Wednesday, August 24, 2016

Reading Between the Lines

Communication has always been a fascinating subject to me. While discussing communication, we always tend to focus on languages, dialects etc, but there is so much more than just the spoken word. This may include other forms of communication such as body language, for instance. This post is a discussion focusing on what is *not* being said and trying to decipher the meaning of something; whether the other person has something to obfuscate or simply not a good communicator. As it turns out, what is *not* being said can shed more light on the interaction. I discuss a few personal stories in this post about reading between the lines.

The following tweet from Michael Batnick a few days ago quoting Peter Drucker resonated with me and reminded that as I get more experienced in a certain aspect of life, it becomes more and more important to learn how to read between the lines. What is it that a person is implying by saying something, or more importantly, what is that crucial piece of information that is not being communicated? As it turns out, this can have a big impact on the overall interaction.

Our Recent Car Buying Experience

To illustrate this idea, let me recount a car buying experience we recently went through. My wife’s car broke down earlier this year. We could have spent a lot of money to keep it going, but considering that it was already 15 years old and would cost us more to fix it to keep running, we decided not to sink more money into it. We tried living on one car, but after a trial of a few months, which didn’t work out — we finally decided that we are a two-car family and the mobility provided was worth the saved time and annoyances of taking public transit (we have a terrible public transit system here in our city, which is a disgrace considering its the capital city).

First idea I had was to go to the same car dealership that I had bought my car to get a quote. A car salesman was very happy to help me out and had that million dollar smile to greet me and show me around and take me on a test drive on a three year old used car listed at $15,500 (about $17,600 with taxes and some added fees).

I liked the car, checked the history, everything looked decent, so I asked for a detailed quote with financing. He printed a quote out which showed me what the monthly payments were going to be. I asked for a couple of different options on the payment financing term — say, 3 years (36 months) and 5 years (60 months). The total amount on a monthly basis added up to be $500/month for the 3 year financing or $323/month for the 5 year financing term.

Hmmm that didn’t seem to add up. What was I missing and was I having a hard time with basic math? Why was it not making any sense to me? I asked for a few minutes to look it over and realized that when you add up the total payments over the financing term, it added up for a total of $19,380 instead of the $17,600. Why the huge difference? That’s a total of an extra $1,780!! And I started looking at the quote closely to find out what was missing from that detailed quote. Sure enough, it was a big one. The interest rate. The page was full of information and numbers with the latest and great acronyms thrown around, but one crucial piece of information missing: the interest rate on the financing.

I asked him what the interest rate was. He said that he can look into it as he didn’t know off the top of his head and he will talk to his manager, who was currently “busy”. Meanwhile, he was happy to go over the rest of the details and explain all the cool features I get. I listened patiently and again firmly asked him what the interest rate was. He went over to his manager and came back to tell me that I was getting a special deal of 7.49%!! I wasn’t sure if I should laugh or be insulted with that kind of a rate. I suppose people just look at the monthly payments and think “Oh, I can afford this” and sign the papers and drive away without thinking how much they are paying in interest.

But wait, there’s more!

Not only is that a ridiculous amount of interest rate to get charged these days, when you can borrow money from a bank for almost no cost. But after throwing a fit, I came back home and looked at those numbers again and realized that there was a “Implicit Financing Charge”. What the heck was that?! It was a charge amount that was added to the total for the privilege of borrowing funds. A quick search online yielded that its common in the auto industry to add that to the total while advertising for a 0% or 1% lease or purchase financing.

So, keep in mind. Whenever you see a 0% or 1% financing/leasing deal, its not the whole truth. Which goes to the original point of this post, the most important thing is to hear what is *not* being said. The implicit financing charge + advertised interest rate is what your total interest rate really adds up to be. So, all said and done — the total financing charge on that car was adding up to 11%!! Needless to say, I told the dealership to stop wasting my time as I wasn’t even sure if it was the best car on the market.

To wrap up this story, my wife and I decided on a different car at a different dealership, which still had that “implicit financing charge” involved, but instead we decided to borrow funds from a bank at 2% instead (banks were more than happy to lend me money at that rate over a period of 18 months) and paid cash for the car purchase.

The Investment World

Nowhere is this notion more evident than in the investment world. From media journalists reporting fantastic earnings (while the real numbers aren’t really that good) to fund managers switching in/out of good/bad companies at the end of the quarter to portray a good performance or financial advisors nudging you towards a fund where they get a bigger kickback — the investment world is full of traps. Unfortunately, most investors tend to fall for some of them atleast once in their lifetime. I know I have. But investors who learn the lesson avoid future mistakes, but for the most part, people tend to stay ignorant and/or repeat the same mistakes over and over.

To provide with a couple of examples, consider the current earnings season. How many companies have reported an earnings “beat” and the media touting that the expectations were smashed? With the earnings season just getting started, I can think of plenty of companies already and continue to watch the patterns I’ve noticed over the last few quarters. The expectations have been driven lower both for revenue and profits, and companies manage to beat them by a whisker. At the same time, read the press release more carefully, and there is an appalling reality hidden that isn’t disclosed unless you dig deeper. Most companies highlight (and the media simply eats it up and repeats) the non-GAAP numbers. Most companies, even blue chip & mature companies has resorted to “adjusted” earnings as their highlight. This is a major problem as it resorts to financial engineering and/or adjusts the books to make the picture look more rosy. Accounting standards be damned!

It is for this reason that I decided to exit a big portion of my positions as I cannot justify staying invested under this house of cards. For further reading about the rise of non-GAAP usage in the market these days, check out these two great posts from Value Walk & Wolf Street.

Another repeated argument I see is that the US market is the only place to be invested in. While the near term outlook remains strong for the US market, investors should always have international exposure. Even in the fixed income market, the following chart gets paraded all over social media that US is the only place to get positive yield on sovereign bonds.

Yield Matrix (source: Pension Partners)

But what is this collection of countries based on? Are the countries simply based on the colored ladder they present to the viewer? There are plenty of countries out there that have positive yield on their sovereign bonds. A lot of emerging markets do. If the argument goes that this only applies to developed markets, then how come countries such as Canada, Australia, and New Zealand aren’t included? All those countries have positive yield on the their notes.

This is where the information has been cut off from the reader to support the case for whatever the writer is trying to make. Investors need to stay aware of this and not take things are face value.


Communication and story-telling are very interesting and as I get more experienced in life and investing, I realize the importance of what is *not* being said. This could be because the communicator could simply be leaving things out in order to avoid confusion, but more often than not, there is a hidden agenda. It is up to us as individuals to stay on guard and learn the nuances to look for that missing piece of information which could have a huge impact. I share a few stories in this post on my recent experiences during the purchase of a vehicle and how this kind of behavior is rampant in the investing world. As investors get more experienced, we tend to learn these things and start looking for the red flags and remain skeptical. Taking things at face value can be an expensive endeavor, and a healthy dose of skepticism is always warranted.

Have you had similar experiences? Share your story, thoughts and comments below.

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