Wednesday, June 08, 2005

9 Blocks, 3 Observations



Walking the nine blocks between Grand Central Station and the Four Seasons Hotel to see some companies, I made three observations, and for what they are worth--you paid nothing to read them--here they are.

First, I witnessed an as-close-to-bodily-injury-as-an-accident-gets-without-actual-death-or-dismemberment, when a woman in a hurry to get to her desk in a high-rise office building tried to cross 52nd Street in front of a cab. She barely made it unscathed, thanks to quick breaking by the cabbie. It was entirely her fault: for some bizarre reason the cab was neither traveling above the speed of sound or running a red light when she made her move.

Observation #1: Sometimes we risk an awful lot for a very little.

Second, there is the sad phenomenon of office-workers-who-stand-in-front-of-office-buildings-smoking-and-looking-generally-pathetic. They are almost always in pairs: the better to chat while they smoke, so they don't appear to be standing on the sidewalk doing nothing but smoking. And there is no glamour attached to what they are doing--they are not ripping power chords on stage at Madison Square Garden; they are not sitting around a campfire reliving the day's roundup; they are not hanging out in a French cafe.

I don't know about you, but all I can think of when I see these clumps of people is "I will be paying your medical bills when you are dying."

Observation #2: Frequently we risk future pain for near-term pleasure.

Finally, I am writing this while drinking coffee at Starbucks, which has created an entire ecosystem for people who drink coffee. There is now food, there is now wireless, and there are tables to meet and conduct business. When Starbucks came public, a lot of people--including me--snorted that it was just a coffee shop. But a lot of people--especially me--were wrong. Starbucks has probably added more value to the American white-collar-worker's daily experience than any service company in its time.

Observation #3: Sometimes we--especially me--are so smart we miss great long term investment opportunities even while we are exposed to them every single day.



Jeff Matthews
I Am Not Making This Up


12 comments:

DaleW said...

I don't know about you, but all I can think of when I see these clumps of people is "I will be paying your medical bills when you are dying."

Isn't this a little bit smug? You know, they are currently paying for your retirement with their contributions to Social Security and they, the smokers, won't be around to enjoy those benefits in the numbers non-smokers will be. In addition, the excise taxes and state settlements smokers pay, which are on the margin much richer than any other consumption tax, fund all sorts of things you don't contribute to as a non-smoker. So, congratulations Jeff, you get to feel superior to these folks, but I would love to see the actual DCF on their contributions to you vs. you to them.

Jeff Matthews said...

My sentiment is not "smug" and it is certainly not "superior."

It's more like "bitter." They are a cost all non-smokers must eventually bear.

Those state settlements are spent just like the bulk of our tax dollars are spent--on waste.

I don't believe there's a net benefit to smoking, and I'd love to see a DCF on he "contributions" of smokers to society as well as you.

Any informed opinions out there are welcome.

cdub said...

There is absolutely now way that taxes on cigarettes more than make up for the health care costs of treating smokers (and those who suffer health problems from second-hand smoke). Not to mention loss of productivity from smoke breaks, smoking-related trips to the doctor/hosptial, etc. The CDC estimated that from 1995-1999, smoking caused a net economic loss of $157 Billion.

Dale said...

I don't believe there's a net benefit to smoking, and I'd love to see a DCF on he "contributions" of smokers to society as well as you.

OK, let's see it then. I think it's smug to just toss off a highly certain "I'll be paying for your sickness" statement. You're the one with the original burden of proof, not me. But the elements would be:

Credits:

1. Excise taxes invested over the liftime of the smoker at the government's hurdle rate or avoided cost of capital. That's a benefit to Jeff Matthews, non-smoker.
2. Avoided costs of transfer payments due to early death of smoker.

Debits:

1. Missed work, higher interim healthcare costs.
2. Externalities, e.g., secondhand smoke
3. Earlier-than-normal end-of-life healthcare costs.

I could derive this. I'm sure we all could. It's just interesting how you were just talking about thinking about small credits without taking into account the chance of very big debits and then in another example you cite all the debits and none of the credits. The fact that a smoker dies earlier than others and thus lessens the burden of transfer payments in old age upon the rest of society is certainly in and of itself a contribution to society as are the excise payments over the course of their lives.

Not to mention loss of productivity from smoke breaks

Sure, non-smokers are SO MUCH MORE productive. When I smoked, I would read. I'm sure my colleagues who didn't smoke invented other ways to take a break. Let's be real here. We can tote up the puts and takes without relying on the Mickey Mouse stuff.

The CDC estimated that from 1995-1999, smoking caused a net economic loss of $157 Billion.

And you believe everything you read in the paper and see on TV? The CDC can be wrong about things -- look at the problems with the costs they ascribed to obesity. There were serious problems with their studies. Did they take into account all facets of the ledger or just the costs? I wonder.

Any informed opinions out there are welcome.

I hope this isn't a comment on my contribution. It's meant in a reasonable spirit. Sorry if you're offended by the lightly delivered suggestion the original article may have been smug or superior.

BelowTheCrowd said...

I have to disagree about Starbucks. They've now gone well beyond being an ecosystem for coffee drinkers. I no longer drink coffee, but I still go to Starbucks, because the "ecosystem" they have created is one in which I can thrive, and one which can likewise thrive on me. I have spent at least an hour or two a day in a Starbucks in San Diego because their true high speed wireless at $30 a month is far, far superior to the 256K "high speed" connection that my hotel was prepared to provide to me for $10 PER DAY!

That, combined with the non-coffee drinks, simple snacks, pleasant music and clean environment has made Starbucks my "ecosystem" of choice whenever I'm traveling. Like all ecosystems, it attracts many different types and is certainly not limited to the original particpants.

-btc

ikedim said...

Yeah, Starbucks - I'm still kicking myself for missing that one. I actually had the insider's edge on that one since I visited a friend of mine in Seattle years ago, when they were a local place. I didn't invest because I didn't like their coffee that much. Somehow I failed to notice that whenever I did go there for a coffee there was always a line out the door ...

Jeff Matthews said...

"Dale": I meant no disrepect to you when I asked for "informed opinions" on a DCF of smoking's cost or contribution to society.

If anything your taking a contrarian stance on an issue like smoking appeals to me: you may have noticed this is a contrarian site.

Asking for "informed opinions" is my standard request when we get a good question here--I was looking for an informed opinion who could help us with the DCF calculation...as opposed to the Infantile Yahoo Message Board kind of yelling and screaming that is banned from this site.

"cdub" responded with a CDC estimate on the net economic cost of smoking, which is certainly an informed opinion and helpful to the discussion.

Further informed opinion--including yours--is entirely welcome!

DaleW said...

Asking for "informed opinions" is my standard request when we get a good question here--I was looking for an informed opinion who could help us with the DCF calculation...as opposed to the Infantile Yahoo Message Board kind of yelling and screaming that is banned from this site.

OK, thanks. Sometimes a "context" button would be helpful -- playful ribbing can turn bad so often via email or posting. Glad it's not a problem.

Speaking of Yahoo's boards, I am amazed after all this time the self-management and rating features of posters on Yahoo are so abysmal. Talk about Gresham's Law -- Yahoo is a wonderful example of how bad posters drive out the good. Reverse-network effects have screwed up those boards -- each incremental poster actually degrades the quality of the boards. As much as the Fool is a screwed up company, their message board features on this score are pretty good.

Anyway, I'll try to derive the problem if it's interesting to anyone. I don't *try* to be contrarian on outcomes, I try to be contrarian on process. In other words, I would like to think through the problem rationally and in a businesslike manner. As Buffett said, take no comfort in people agreeing or disagreeing with your opinion, take comfort in being right. NOT that I'm right -- I don't know if I am or not, but I don't like being a contrarian just to be one. I do actually find comfort in it, but to be successful, we all have to try to test our comfort zones, right?

How do I post Excel files here? I can email if that's not possible. My profile should be public.

Chug-A-Bug said...

Dale,

It is debatable whether the government services funded by smokers are of any value.

It is not debatable that the health costs of smokers are a huge negative.

Jeff (and I, and many others) find no value in the government services funded by tobacco taxes, hence the resentment of smokers who just suck up our cash for their health problems.

If you believe that Jeff is wrong about the value of government, that's a different debate, and by your logic, you should advocate an increase in smoking.

DaleW said...

It is debatable whether the government services funded by smokers are of any value.

Well, that's just the thing. The excise taxes go straight into the general fund. So wouldn't it be a necessary point of logic that if services funded by smokers are worthless then all government services are worthless? That's a rhetorical question, not a point of view, by the way.

It is not debatable that the health costs of smokers are a huge negative.

Smoking overall is a huge negative, I agree.

Jeff (and I, and many others) find no value in the government services funded by tobacco taxes, hence the resentment of smokers who just suck up our cash for their health problems.

Well, that's the root of my inquiry...there's an offsetting credit that can't be ignored. I've love to see how the public policy people quantify it. I have a pretty simple spreadsheet on it, but it's totally open to debate.

If you believe that Jeff is wrong about the value of government, that's a different debate, and by your logic, you should advocate an increase in smoking.

I don't believe my post proposed a conclusion, just some things to consider. My logic is incomplete. But sure, if it's NPV positive to smoke and only 25% of society smokes, it's probably NPV-positive. It sounds sick, I agree, but that's the financial logic, not the emotional logic of the issue.

Chug-A-Bug said...

One need not be an anarchist to believe that government is largely worthless, even counter productive. If the excise taxes from tobacco fund bureaucrats that strangle the economy with regulation, for example, then the excise taxes are themselves a negative.

What if government, starved of excessive revenue from smokers, were forced to become more efficient and focused on its core activities, thus abandoning all of its harmful and wasteful projects?

DaleW said...

What if government, starved of excessive revenue from smokers, were forced to become more efficient and focused on its core activities, thus abandoning all of its harmful and wasteful projects?

I would be all for it. In the interim, however, I doubt legislators see the funds as anything more than fungible. While the marginal propensity to spend among the average citizen is around 95%, it seems the marginal government propensity to spend is 105%. The source of marginal tax revenues in the late 90s was fairly easy to understand, but that didn't stop legislators from adding fixed spending based on variable revenue dollars -- this the federal budget deficit. In the end, though, I don't think a marginal dollar from tobacco excise taxes is any different than a marginal dollar from other sources. It's not dispostive on my original theory that the NPV of excise taxes paid by smokers over their life less their end-of-life healthcare expenses, less externalities, plus the foregone Social Security payments due to their shorter lifespans all actually come out to be NPV positive. Sure, by my logic, everyone should smoke and we'd all be rich. But that's like saying all companies would be debt-financed to reach an optimal WACC -- we know that's a ridiculous thought (except if you Stern Stewart). I'm just saying the excise taxes and the avoided retirement costs for society as a whole could amount to an NPV positive phenomenon when 25% of adults smoke. Just a theory, though.