Small Business: Do Good, Not Feel Good

Two adjacent entries in a social media app I use highlighted a very good and a not so good reason to be a supporter of small business.

The first, from patrons in one of our better local restaurants, Spare No Rib, as they were dining, bemoaned the fact that only two tables were occupied and encouraged the neighborhood to eat there based on the quality of the food in order that they remain a going concern.

The other lauded the ambiance of the neighborhood and cited a loss in quality of life if neighbors took their business to the mall or Amazon. No specific business was mentioned nor any trade, service, or product. Just a vague 'we'll all be poorer if small businesses disappear' Rockwellian lament. 'Small businesses won't be here to buy from other small business or employ neighbors'.

Bull.

I'm very familiar with small businesses - I own one. Small businesses exist for the same reason large ones do - to provide value to their customers. They're not some Currier & Ives nostalgic prop from a bygone era there to bring atmosphere to the neighborhood and boost a livability index. If, like Spare No Rib, they provide quality and value, they should stay in business. If they don't, they should make room for businesses, large or small, that do.

(This Saturday is "Small Business Saturday", a pseudo-holiday like Black Friday, created by American Express in 2010. American Express is a big provider of credit to small business.)

Profit Is Win-Win

"Just as in physics, there were laws in the world of economics. The most basic was that when one person profited, another person did not." - "The Crown's Vengeance", Andrew Clawson.



Boy, you try to lighten up your reading for the weekend (I've not finished it yet, but pretty intriguing so far), but end up writing a blog post on the nature of economics.

The sentiments expressed in that opening quote could not be more wrong. I won't address the first sentence here today (if only economics were a predictable as physics!), it's the second that cannot stand unchallenged.

Despite being a popular theme in partisan rhetoric and entertainment, in the absence of fraud or coercion, the exact opposite is true. In every transaction, both parties profit. An example:

You buy my used 2007 PT Cruiser for $3,000. I have profited because I desire $3,000 cash more than the car. If I didn't, I would not sell it to you. Conversely, you value the car more than any other goods or services you can obtain for $3,000. If there was something else you valued more, you were free to go buy that with your cash. If each of us were not better off, if each of us did not profit from the transaction, there would be no transaction.

 Well, you say, I've got to buy this car so I can get to work but I'd much rather spend that $3,000 on vacation in Destin next month. This is a crucial difference between wanting something and valuing something. As adults, we're free to choose between these two options and live with the consequences.  If you do truly value the vacation more (including the negative value of not being able to get to work because you don't have a car), you're free to book your trip, but again in that case there would be no transaction.

 But, you say, I can't shop around for a better deal - I don't have time. In that case, you've already profited from the value of the free time you gained by not taking the time to prepare for the eventuality of needing to buy your next car. Anything extra you pay is for value you have already received.

What if it breaks down, or gets T-boned on the way home? Where's my profit then you ask. The agreed-upon price already takes into account the probability and negative value of adverse contingencies (or the cost to mitigate them). Trust me, if the average '07 Cruiser is selling for $3,000, I'm not selling mine at that price if I knew for a fact it would never breakdown.

Yes, you may want to spend that money on something else, you may get buyer's remorse, it may breakdown, you may find it cheaper elsewhere later, but at the moment a deal gets done both sides profit. Always. Multiply that millions of times over and see how wrong viewing economics as a zero-sum game really is.

Advisors' Roundup - November 21, 2014

Here's what on my radar this week:

It turns out predicting the economy is hard:
FiveThirtyEight.com

We've launched a new video channel on YouTube
Compton Advisors L.L.C.'s YouTube Channel is Up and Running

Hammering the point home: Quit Chasing Winners!
The Irrelevant Investor

Why would anyone buy a front-loaded mutual fund?
The Certifiable Planner

And finally . . .

Here's what low-cost mutual funds can do for you:
The Reformed Broker