is completely and utterly wrong. Lending to rich people is a bad idea. They always pay you back. Lending money to poor people is much more profitable. They can't pay you back, so you've got them in your pocket for the rest of their lives.

A Harvard Law School professor interviewed in the movie reveals this paradox. Warren tells two stories.

In her first story, the professor has a discussion with a vice president from Mastercard. The VP tells her the credit card industry's favorite customer is the guy who has already been through bankruptcy. "He can't go bankrupt again," he says, "and he already has a taste for credit, so we know he'll be making minimum monthly payments to us for the rest of his life."

In her second story, the professor says she was invited to give a presentation to a roomful of Citibank credit card bankers. With slides and data, she spent two hours showing them, if they'd screen out the riskiest 5% of their customers, they'd halve their bad debt losses.

At the end of her presentation and after a few questions, the division's head honcho puts his hand up and says, "Interesting presentation, but if you cut out those five percent, you cut out all our best customers and we lose our profits."

The credit card business is very simple. You lend money, unsecured, at high rates of interest. All the profits come from the poorest, most vulnerable customers with the worst credit ratings.

So here's my idea...

Protect your money in a recession by investing in credit card companies. Credit card companies are already fabulously profitable. Given the paradox I found in Maxed Out, credit card companies should perform well during recessions, too.

America has the most heavily indebted population of any country... and as the Mastercard VP said: Americans already have a taste for credit. In other words, if there's a recession in America, you should consider adding credit card issuers alongside your tobacco, alcohol, casino, and firearm stock portfolio.

Good investing,

Tom P.S. If you'd like a jumping off point for further research on specific credit card companies, you can do worse than take a lead from Warren Buffett. The legendary investor owns nearly 13% of American Express.

Poker machines make people rich too, just not those playing them.

 

[phlogiston]

It's long been known that the easiest way to make money from gambling is to buy a casino.

 

[Winmar]

Credit providers love people who can't make more than the minimum payment, and the less financially literate people are, the better.

 

[Dän]

So we blame Howard and the multi national corporations right? Not peoples ignorance?
You get sucked into gambling that is your fault, not the casino's. If you borrow money you cant pay back that is your fault and not the creditors. You can't seriously blame companies for making money can you?

 

[Goreripper]

That's a typically short-sighted conservative view from you. Companies are deliberately targeting low- and middle-income wage earners, even offering them special deals -- signing them up with no credit checks, all sorts of "Bank Said NO? Come see us" traps -- and keeping them on a line of credit they know they'll never pay off, and you just shrug and say, "That's fair". There is something intrinsically wrong with a person who thinks that this sort of capitalism is OK. It isn't OK. It deliberately creates an underclass of people who can never afford to break out of a debt cycle. It might be "your" fault to borrow money you can't pay back, but creditors shouldn't be allowed to borrow to people or extend them infinite lines of credit if there's a significant risk of them falling into such a cycle. Read this part again:

The VP tells her the credit card industry's favorite customer is the guy who has already been through bankruptcy. "He can't go bankrupt again," he says, "and he already has a taste for credit, so we know he'll be making minimum monthly payments to us for the rest of his life."

That's OK by you, is it? It's all very well for you to say, "Well, that guy shouldn't borrow". Perhaps you're right, but a lending firm lending him money because they know he'll never pay it back is precisely the reason usury was considered a sin in the first place.

 

[Winmar]

Credit card companies accost you at shopping centres and train stations to sign up as well. If anyone wasn't fully aware of the potential consequences they'd just go along with it.

I've been in the bank and the teller has increased my credit limit without even asking me. I didn't really care, but the higher the limit is, the more you think you can spend. Even when you know that's not really the case....

 

[Goreripper]

Further from what I said up there, by Dan's definition, it's ok for drugs companies* to offer doctors kickbacks to prescribe Ritalin to people who don't really need it, because you can't blame companies for making money. It's also OK for developers to build cheap housing on flood plains, or former toxic waste dumps, or for herbalists to market therapeutic remedies as medicine, even if they're not, because you can't blame people for wanting to make money. And you can't. But it's not ethical, and it isn't right to take advantage of people's trust and/or ignorance to do so.


*I tried to write "phar ma ceuticals" there, but the filters blanked it out.

 

[Dän]

Read the terms and condidtions of what you are signing, and for fucks sake take responsibility for your actions. It's not a conservative view, its a damn common sense one.

 

[Goreripper]

I agree with that. But you implied that it's ok to deliberately target the unfortunate. I disagree.

 

[Shannow]

Read the terms and condidtions of what you are signing, and for fucks sake take responsibility for your actions. It's not a conservative view, its a damn common sense one.

Dan,
who writes the terms and conditions ?

(I was acting Contracts Manager for a company that turns over $600M a year, so I've got a fair idea of the people who write the terms and conditions).

Who reads the terms and conditions ?

The manner in which these "contracts" are thrust under people's noses, and the presentation of the sales people misrepresents the complexity of the decisions that these people are making.

Yep they are stupid for not reading the T&Cs. Should the Contracts be written such that they need to engage a solicitor to explain the contract to them, when it can always be written in somewhat plain English...i.e. "Sign here, and we OWN you" ?

I was gobsmacked when as a retail electricity consumer,I was being offered electricity accounts from the various retailers to "step away from the traditional model" (endorsed by Little John and the ACCC).

The brochures showed the savings. The fine print showed the risks.

That is not honest.

Yes, the information is all contained in a single envelope, but the brochures (all glossy and happy) show one half, while the matt paper stuff had all of the details how you were to be screwed.

That's not fair on the average Aussie

 

[Dän]

I agree with that. But you implied that it's ok to deliberately target the unfortunate. I disagree.

I didn't imply anything. And even if you are one of 'the unfortunate' you should still read the terms of your contract and you shouldn't blame casino's for you loosing money.

 

[Shannow]

So who's the most irresponsible here ?

The borrowers of sub prime loans, or the greedy banks offering them ?

Whoever it is is responsible for a whole world of greif at the present time.

Who's at fault here Dan ?

 

[Mark]

When you're in the shit financially (which happens for a lot of reasons, not all due to financial ignorance), you're more likely to borrow money to get you out of the shit if your earning potential is not enough to help you. Which then puts you further into the shit. So you borrow more. Which then puts you further in. So on and so on.

It's easy to say 'read the terms and understand the risks you take', but if you have a choice of remaining in financial strife, or getting a loan so you can feed/dress/give a good Christmas to your family, for most people it's an unfortunate no-brainer - some people simply don't have the means (income, potential, whatever) to do otherwise. If people were not able to extend themselves when they first find themselves in difficulties, they'd find it much easier to get themselves out.

That's my 2c (borrowed at 25.9% APR).

 

[Goreripper]

Bravo Mark. WB.