Category Archives: Economics

Ready for Another GoPro Bounce?

Nick Woodman, CEO of GoPro

Nick Woodman, CEO of GoPro

This is a follow up to a couple of previous blog posts about Wall Street’s unwarranted bearish outlook on GoPro, which you can find in this first post and this second post. I was right about the stock rebound, but it has gone back down again, and I think it is a screaming BUY, so here we go again!

GoPro Inc. (GPRO) hit an annual low this month after reporting its second best quarter ever. According to GoPro Founder and CEO, Nicholas Woodman, “Our core business is enjoying terrific momentum as we charge forward into attractive adjacent markets.” GoPro hit its previous low in March after it continued to post strong quarterly gains, followed by another ascent on the back of continued strong results.

Surely, you ask, Wall Street must be missing something to cause the stock to crash yet again. The market seems to have the notion that GoPro, despite its impressive earnings, revenue, and margins, is once again on the verge of collapse as the action camera fad ends and sales plummet as it reaches its last niche customer. Not that there is any evidence of this, mind you, but that is the fear.

GoPro stock price roller coaster

GoPro stock price roller coaster

In the second quarter of 2015, GoPro reported almost $420 million in revenue, a 72% year-over-year increase and their best quarter ever. Earnings per share jumped from $0.08 to $0.35 year over year and gross margin increased 420 basis points to 46.4%. It was a beat on guidance for all three measures.

Third quarter guidance is for revenue of between $430-445 million, which would be a 56% year-over-year increase. EPS should be $0.29 to $0.32, with gross margin at about 46%. Analysts reacted to the strong quarterly results by increasing their own estimates and reiterating indications that the brand is still extremely popular.

All seemed well until the stock started in mid August to slide from the $60s to below $30 for no apparent reason. If this sounds like “déjà vu all over again,” it does seem to be a repeat of the previous period of volatility between December and March. After weeks of a declining share price, analysts started to point to previously-expressed fears about the company’s prospects against cheaper Chinese competitors such as Xiaomi or well-known brands such as Sony. Slower than expected sales of the new Hero 4 Session, which was priced at $399, the same as the Hero 4 Silver, caused GoPro to slash the price by $100. This caused analysts to fear that, this time, GoPro had finally lost its appeal.

GoPro Flying Bear

GoPro Flying Bear

Piper Jaffray downgraded GoPro based partly on the Session price cut and partly on a teen survey that showed a deceleration in holiday wish list activity and a reduction in its Amazon product sales index. According to Analyst Erinn Murphy, “We believe we are starting to see the tipping point of demand in our survey and against a holiday with no new products likely on deck, prefer to sit on the sidelines.” But she also cited volatility as a reason for “stepping to the sidelines” on the stock. Seriously—she cited volatility as a reason to downgrade a stock. That is just as bad as recommending a stock just because it is going up.

I suspect that simple fear and the taking of profits was the real cause for the stock’s price drop rather than any credible news. One of my favorite quotes from Frank Herbert’s science fiction classic Dune series is this: “I must not fear. Fear is the mind-killer. Fear is the little-death that brings total obliteration….” Well, the stock price has clearly been crushed over the past two months, but company performance is another matter entirely.

Fear is the Mind Killer

Fear is the Mind Killer

On September 1, GoPro’s video chip supplier, Ambarella, reported outstanding results, but provided guidance that made analysts even more nervous. What Ambarella’s CEO actually said during their Q2 earnings call was this:

“As we discussed in our Q1 earnings call, wearable camera revenues are expected to be down sequentially and year over year, reflecting the substantial build of newly released and existing products in Q2 of this year by GoPro and Xiaomi, rather than in Q3 as occurred in the prior years. However, we see the average of Q2 and Q3 unit shipments between FY16 and FY15 being in line with our growth expectations for this market.”

Sounds like no big deal, right? As you can see from GoPro’s guidance, they “only” guided for a 56% year-over-year increase in revenue for the third quarter, compared to the 72% increase in the second quarter. This makes sense if you consider Ambarella’s comments that the second quarter will show slower growth due to the shift in product launches back from the third to the second quarter.

The same kind of shift in sales happened in the first quarter of 2013, when holiday shipment delays caused a shift in revenues to January. This made the seasonal decline in revenue in 2014Q1 appear higher than the seasonal decline in 2013Q1. When GoPro had a blowout holiday quarter in 2014Q4 and issued conservative guidance for 2015Q1 showing an even larger seasonal decline, analysts panicked and drive down the stock price. Here is the GoPro guidance I’m referring to:

“Revenue and units shipped for the three months ended March 31, 2013 were impacted by production delays of our HERO3 Black edition capture device in the fourth quarter of 2012. These production delays correspondingly delayed shipments until the first quarter of 2013, which resulted in revenues in the first quarter of 2013 that did not reflect the traditional seasonality in our business. The three months ended March 31, 2014 were not similarly affected.”

After Q1 2015 results beat expectations, showing that action camera sales were not a fad already on the decline, the stock moved back up. What does this all mean? That analysts are prone to confirmation bias of any guidance, news, or even surveys that might confirm their worst fears. Namely, that GoPro is a fad that will eventually end, or will face overwhelming low-price competition, or will face other well-known competitors who will challenge their market share and compress profit margins. Yet, none of these fears have materialized. In fact, GoPro has been facing all these potential threads head on with brilliant marketing, top-notch engineering, world-wide sales channels, and a focus on entering new adjacent markets such as virtual reality and drones.

GoPro Hero4 Black vs. Session

GoPro Hero4 Black vs. Session

The Session camera appears to be a very good product that was improperly priced. Consumers seemed to prefer the Hero 4 Silver, which has a built-in touch display and higher-resolution video options. GoPro was actually quick to respond to customer feedback and correct the mispricing of this product, which should lead to better sales. In any case, consumers still seem to be purchasing high-end GoPro models rather than abandoning the brand for competitors.

What can we expect when GoPro reports its third quarter results on October 28th? I can’t say, because when fear rules, it isn’t enough to beat expectations, as Under Armour found out last week. Nevertheless, for investors who are focused on the long term, GoPro is a compelling investment opportunity. It is a company focused on growing into new markets and has a premium brand that gives it strong pricing power. I’m not willing to try and time the market by predicting when Wall Street will come to its senses, so I’m taking advantage of this pullback to pick up some more shares at an incredible discount.

Disclosure: I own shares of GoPro (GPRO).

Gratuitous Display of GoPro Marketing

Gratuitous Display of GoPro Marketing

Update: Boy, was I wrong on this one. Maybe it will bounce after it hits rock bottom! I’m still optimistic about drones and virtual reality camera rigs, so I’m still pulling for you GoPro….

Tax Wars

Cost of Tax Compliance

Cost of Tax Compliance

A 2005 Tax Foundation study on the cost of complying with our incredibly complex tax code estimated that individuals, businesses and nonprofits would spend an estimated 6 billion hours complying with the federal income tax code and an estimated compliance cost of over $265.1 billion. The compliance cost is an estimate based on the time spent on tax preparation valued at the compensation rate of the filer or his tax professional. This represents about 22% of federal income taxes and is equivalent to more than half the revenue of Wal-Mart. The time spent working on taxes is equivalent to a workforce of 2.8 million workers, which is about the same as the number of soldiers, sailors and airmen in the US military on active duty and in the reserves.

Italy Calls in Military to Protect Tax Collectors

Italy Calls in Military to Protect Tax Collectors

Essentially, our tax code has created the equivalent of a large second army that has been fighting a costly war for longer than any other war in American history. And the costs have been increasing. You can think of the IRS and its workforce as the equivalent of the Pentagon, which provides direction and control of the army. The accountants, tax attorneys, and other tax professionals are the junior officers, NCOs and regular soldiers following orders and participating in the tax battles and skirmishes that take place all year long. The rest of us, small business owners and individual taxpayers, are the part-time reserves and militia providing part-time service when the tax army mobilizes for its annual spring offensive every April.

Income Distribution of Tax Compliance Costs

Income Distribution of Tax Compliance Costs

In monetary terms, for every dollar in taxes you pay, the equivalent of 22 cents is wasted. These costs do not even include the additional costs of tax planning, tax audits and litigation. This burden falls more heavily on small businesses and individuals who earn the lowest amount of income when measured as a percentage of their income. This is because they file most of the tax returns. Larger corporations and wealthier individuals may have higher compliance costs, but they also earn more, so it is a lower fraction of what they earn. Therefore, tax simplification would most help those who pay the least in taxes. Nobel Laureate economist Gary Becker provides an excellent overview of the economics of tax complexity.

Tax Compliance Costs per Employee

Tax Compliance Costs per Employee

The Tax Foundation study estimates costs based on the value of your time. Certainly, your time, or the money you spend having someone else prepare your taxes, has value. But how does that compare with more concrete costs? For reference, the 2013 budget request for the IRS is $12.9 billion. Intuit, maker of Turbotax and other accounting software and services, earned $4.15 billion in 2012. H&R Block, a large tax preparation company, earned $3.04 billion in 2012. These are certainly a lot less than the tax compliance cost estimates above, but also do not take into account other costs.

The actual cost of salaries, equipment, or software paid for in-house accountants or attorneys who work on tax-related recordkeeping or preparation is unknown. According to the US Bureau of Labor Statistics, average annual employment in tax preparation services was 113,000 in 2009, but this excludes Certified Public Accountants and companies that provide accounting, bookkeeping, billing, or payroll processing services in addition to tax preparation services.

For reference, here is a sample of relevant 2010 job and income statistics:
Tax examiners, collectors and revenue agents: 74,500 jobs at a median $49,360 per year
Tax preparers: 59,180 jobs at a median $39,410 per year
Personal financial advisors: 206,800 jobs at $64,750 per year
Accountants and auditors: 1.2 million jobs with a median pay of $61,690 per year
Bookkeeping, accounting, and auditing clerks: 1.9 million jobs at $34,030 per year
Financial examiners: 29,300 jobs at a median $74,940 per year
Financial managers: 527,100 jobs at a median $103,910 per year
Financial analysts: 236,000 jobs at a median $74,350 per year

The above occupations account for over 4 million jobs and $233 billion in salaries. While only a fraction of the people in some of these occupations work on tax planning and preparation, the direct economic cost of tax preparation and management, including private and government salaries, equipment, software, and other expenses, but not counting the cost of your time, has got to at least be in the tens of billions, if not much, much more.

Tax Compliance Costs

Tax Compliance Costs

Of the 140 million individuals and families who file tax returns each year in America, 60% pay someone else to fill out forms for them, while 29% buy tax-preparation software or online services. It is possible that automated electronic tax preparation and filing software has and will continue to reduce tax preparation costs for small businesses and individuals. However, tax complexity still requires more time spent on tax preparation and planning that would otherwise be necessary.

How many of you dread the process of filing a tax return and worry about paying too much because you didn’t know about some special deductions you might have been able to take advantage of? It is extremely likely that many people do not take advantage of legal deductions. Research by the Government Accountability Office and Internal Revenue Service indicates that between 15% and 25% of households who are entitled to the Earned Income Tax Credit do not even claim their credit, or between 3.5 million and 7 million households. Simultaneously, others are able to fraudulently claim a credit.

Another side effect of tax system complexity is an increased ability to evade taxes through use of loopholes. The more complex the system, the harder it becomes to detect fraud or the more it costs to monitor tax returns and other tax-reporting data.

Is there a way to reduce these tax compliance costs and put the money back to productive use? Of course, but special interests will fight it every step of the way because everyone is looking out for their own self interest. Most of the lobbying comes from large businesses and tax-exempt charities. So, it makes sense to take them completely out of the equation by eliminating all income taxes on organizations and passing through all taxes to the individuals who earn the profits. If large organizations have no interest in the tax code, they will not try and influence legislators to give them special exemptions. This will help stop the practice of using the tax code as a system for rewarding those who are able to convince legislators to give them special benefits. After all, large organizations are just collections of individuals who are the ultimate beneficiaries of any profits they earn. Corporate taxes are just taxes that could be passed through to individual investors, where they can be taxed at their appropriate rate, without all the corporate tax manipulation.

IRS Revenue Sources

IRS Revenue Sources

Automation will also help to reduce compliance costs as well as tax evasion. Sales taxes are fairly well automated, although elimination of all sales tax exemptions would make it even more so. Tax-exempt charities will have to pay sales taxes. An agreement between states to resolve the issue of inter-state sales taxes would eliminate the complexity of sales versus use taxes and provide businesses with a simpler way of collecting and reporting sales taxes. For instance, everyone should pay either an in-state sales tax or a flat inter-state sales tax.

I know this sounds like just another tax, but the objective is to reduce overall rates, not to generate more revenue. The inter-state tax could be distributed to the states according to where the purchasers reside, thus effectively enforcing the “use taxes” that most states have on the books but cannot currently enforce. Overall, the result will not be an increase or decrease in tax rates, but a more efficient system that will reduce the burden on businesses and end the inter-state fights over sales and use taxes.

The payroll tax is already a highly automated method for collecting income taxes. However, better automation of all forms of income, including automatic withholding of investment income, would help to make automatic year-end calculation of income taxes possible. If income tax calculation were simple enough to be automatic at the end of the year, the cost of tax compliance would plummet.

What about income from cash transactions? We know that cash-based businesses are notorious for under-reporting income. We can’t just eliminate cash, even though there are other fringe benefits. Studies show that paper money is costly to produce and also tends to carry bacteria that can make you sick. The growing use of electronic payments is already quickly reducing the number of cash transactions. We could further encourage this trend by providing tax benefits to anyone who uses such forms of payment.

For instance, electronic transaction networks could be required to collect, report, and deposit all sales and use taxes. This would help businesses by automating and eliminating their sales tax-collection burden. At the end of each month, the amount of sales tax paid could be automatically applied to each individual’s income tax withholding as a deduction. If they are in a low-income bracket, they will finally gain a benefit that high-income earners normally get when they itemize deductions. Those who end up with a credit could opt to have it deposited into an investment account or receive an automatic electronic refund.

Any other remaining expenses that are tax deductible, such as home mortgage interest and refinancing costs, or state and local taxes, should be automatically credited to an individual or joint tax account, with excess payments invested or refunded monthly. Any other forms of investment income should, similarly, be collected automatically and invested or refunded monthly. At the end of the year, a simple income tax calculation will be automatic.

This kind of automation and simplification is desperately needed. Special interests will fight it because they only care about themselves, but the overall effect will be to lower average rates by eliminating loopholes, tax evasion and tax compliance costs. Will it be fair? There is no such thing, so let’s stop talking about fair and start talking about what is efficient, reasonable, and transparent enough that people finally know what they are paying in comparison to everyone else.

Putting wasted assets to more productive use will make America stronger and more competitive with the rest of the world. Higher standards of living come from increases in productivity and are dragged down by waste and inefficiency. We are capable of amazing technical feats, so I’m confident we can design a simple, efficient, progressive tax system that will take more from the wealthy, but not enough to reduce the incentive to produce or to take extraordinary measures to avoid or evade taxes. Imagine if we could redirect some of the billions of dollars in annual compliance costs to pay down the national debt? Is that worth your vote? Does anyone in government have the guts to push for a revolutionary simplified tax system that can achieve this goal?

I don’t want to end this with nothing to show for it but a bunch of useless complaining. What is the point of complaining about something if you don’t have something better in mind? So, here are a few simple, yet revolutionary, recommendations on how to rebalance the tax system and thereby our economic and political system. Politics is all about money and power, so let’s start by talking about where our tax money comes from. It might not be what everyone agrees is fair, but at least it will be simple, transparent, and efficient, without a lot of waste or hidden loopholes. I don’t really believe there will ever be such a thing as a “fair” tax code, but if there were, this would be a big leap in that direction.

It’s time to stop fighting a tax war and demobilize the tax army. Support our tax troops by bringing them home! What will all those IRS workers, tax accountants, tax attorneys and other full-time tax professionals do when they lose their jobs in the tax army? How about a new GI Bill to get them into new and productive jobs that will make our country even stronger!

Bring the Tax Army Home!

Bring the Tax Army Home!

Recycle Bots

Wall-E Robot

Wall-E Robot

If you had a choice between a quality product and a cheap one for the same price, wouldn’t you always choose the higher quality item? Isn’t the sale of high-priced, high-quality smart phones what has made Apple the most valuable company in the world? We could all just settle for cheap, disposable prepaid phones, but most people don’t. I would assume that a better product would always be preferable, barring some unusual circumstances. But throw in one more factor, extreme convenience, and that answer seems to go out the window.

My company offers free coffee and tea to all employees along with a kitchen area that has microwaves, a sink for cleaning, and tables for eating. They also provide paper or Styrofoam cups and plastic utensils for anyone who needs them for their lunch. I prefer to use my own coffee mug and real silverware, which I keep at my desk.

Paper Coffee Cups

Paper Coffee Cups

Yet, I’ve noticed that most people prefer to use the disposable cups and utensils even though I know most of them have perfectly good mugs at their desks and utensils at home. Nearly everyone has a mug because they are easy gifts and companies tend to give them out with their company or product name on them. Other people buy mugs with the logo of their favorite sports teams, funny quotes, or other personalized features. So, not using a mug isn’t a matter of cost.

So why would someone forego a perfectly good mug, which is certainly much more comfortable to drink out of and better insulated, for paper or Styrofoam? The only answer I can come up with is the convenience of not having to carry the mug to the coffee pot or to clean it. However, some people who do use mugs don’t even bother to clean theirs, so that excuse doesn’t even work. They often point to their coffee-stained insides with pride when they tell me how many years of coffee buildup they have achieved without a single cleaning. So, it is hard to believe that it is a matter of cleanliness. It’s all about laziness.

Are people really so lazy that they would rather use a small disposable cup than have to carry around a mug? It appears that this is the case. If so, what are the global implications for consumption as a whole? Would people rather throw away than reuse something better? It seems so, but this explosion of waste is driving environmentalists crazy.

I happen to be one of the few people who buys some of our milk in a reusable half gallon glass container. When the container is returned to the store, I receive a refund and the local company that bottles it reuses the container. Why bother? Because their chocolate milk happens to be much better than anyone else’s, but also because the container is thick and feels good to hold, plus I like the idea of non-destructive recycling. But it is no longer the norm. In fact, I’m surprised that anyone still recycles containers.

At what point will it become more cost effective to recycle containers and, even if this happens, will people bother? I suspect that they will not. It has taken years to finally get a great destructive recycling program going, where people can throw all kinds of recyclable material into a single mixed bin. But I can’t conceive of a time when people will, in large numbers, choose to reuse materials rather than to throw them in a bin for collection.

Italian Trash Robot

Italian Trash Robot

The only technological development I can foresee that will save us from our destructive, wasteful tendencies is that of the robot. When they become cheap enough, they can be set upon our waste landfills like ants on a pile of crumbs. They can sort out all the most valuable recyclable products, separate them, reprocess them, and make them available as resources for re manufacturing. By fitting them with material sensors and connected to information about the market price for commodities, these recycle bots will be able to prioritize, in real time, the selection of items for recycling. Guess what? We already have trash robots.

Dog Trash Robot

Dog Trash Robot

When robots come into wide scale use for the processing of trash, the cost of commodity materials will go down and will make it even more cost effective to produce disposable products. The world may have many other uses for robots, but I suspect we will have armies of them devoted to nothing more than searching for waste that can be recycled. If they are owned by private parties, rather than provided as a government service, they might even compete for your waste. When this happens, there will no longer be a need for trash bins. People routinely throw their trash on the ground anyway because they are too lazy to look for a container, but when the day comes that there are bots to retrieve it for you, how many people are even going to bother to look around for a waste container?

Trash Can Bots

Trash Can Bots

Imagine you are walking down the road eating a snack. Instead of looking for a waste container, you might be able to simply throw it on the ground knowing that a bot will come by shortly to retrieve it. Bots might even see you walking with the snack and follow you knowing that you will eventually throw it away. Or maybe they will dash out of tiny garages to grab it before another bot can get to it. I know–it sounds creepy…. Or maybe you can just call for a trash bot and it will come. If the cost of bots is far lower than the value of the resources they can recycle, we may end up with fast bots that compete with each other for the trash, especially in dense urban environments.

I’m not sure I like the idea of little robots running around us picking up trash, but it seems like a plausible solution to our even-increasing habit of using disposable products. But what happens when a trash bot starts to malfunction? Will another trash bot kill it for its parts? I guess we’ll just have to make our bots cannibals. Just beware of the human organ recycling bots!

Robot Battle

Robot Battle

Beat a Hero

Hero Hater Jonah Jameson in Spiderman

Hero Hater Jonah Jameson in Spiderman

Just as Jonah Jameson, publisher of the Daily Bugle, just can’t credit Spiderman for his heroic acts, Wall Street has again dissed its latest hero, GoPro, maker of the Hero series action camera, which just demolished expectations for the fourth quarter of 2014 with a year to year increase of over 75% in revenue for the holiday quarter. GoPro (ticker GPRO) is crushing the competition and had the hottest selling video camera of the holiday season.

GoPro Be a Hero

GoPro Be a Hero

So, why did the stock initially jump up during the earnings announcement only to reverse course during the company conference call and crash and burn for the past few days? Is Wall Street populated by manic depressives, schizophrenics, idiots or just paranoid jackasses? The apparent cause of the stock price crash was a discrepancy between the tremendous holiday quarter and the merely-average projections for a 42% year over year performance for the next quarter, which still exceeds revenue expectations and are in the expected range of earnings estimates ($.15-.17 per share compared with average expectations of $.17 per share). It also didn’t help to find out about the resignation of the COO, Nina Richardson, which immediately sent Wall Street’s analysts in a panic, taking the momentum out of the stock.

Robert Duvall as Max Mercy in The Natural

Robert Duvall as Max Mercy in The Natural

Is GoPro a hero or a goat? In the movie The Natural, Max Mercy, the shady newspaper reporter played by Robert Duvall, had the following to say about whether or not Roy Hobbs, the hero of the story, would help the Knights win the playoffs. I think this quote is completely applicable to Wall Street stock analysts today:

“They come and they go…. I’ll be around here longer than you or anybody else here. I’m here to protect this game. I do it by making or breaking the likes of you. And after today whether you’re a goat or a hero, you’re gonna make me a great story.”

I don’t normally dig into the details of company financials, but something just didn’t smell right and my Spidy senses were tingling, so I did a bit of checking. What I discovered is that Wall Street, for all its high-powered talent and number-crunching ability, didn’t do jack to figure out what actually happened here. The issue seems to center around the difference between the revenue projections for the first quarter of the year. During the conference call, Citibank analyst Jeremy David asked why revenue was expected to go down by 47% from Q4 2014 to Q1 2015, compared to a decrease of only 35% between Q4 2013 and Q1 2014. GoPro responded that they were projecting average 41% growth last year, so that is what they used. This projected slowdown in growth must have sent his mis-guided Spidy senses tingling. Citibank is among the most negative of all GoPro analysts.

After only a couple hours of digging around, the cause of this entire first quarter estimate problem became clear to me. It all seems to revolve around a delay in shipment of the Hero3 cameras that were supposed to be available for the holiday quarter of 2012. The Hero3 was a dramatically improved camera that could take 4K video and was announced in October of 2012. However, GoPro had trouble getting orders out the door, so most of their sales were pushed to January 2013. I found customer comments on various web sites (including Slickdeals.net and Facebook), discussing shipping delays. Reviews of the Hero3 on Amazon.com started with only four reviews in October and November, with a relatively small number in December, further indicating that most customers were not able to get their cameras for Christmas that year. And the smoking gun … the SEC S-1 Registration Statement dated May 19, 2014 from GoPro, which said:

“Revenue and units shipped for the three months ended March 31, 2013 were impacted by production delays of our HERO3 Black edition capture device in the fourth quarter of 2012. These production delays correspondingly delayed shipments until the first quarter of 2013, which resulted in revenues in the first quarter of 2013 that did not reflect the traditional seasonality in our business. The three months ended March 31, 2014 were not similarly affected.”

So, what does this mean? Simply that the first quarter of 2013 had an inflated number of sales due to GoPro not being able to get them shipped out for Christmas. This is clear in the revenue numbers, since there is an 8% decline in sales from Q1 2013 to Q1 2014 and an even larger and unusual decline from Q1 to Q2 of 2013 compared to Q1 and Q2 of 2014. The result is a bunch of stock analysts who can’t figure out why first quarter sales are projected to be 47% down this year compared to only 35% down last year (Q1 2014) and only down 31% the year before (Q1 2013). Sometimes you have to do more than crunch numbers. You also have to read and investigate. Isn’t that what stock analysts are paid to do?

So, I went back and adjusted the revenue for Q1 of 2013 to account for the delayed 2012 holiday season sales and placed the revenue in line with how GoPro has been growing for several years. I decreased revenue for Q1 2013 by 33%, which places it just under the revenue for the second quarter and shows about the same growth quarter to quarter as in 2014. This small adjustment changes the outlook going forward. GoPro has consistently issued conservative (low) guidance, and based on my revised numbers, I believe that this is what happened last week. By my estimates, the first quarter of 2015 is probably going to be another large earnings beat. Here are the charts to back it up.

The following chart shows GoPro revenue by quarter using actual numbers and the one below shows revenue with the adjustment to the Q1 2013 revenue (revised down by 33%). The second chart shows more even continued upward growth.

GoPro Revenue by Quarter

GoPro Revenue by Quarter

GoPro Revenue by Quarter with Adjustments

GoPro Revenue by Quarter with Adjustments

The following chart shows GoPro revenue by year using actual numbers and the one below shows revenue with the adjustment to the Q1 2013 revenue (revised down by 33%). They both show a decline in the previous unsustainable growth rate of 266% in 2011 to a more sustainable rate. However, the second chart shows a bigger growth rate for 2012, when the Hero3 was supposed to have been sold, but was delayed. This shift in revenue leads to lower, but still great growth in 2013, which is when the Hero3+ was released (Oct 2013), followed by another surge in growth after the Hero4 was released (Oct 2014). If correct, 2014 would have seen revenue growth of 55%, not 41%. Although the change does not affect what happened in 2014, it changes the trend. Increasing the 2014 revenue growth would also increase the earnings per share growth upwards as well.

GoPro Revenue by Year

GoPro Revenue by Year

GoPro Revenue by Year with Adjustment

GoPro Revenue by Year with Adjustment

This leads to the final charts, which show revenue projections adding in GoPro’s estimate of 42% revenue growth for 2015. At this rate, current earnings estimates should fall in line with their projected range of $330-340M for the first quarter of 2015. However, the upward trend looks even stronger to me. If the trend really is in line with my revisions to Q1 2013 revenue, then GoPro might be looking at smashing estimates for Q1 2015 with 55% growth (about $364M) assuming all things stay relatively stable.

Of course, this is all guesswork. No matter how many charts and numbers we can put together, nobody can predict the future. But if I were a Wall Street analyst, I’d spend a little more time looking at the numbers we already have. Come on Citibank, get your act together! What do you say about them apples???

GoPro 2015 Revenue Projections

GoPro 2015 Revenue Projections

GoPro 2015 Revenue Projections with Adjustment

GoPro 2015 Revenue Projections with Adjustment

GoPro Revenue Projection Increase

GoPro Revenue Projection Increase

April 28th, 2015 UPDATE:

GoPro Inc. is scheduled to release its quarterly results today after market close. Analyst estimates still don’t make sense to me. If you add up the projected revenue numbers for the first two quarters of this year, which I even think are low, and subtract them from the annual revenue estimate, GoPro would have to fall flat on its face during the Christmas quarter to only deliver $1.73B in earnings for 2015. We will find out after 5PM today how GoPro fared in the first quarter. I’m betting on an upside move. Short seller interest is incredibly high at over 61% of the floated shares. If they are right, the stock will crash tomorrow. If they are wrong, it will soar upward as they all rush to cover their short positions.

Here are the current analyst estimates the day GoPro is scheduled to release its quarterly results:

Earnings Est Current Qtr.
Mar 15
Next Qtr.
Jun 15
Current Year
Dec 15
Next Year
Dec 16
Avg. Estimate 0.18 0.16 1.39 1.69
No. of Analysts 15.00 15.00 16.00 15.00
Low Estimate 0.16 0.08 1.07 1.18
High Estimate 0.25 0.22 1.55 1.87
Year Ago EPS N/A 0.08 1.32 1.39
Revenue Est Current Qtr.
Mar 15
Next Qtr.
Jun 15
Current Year
Dec 15
Next Year
Dec 16
Avg. Estimate 340.99M 333.72M 1.73B 2.06B
No. of Analysts 12 12 15 14
Low Estimate 334.72M 300.90M 1.58B 1.77B
High Estimate 355.90M 362.70M 1.81B 2.20B
Year Ago Sales NaN 244.60M 1.39B 1.73B
Sales Growth (year/est) N/A 36.40% 24.20% 18.70%
Earnings History Jun 14 Sep 14 Dec 14
EPS Est N/A 0.06 0.08 0.70
EPS Actual N/A 0.08 0.12 0.99
Difference N/A 0.02 0.04 0.29
Surprise % N/A 33.30% 50.00% 41.40%
EPS Trends Current Qtr.
Mar 15
Next Qtr.
Jun 15
Current Year
Dec 15
Next Year
Dec 16
Current Estimate 0.18 0.16 1.39 1.69
7 Days Ago 0.18 0.15 1.38 1.68
30 Days Ago 0.17 0.15 1.38 1.67
60 Days Ago 0.17 0.15 1.38 1.68
90 Days Ago 0.17 0.15 1.26 1.57

Invest in Me

Tuition Costs

Tuition Costs

In 2012, a Florida state task force on education recommended adjusting tuition by major. Science, technology, engineering and math (STEM) majors would cost less, while some majors, such as psychology and the performing arts, would cost more. This recommendation has not been implemented, but here is the basic idea.

“Tuition would be lower for students pursuing degrees most needed for Florida’s job market, including ones in science, technology, engineering and math, collectively known as the STEM fields…. The purpose would not be to exterminate programs or keep students from pursuing them. There will always be a need for them … but you better really want to do it, because you may have to pay more.”

Kevin Stange, a professor of public policy at the University of Michigan, studies the outcomes of differential tuition and has found that higher prices tend to dissuade students from pursuing a particular major. The generally accepted consensus is that a $1,000 change in costs is associated with a 5 percentage point difference in enrollment rates. A study from Hanover Research found that for every $100 increase in tuition, enrollment decreased by 0.5% to 1%.

Sounds reasonable, no? It is good to consider the value of an education and treat it like an investment, because that is partly what it is–an investment in one’s future earnings potential. But people also have to live with their choice of employment and can’t just choose a path for its simple economic return. Unfortunately, pricing tuition by major is a centralized government solution that, like most government solutions, probably will not work out as expected. This is because the actual cost of providing educational services may be more or less than the artificially determined price and because any time that bureaucrats are allowed to determine the cost or benefit of a product without any market input, they typically fail miserably.

Instead of increasing tuition across the board, many universities now charge more for majors with courses that are more costly to provide. Degrees in biology and engineering, for example, typically involve smaller class sizes, higher faculty salaries and cutting-edge labs with expensive equipment, so they charge more. Today, 45% of large public research universities differentiate their pricing this way. At the University of Texas at Austin, which started charging different tuition rates in 2004, engineering students pay $5,107 each semester, while liberal-arts majors pay $4,673. This is a market-based solution that makes sense. Sure, a technical education may be worth more in earnings power, but it can also cost more to provide.

Tuition Debt

Tuition Debt

If the cost of a technical education is artificially lowered, while liberal arts majors are artificially raised, people will object to their representatives to stop the policy. But even more importantly, students will vote with their dollars. They will simply attend schools in other states where the tuition is lower. Besides, do we really trust the government to decide what majors are best? When has the government ever made good economic decisions for us? It will be highly subjective to adjust the cost of different majors based on their perceived value to each state government. Determining the market value of a course of study is something best done by the market, not by the government. This means allowing the market to finance an education based on cost, risk, and expected return. Thinking about the value of an education is a concept that is going in the right direction, but I think it would be better to treat educational expenses like the investments they are.

How about financing educational expenses based on the expected return on investment over the first 10 years or so or their working life? For instance, if a degree is projected to net one student an average salary of $70K per year, while another student is projected to net only $35K per year, the first student might be offered up to double the amount of money in tuition loans or scholarships over the same payback period. Furthermore, it is likely that the risk the loan would not be repaid can be correlated with high school grades and college assessment scores (e.g. SAT or ACT scores). If banks were to make investment decisions on a per student basis, this would directly link the value and cost of the education and thereby influence the educational decisions that students make without any need for government interference.

If I have stellar grades and SAT scores and choose to pursue a high-paying major, I would have the opportunity to borrow more and/or to borrow it at a lower rate of interest because my risk and return factors lower the investment risk. Maybe I could then afford a higher-cost technical bachelor’s degree plus a masters degree on top. On the other hand, if I have low grades and SAT scores and choose to pursue a low-paying major, I would have great difficulty borrowing enough to cover my costs for just a bachelor’s degree or would have to pay a higher rate of interest. Like mortgage applicants with low scores, I might have to pay 20-30% of the tuition costs out of pocket first (or use grant or scholarship money) before I receive any financing.  An education that results in lower financial returns might be more expensive, but it might not. If I have great qualifications (e.g. grades and scores), I might be able to finance it over a longer term at an affordable rate.

Lower-paying majors should not necessarily cost more than higher-paying ones. Maybe they actually cost less to provide. But, in the end, somebody has to bear the financing risk. It makes sense that students should bear most, or at least a significant amount, of this risk, but I think we still want to enable people to pursue an education for reasons other than pure financial return. This is America and we want people to have the freedom to pursue happiness, but not at the expense of everyone else. I think we benefit as a society from a broadly educated and diverse population. So, maybe we need a better balance between publicly-funded and privately-funded education costs.

Student Debt

Student Debt

Adding more responsibility to the financing of an education would limit public exposure to bad investments by lowering losses on student loans that don’t pay off for investors. Considering that the government is often the investor, this will result in a better value for the taxpayers and for the nation as a whole. But why do all degrees have to cost so much? Student debt is at all-time highs, even for those who choose majors that will not generate enough income to pay off their huge loans. Maybe some education programs could be structured for completion in less time–say three years instead of four. Some schools seem to be trying to extend degree programs to five years rather than shorten them, which might be the opposite of what we really need. Does an art major need as much time as a physics major to achieve competency?

Why should everyone need the same amount of time to achieve proficiency in completely different courses of study? All doctors need to attend medical school, but does a brain surgeon require the same amount of study and preparation as a gynecologist? I actually don’t know the answer, but I suspect that the amount of preparation time is not equal and we should not expect it to be. I certainly would not want anyone messing with my brain if he didn’t spend a lot of time practicing and preparing, and I don’t mean playing the game Operation.

I have no problem with people who want to pursue lower-paying careers, or even pursuing education for the hell of it. Stay in school forever if you want. Just don’t expect me to pay for it. I just want students to be primarily responsible for evaluating the cost and value of an education and to be able to make an appropriate decision.

To Trust or To Anti-Trust?

Good Witch of the North

Good Witch of the North

“Are you a good witch or a bad witch?” asked Dorothy of the Good Witch of the North when she arrived. You see, there are two kinds and you can’t always tell. When the Sherman Anti-trust Act of 1894 was written, it was under the assumption that all monopolies are evil and therefore act in ways that always hurt consumers. They failed to consider the possibility that a company could be a good monopolist or a bad monopolist. We now have our answer.

After crushing traditional booksellers and establishing a dominant position in the market for books, Amazon.com released the Kindle e-reader, which has helped them to grab about 90% of the market for e-books. This is about as close to a monopoly as one can get. Only instead of taking advantage of this position to raise prices, they have actually lowered the cost of books for consumers to about $9.99 each.

Who doesn’t like lower prices? Book publishers, of course. They have been unhappy about Amazon’s use of a wholesale e-book pricing model, which has given Amazon the power to set its own prices, even if they are at or below cost. While the publishers still get a royalty for each sale, this practice has encouraged consumers to buy e-books instead of higher-priced physical books, which has lowered publisher profits. This was intentional on the part of Amazon, which has been willing to lose money to gain control of the e-book market. So, five of the largest book publishers allegedly tried to collude with Apple to switch to an “agency” model whereby publishers would have been able to set their own, presumably higher, prices. The US Federal Trade Commission brought an anti-trust suit against Apple and the book publishers, but ironically, the decision favored Amazon.com, the reigning monopolist.

Apple Monopoly?

Apple Monopoly?

Apple contends that they did not care what prices the publishers set for content and just wanted to make sure no other retailer, such as Amazon.com, received a better wholesale price. It doesn’t even make sense that Apple would have tried to gain market share by raising prices. How do you encourage consumers to switch to e-books and gain market share over a competitor by selling the same product at the same or an even higher price? Apple apparently just wanted to make sure that no other retailer could get a better wholesale price.

The publishers may have wanted their e-books sold at higher retail prices, but there was no way to guarantee that this would happen. One publisher even admitted that they were afraid Apple would just match Amazon’s low prices, leaving them no better off. Nevertheless, the FTC decided that the negotiations constituted collusion that was not in the best interests of consumers. In other words, monopolist Amazon.com was declared to be a good witch, but does that necessarily make Apple a bad witch? The real effect of this case may be to hurt competition, which will ultimately hurt consumers.

Ironically, Apple did the same thing for downloadable music that Amazon.com did for e-books, which was to lower prices for consumers. Steve Jobs fought hard to change the business model that the music labels had held onto for so long in order to create the iTunes store where people could buy music for only $0.99 per song. He did so over the objections of music labels that wanted to keep the prices for albums high or set different prices for more popular songs. The lower prices on iTunes finally got many consumers to switch to digital music and to slow the trend to illegally share music online. But the music labels have been trying to break Apple’s near monopoly on digital music sales so that they could negotiate better deals with retailers. They turned to Amazon.com to try and break Apple’s monopoly, but instead of raising prices, Amazon has been allowed to lower them even further. I guess that makes both Apple and Amazon.com good witches.

Google: Don't Be Evil

Google: Don’t Be Evil

What about Google? One of their most famous company values is “Don’t be evil.” Google’s Android phone operating system is the only real competitor to Apple’s IOS, but they give it away for free, along with tons of other web-based services, which are mostly funded by advertising. Google has stimulated competition in most of the markets it entered and has benefitted consumers greatly. People use their services because they are damn good! Google even refused to bow to Chinese pressure to censor web searches at great cost to their market share in China. Google must be a good witch too.

Google Anti-Competition Case

Google Anti-Competition Case

But that hasn’t stopped the FTC or the European Union Competition Commission from investigating Google for allegedly abusing its 90 percent share of the online Internet search and advertising market. The FTC already settled its case, with little to show for it. The EU still isn’t happy and wants Google to suggest ways to overcome their concerns.

 

Inspector Clouseau

Inspector Clouseau

Perhaps Google should just offer to create something called Google Light, a dumbed down search feature just for Europe. For instance, every once in a while, it would answer a French query with “Pardon me, but I can’t understand your ridiculous French accent! Please visit our unrestricted American site for better search results.”

What is going on in the American technology industry? Aren’t there any bad witches anymore? I guess Microsoft was the last one, at least according to the FTC. Remember the long, drawn out anti-trust suit brought against them for bundling and giving away the Internet Explorer browser for free, which helped to destroy Netscape’s business? In retrospect, it doesn’t sound so evil. Maybe Microsoft was also a good witch after all.

Sure, the millions spent on attorneys and time spent in court fighting the anti-trust case was probably a major hassle for monopolist Microsoft. But the case was more like an annoying insect that would not leave them alone than a major threat to their business. What has really hurt Microsoft has been the pressure put on them by the three new good witches. Sales of the Windows operating system are being crushed under the weight of IOS, Android, and the Kindle.

Antitrust laws exist for the benefit of consumers, not as a tool to try and bring down market leaders or competitors. The following quote from the Supreme Court decision in the case Spectrum Sports, Inc. v. McQuillan states this clearly.

“The purpose of the [Sherman] Act is not to protect businesses from the working of the market; it is to protect the public from the failure of the market. The law directs itself not against conduct which is competitive, even severely so, but against conduct which unfairly tends to destroy competition itself.”

FTC's Weapon

FTC’s Weapon

Maybe it is time for the Federal Trade Commission, the Attorney General, and European Commission to step out of the way and let the good witches battle it out by themselves. No matter which giant monopoly wins or loses, consumers still seem to win. Government action seems to be more anti-consumer and an irrelevant, expensive, and distracting annoyance than anything else.

Dance for Money

Dance for Money

Dance for Money

In a previous post, I discussed how free stuff is worth every penny. An alternative to free stuff is discounted stuff. There has been plenty of discounting going on before and after the Black Friday and Cyber Monday shopping “holidays.” But this isn’t what I want to talk about. I want to talk about discounts that are only offered if you are willing to perform a task.

Sometimes you are lucky enough to get a discount just because you were in the right place at the right time and it was available to everyone. But more often, you have to perform a useless task to qualify for it. Take these activities, for instance: clipping coupons, finding online coupon codes, cutting out special box top offers, wearing a specific color of clothing on a particular day, writing an essay, giving out your contact information, or submitting a rebate form. Entire companies, such as Groupon and Living Social, have been built on the idea of offering discounts to help companies obtain new customers or get existing customers to shop more often. All these gimmicks are part of a strategy for enticing consumers to buy a product or to offer discounts to some people but not everyone.

Groupon

Groupon

These tasks provide no productive benefit to anyone and, in fact, cost time and money, which effectively increases overall prices. Somebody, after all, has to process the coupons, forms, or applications. Companies even outsource these tasks to other companies since they are too much trouble to bother with themselves. The sole purpose of this activity is usually to separate the people who are most price sensitive from those who are less so. It is an innovative way of selling products at more than one price at the same time by letting people decide which price they want to pay. To keep everyone from choosing the lower price, they require a trade-off that only some self-selected low-income (or cheap) individuals are willing to make. Economists call this price discrimination.

Time is Money

Time is Money

Clipping Coupons

Clipping Coupons

The trade-off, of course, is time–a resource that is even more precious than money. Consumers must surrender some of their most valuable limited resource to get a lower than average price. Overall, consumers pay a slightly higher price to pay the costs the business incurs to run the special promotions. Usually, the value of time is most appreciated by those who have a higher-than-average abundance of money. The more money one makes, the more likely one is to pay others to perform tasks that can be accomplished at a lower rate of pay or to forgo activities that might get them a discount.

But who pays the cost of these time-sucking activities? They are passed on to consumers, as usual, while all the benefits go to the business. Consumers who pay full price subsidize the cost of consumers who pay the discounted price. The older I get and less free time I have available, the less I participate in such nonsense. I have self selected myself out of the game and resigned myself to paying higher prices.

Haggling

Haggling

The timeless traditional solution to the problem of getting the maximum amount of money out of a sale has been to start with a high price and allow people to haggle until an agreement is reached. In some countries, this is still standard procedure. This also requires a sacrifice of time, but impacts both the buyer and seller. It can take time for a buyer to wear down a seller to get the lowest possible price. It also requires more skill and incentive on the part of the negotiators, so it does not scale well for large businesses. They simply cannot expect to find or train a large number of low-wage retail workers to succeed in such an environment. For high-priced goods, such as cars and homes, it is still a valuable tactic for selling to price-sensitive consumers.

Dance for Scholarships

Dance for Scholarships

Even the cost of college can be reduced by performing useless tasks. There are now many scholarship web sites and mobile phone applications that allow people to search for thousands of “scholarships” that are awarded on criteria that has nothing to do with academic or athletic achievement. They are usually available to people who are willing to submit information about themselves for a random drawing and may have a specific selection criteria, such as race, gender, religion, or interests. Many are contests of academic or creative skill that require one to write an essay, draw a picture, make a video, or perform some other task that is then evaluated, judged, and used to select a winner. These are not necessarily all useless tasks and may perform a function that is valuable to someone. They might generate marketing information or content that can be used to further market a cause or promote the interests of a company or non-profit organization. However, they may be nothing more than a random selection mechanism for channeling a limited supply of money to people who feel they need it.

As a society, we keep finding new non-productive ways to channel money from those who have enough to those who do not (or are willing to trade their time). It starts with higher tax brackets for those who earn more, but this is supplemented by price discounts for low-income or other targeted groups, and self-selected discounts. Productive paid work is slowly being undermined by alternatives that involve non-productive work.

Volunteer

Volunteer

All this wasteful make-work activity makes me wonder if there is there a way to channel these discount tactics into useful activity. How about channeling it into public service? Instead of spending time clipping coupons or performing other tasks, maybe people could be directed to help out at local food banks, homeless shelters, schools, or veteran’s hospitals in order to obtain credits that could be used like coupons. Charities have a difficult time getting people to volunteer, but imagine how much help they could get if major companies partnered with them to offer useful service-based discounts.

Volunteer Web Site

Volunteer Web Site

Here is how it would work. Companies or non-profit organizations would create service work that has some practical use and register these in an online service catalog. Companies who want to offer discounts or “scholarships” would select those activities that interest them and offer discounts to people who earn community service “coupons” through actual useful work. Want to get a discount with a company of interest? Sign up with the service and check the catalog to see what kind of work you have to do to quality. Then volunteer your time, get credit for it, and trade in your work coupons to get the discount.

What would these earned discounts be called? How about Service Discounts or Community Coupons. No, there has got to be something snappier. How about Volunteer Rewards? Kind of ironic though, since volunteer work isn’t really supposed to be done for monetary reward. Money for work is usually just called WORK. Many of us do it every day. Let me know if you think of a better name. Then I’ll get a trademark and find some venture capitalist who wants to back the next Groupon-style startup! The whole point is that some kind of productive work has to be done to earn the discount. No useless make-work. Everyone benefits. Charities get more volunteers and companies get to offer discounts to a self-selected group of consumers who are willing to put in the necessary time and effort. Sure, somebody has got to run the thing. Most of it can be automated, but someone also has to check for fraud to keep organizations from making up fake work and offering fake coupons.

Greek Money Dance

Greek Money Dance

Dance for Money

Dance for Money

I know–this is probably just wishful thinking! Unfortunately, real volunteer work might require far more time and effort than just clipping coupons. The work required has to be somewhat proportional to the benefits, but it is hard to compete with the limited effort required to clip coupons or fill out rebate forms. Companies don’t care about the actual work involved–only about how the marketing affects their bottom line. As long as companies are satisfied offering discounts for small amounts of time or information, they will continue to require trivial, time-sucking, make-work activities. Maybe it would be better to just make people dance and sing for money. Not only will it screen out people who can afford to pay full price, it will also provide entertainment for the rest of us. It wouldn’t be good entertainment, since most people can’t really sing or dance. It would be the kind of entertainment you can’t help but watch because it is just so bad–like a car crash or a train wreck. Like The Gong Show.

So, here is my challenge to retailers. Do you want to continue the tradition of driving lower-margin sales through the destruction of human productivity or do you want to start a new tradition of rewarding productive behavior? With some creative accounting, you might even find a way to write off your social contribution discounts as charitable donations. So, what’s it going to be? Real work or The Gong Show? It’s up to you.

The Gong Show

The Gong Show

APPENDIX

Mini Case Study of a Typical Rebate Program: 

Consumer Costs:

  • Time to fill in rebate form (on paper or online) and assemble documents
  • Cost to copy form, UPC code, and receipt (paper and ink)
  • Cost to mail in rebate application (envelope and postage)
  • Time to follow up on denied rebate claim and/or cost to resubmit forms

Retailer Costs:

  • Cost to develop rebate program and web site (labor, equipment, materials)
  • Cost to distribute rebate forms with products (paper, ink, labor for packaging)
  • Cost to process rebate forms (labor or outsourced work)
  • Cost to prepare and mail rebate check, card, or code (labor, paper, postage)

Expected Benefits:

  • Increased sales from consumers expecting a lower price (company profit)
  • Consumers who actually obtain the rebate (consumer discount)
  • Consumers who never actually obtain the rebate (more company profit)

A rebate program is a bit of a gamble. The amount of profit generated depends on the costs of running the program minus the number of rebates issued. If the number of rebates can be minimized, then the result is higher profit. The more time and effort required, the lower the redemption rate and the higher the profit. Most consumers never apply for or get the rebates to which they are entitled, which makes them a great marketing tool, but not such a good way to get a lower price.

The Mouse Tax

If You Give a Mouse a Cookie

If You Give a Mouse a Cookie

I wrote this in a moment of excessive pessimism about the growing welfare state. It isn’t that I’m against charity for those in need or for funding of programs that benefit society as a whole. I just don’t think we can afford everything that people think they deserve–at least not yet. But I think (hope) that technology will eventually provide the means by which we can produce enough goods and services to meet everyone’s basic needs after the robots take all our jobs. But I predict that it’s going to get much worse before it gets better.

If you give a mouse a cookie, he will want a glass of milk.
If you give him a glass of milk, he will also want a free supply of cheese.
If you give him free cheese, he will want a free school lunch to go with it.
If you give him a free school lunch, he will want a scholarship to go to college with you.
If you give him a scholarship, he will soon want forgiveness on his student loan so he can get out of debt.
If you write off his student loan, but he still can’t find a job because he studied the History of Cheese, he will want extended unemployment benefits.
If you give him extended unemployment benefits, he will get sick and tired of looking for a job and will want disability benefits.
If you give him disability benefits, he will want free health care to ensure he and his little ones stay healthy.
If you give him free health care, he will want subsidized housing to get out of his dirty little mouse hole.
If you give him subsidized housing, he will also want a full exemption from income taxes.
If you give him a full tax exemption, he will also want a child care credit to help take care of all his little mice.
If you give him a child care credit, he will still want social security benefits.
If you give him social security benefits, he will want amnesty so he and his mice can finally become citizens.
If you grant him amnesty and make him a citizen, he will want to vote.
If you let him register to vote, he will want to increase taxes on the rich and middle class workers to pay for all of his benefits.
If you promise to increase taxes for everyone else and increase his benefits, he will vote for you and will live happily ever after.
If he lives happily ever after, his children will have to deal with the eventual economic collapse, but who cares? It’s not his problem.

If You Give a Pig a Party

If You Give a Pig a Party

Insure Me to Death

Forrest Gump's box of chocolates

Forrest Gump’s box of chocolates

As Forrest Gump’s momma used to say, “Life is like a box of chocolates; you never know what you will get.” That begs the question, is there a way to buy chocolate insurance? You know, just in case you get a box full of crappy pieces. You can buy insurance for just about anything else today, so why not? I just got suckered by my mobile phone carrier into buying iPhone insurance, which I now greatly regret, but more on that later.

Not only has the variety of products and services available for purchase expanded exponentially, so has the variety of insurance products. If I was worried or paranoid enough, I think I could probably spend every dollar I earn on insurance. It seems like a never-ending list of offers for insurance against real or perceived risks. Let’s list some of the more common types of insurance available to individuals, not to mention less common products such as kidnapping insurance for high-wealth individuals.

Divorce Insurance

Divorce Insurance

Types of Personal Insurance Products:

  • Medical insurance
  • Dental insurance
  • Vision insurance
  • Life insurance
  • Short-term disability insurance
  • Long-term disability insurance
  • Critical illness insurance
  • Accidental death and dismemberment insurance
  • Business travel accident insurance
  • Personal Travel accident insurance
  • Accident insurance
  • Auto insurance
  • Homeowner or renter’s insurance
  • Liability insurance
  • Legal insurance
  • Identity theft insurance
  • Mortgage insurance
  • Title insurance
  • Travel insurance
  • Divorce insurance
  • Tuition insurance
  • Interest rate insurance
  • Pet insurance
  • Credit insurance
  • Burial insurance
  • Flood insurance
  • Individual Product insurance
  • Social Security (insurance)
  • Unemployment insurance
  • Workers compensation insurance
Amish Barn Raising

Amish Barn Raising

So, you get the idea. We are constantly bombarded by offers for insurance. This was not a common practice for our ancestors. If something really bad happened, they were either SOL or obtained the assistance of family, friends, and neighbors. Speaking of neighbors, the Amish still prefer the old ways. They insure themselves as a community. Your house just burned down? No problem. The community gets together to build another. You can’t afford your hospital bill. No problem. The church pays the cost. Your house burns down again? Um, I suspect they will look at you cross-eyed but probably still get together to build you another house. After that, it might be problematic. I’m not Amish, so I just don’t know the protocol.

Anyway, in 1965, Congress passed a law to exempt certain Amish and Mennonite religious orders from the requirement to participate in Social Security, Medicaid, and other government-mandated insurance programs. They are now also exempt from Obamacare. That’s right. Don’t you wish you lived in a tight-knit community now?

Jesus is my health insurance

Jesus is my health insurance

Some religious groups believe that insurance represents a lack of faith in god and an unwillingness to accept his will. But I suspect that few people are hard core enough in their faith to believe that god actually wanted to blow their house down and doesn’t want them to try and build another. Instead of using commercial insurance products, religious communities often simply insure themselves as a way of sharing risk. It’s a great idea if you can stop unsavory people from taking advantage of everyone else. Our government and the insurance industry have a hard time detecting and stopping fraud or risky behavior, which is a major driver of insurance costs.

Here are some thoughts I had on some new insurance products I might be able to sell:

  • Gambling insurance (because you know you’re going to lose, right?)
  • Plastic surgery insurance (for celebrities who just can’t help themselves)
  • Tax insurance (for tax cheats who bet on IRS incompetency)
  • Pregnancy insurance (it’s illegal to buy children, but you get the full health “claim” if you turn it in)
  • Election insurance (for politicians who can’t help but take inappropriate selfies)
  • Food insurance (why bother with a lawyer over food poisoning if you can just file a claim?)
  • Bad decision insurance (this one is great for everyone; it gets you a do-over)

Back to the problem of over-insurance that most of us have. Most financial advisors will tell you that insurance is only appropriate for protecting you from low-probability catastrophic loss. Things like a serious illness or destruction of your house. If your car is expensive enough, that would qualify too, but not if you have an old rust bucket. It isn’t useful for things you can easily afford to replace. I should have learned my lesson about buying product insurance after I tried to get Best Buy to fix a CD player on warranty. After three failed attempts, I finally gave up trying to get them to fix it properly or replace it.

Mobile Phone Insurance

Mobile Phone Insurance

So, it was out of character for me to accept the iPhone insurance offered by my carrier, AT&T, last month. A 64GB iPhone6 costs about $749 new if you have to pay full price, but for only $6.99 per month, you can be protected from any kind of loss or damage. Because I have teenagers who seem likely to mistreat their device, I grudgingly accepted the offer. But now I regret it. I should have insured my own family myself.

Within a month, one phone was terminally trashed due to a liquid leakage that got into the iPhone. Great, I thought! I’m covered and it only cost me $6.99 for the first month plus a $199 deductible. That’s a $543 savings, which is the best you can do! How wrong I was. Here is what I didn’t know.

First, the insurance provider that most carriers use is Asurion, which has a horrible reputation for providing non-functional reburbished replacement phones. Yes, you are most likely to get a refurbished phone, and a lot of them still have problems. So, you might never get a completely working phone or, if you do, it may take a long time to get one that is new or like new.

AppleCare

AppleCare

Second, Apple offers AppleCare for only $99, which covers all phone replacements for only $79.

Third, even if you didn’t buy AppleCare, Apple offers non-warranty repairs or replacement at reasonable prices. An iPhone6 battery replacement is only $79, a screen replacement is only $109, and it is only $299 to have the entire phone replaced. And that is for a new iPhone6, not a refurbished one! That means the Asurion insurance is really only saving you $100 maximum, minus the cost you paid for the monthly premiums, but you get a refurbished replacement that might not work. In the worst case, it costs you more than an Apple repair and you still have to pay the monthly insurance premiums.

Because I’m a bit of a geek, I decided to make a chart showing the cost of monthly premiums compared to the cost of buying a replacement for an uninsured iPhone6 from Apple for $299, which is the worst-case situation for someone with no insurance. Each colored line represents the insurance cost for 1 to 6 people. Each gray line is the cost of a full replacement phone.

For a family of 6, you pay enough in insurance premiums over 24 months to pay for three new iPhone6s (total loss claims) or nine screen replacements! For a family of 4, you pay more than enough over 24 months for two new iPhone6s or six screen replacements! For a single individual, it takes longer to pay enough in premiums to cover the cost of a new phone, so it is more of a risk. Still, if you are single, you ought to be able to save enough to cover the cost of one phone. It is obvious that a family can easily insure itself against small losses such as this.

Cost of iPhone insurance vs. cost of a replacement

Cost of iPhone insurance vs. cost of a replacement

Protection is Peace of Mind

Protection is Peace of Mind

So, why do we buy insurance on small stuff? I suspect it is just about marketing and fear. It often sounds like a good deal because we think the risk of loss is high while the cost seems low, but it’s really a very bad financial move. I received a replacement device from Asurion via FedEx the day after I filed the claim, and it was wrapped as if it were a new iPhone. Great-I thought! But the battery would not hold a charge, so I knew it had to have been refurbished. So, to avoid weeks of further hassle, I sent it back, cancelled my claim and bought a new replacement from Apple for $299. The insurance wasn’t even worth the cost of one monthly premium and the deductible. I prefer to never have to deal with this, or any other product insurance company, again. I’ll insure myself, thank you.

Burial Insurance

Burial Insurance

So, the next time someone offers to insure that new gadget you just bought, politely say no thanks—I don’t need the hassle. Or, you can just shop at return-friendly stores like Costco. They will take just about anything back, no questions asked.