Thursday, January 17, 2019

John Bogle, Founder of Vanguard, Died Yesterday

John Bogle died yesterday  This is not an investment blog but he was the most influential investor to me personally and if you don't follow the markets, John Bogle was the most important innovator in the market in recent memory that you never heard of.  Everyone has heard of Warren Buffet and Bill Gates and Jeff Bezos, but most people don't know who John Bogle is and what he accomplished.  If you trade on the stock market in mutual funds, whether through indexing or not, you owe John Bogle a debt of gratitude and he has almost definitely saved you a bit of money so I thought it would be worth it to talk about him accomplishments.

John Bogle had a couple of radical ideas that were extremely simple.  





1) Almost nobody is smart enough to consistently beat the average stock market return long term.

2) Fees, taxes and inflation matter a great deal.

3) Don't try to time the market


Being Better than Average Consistently is Not Common

Bogle argued that psychologically we tend to throw money at the latest money manager who has beaten the market because we don't want to miss out on the great returns they are about to dole out.  The problem is that by definition there is always someone who is doing better than average.  The more likely outcome after they beat market short term is regression to the mean which is below average returns.  Everyone who invests in the stock market will always receive 100% of the stock market returns.  You are paying someone to hopefully get better than average which is a rare feat.

There are almost no fund managers out there who have consistently beaten the average return long term.  Warren Buffet of Berkshire Hathaway (BRK.A though you are more likely purchasing BRK.B) is a notable exception to this and I would argue that Thomas Gayner of Markel (MKL) is another exception.  I'm sure there are others and I don't consider myself an expert here but the point is that even those have done it in the past have no guarantee for the future.



Fees and Taxes Matter a Great Deal


As I said before, all  investors will by definition receive the return of the entire market.  The entire market minus fees, that is.  You see if the entire market return was $10 and 5% of that was paid out in fees to brokerage houses for advice and commissions that means that there is only $9.50 for everyone to share.  

5% is more than your average fund manager takes (though hedge funds typically 2% of funds under management and 20% of profits) but even at 1% which is pretty common, fees tends to cripple your return long term because of compounding returns.

I'll give you some examples so you can see how bad it is.

If you start with $10,000 and you invest it for 30 years and got a 7% return and paid 1% in fees, your balance would be $56,4891 which is a 460% return but you would have paid $19,641 in fees over those 30 years.  That means you are sacrificing another 200% of your initial investment.



Get that down to 0.50% in fees and your same 7% gains change to a balance to $65,573.  It's a difference of more than $10,000 in fees!  100% of your initial investment.





The more you invest the bigger impact of the fees and the longer you invest the bigger the impact of the fees.



Taxes matter because the only way that a fund manager can beat the market is either to purchase better stocks and hold onto them or to continually weave in and out of stocks to buy low and sell high.  This leads to large tax liabilities (hopefully!) even though you are putting the money back in the market.

Inflation matters because you are paying a premium in risk by putting your money into equities and if inflation is going to eat at the real value of your gains is it really worth the risk.


Don't Time the Market

If you read books on behavioral economics you will found out that Humans don't always do the most logical things.  I'd recommend either The Undoing Project by Michael Lewis or Predictably Irrational by Dan Ariely if you are interested in general (both affiliate links). The point is that when we see the stock market go up, we get greedy and don't want to miss out and we buy stocks.  It's based off recency bias and FOMO.  When the stock market is crashing we get scared and sell.  This is the literal opposite of what you should be doing.  As things crash you should be buying stocks and as stocks are heating up that's the time to sell.  As Warren Buffet says, "Be greedy when others are fearful and fearful when others are greedy."

The other problem is that it is usually impossible to know when the market has topped and when the market has bottomed so even if you wanted to follow Buffet's advice, most people wouldn't know when to execute.



Bogle's Solution - Index Funds 


Bogle championed the idea of an index fund to solve these problems and he founded Vanguard to do it.  As opposied to picking a few stocks, you pick all the stocks in the S&P 500 (or whatever else you are indexing). That means that you are going to buy a piece of the entire economy.  Who is going to win between apple and microsoft?  Who cares!!!??? One of them will or a newcomer will and you will own a piece of that so as long as the economy keeps chugging forward you will get the gains of the entire market.


Index funds also allow for very very low fees.  You don't have to pick stocks, you are buying everything so you don't have to pay a manager for his "brilliance," anyone can do it.  You see I can buy an index fund that is set up the same way as any other index fund. Every brokerage house has them now so they compete on low fees because for the most part that's the only thing you can compete on for index funds.

Index fees got so popular because of their low fees and the average investor started caring and talking about fees that even active funds had to slash their fees to compete so if you own any funds, even active ones, you have John Bogle to thank for their relatively low fees and all the money you get to keep instead of lining the pocket of the fund manager.


You should also not time the market.  Try not to even look at the market.  Consistently add to your index funds over time.  You will sometimes add when the market is high and sometimes when it is low but as long as you don't panic and sell when it is low or get greedy and throw in extra when it is high, your purchase price risk is gone.  The market can have wild swings short term but long term (horizon of decades) you are almost guaranteed to make good money in the stock market.

If you want to know more about his method, you can read one of his books.  The one I read is called "Common Sense Investing" (also an affiliate link).  It is short and well worth the read.




Using credit card points to invest in the market



Getting back to regularly scheduled programming:


I have mentioned this a few times before but besides my regular investing, I use my credit card points (the cashback ones at least) to invest in the market following the "Boglehead" method.  The cashback gets transferred to Fidelity.  Doesn't have to be Fidelity but I will explain why I do that.











Every time I earn enough for at least one share of ITOT I purchase more.  ITOT is an index fund that is the S&P top 1500.  I used to invest in IVV which was the S&P 500 but it costs over $250 per share which makes it harder to buy with small amounts of money since you need at least $250 to purchase even one share.  The advantage for them is both in fees and commissions. If you have a Fidelity account it is commission free to trade any iShares ETF like ITOT so buying 1 share at a time doesn't cost anything extra.  Their management fee is 0.03% which is one of the best on the market.  Going with that same initial $10,000 investment, you would save another $10,000 of fees over 30 years a 0.03% compared to 0.5%.  That's a big difference!






Monday, January 14, 2019

2018 Recap and Looking Ahead to 2019

Every once in a while it is important to cover the big picture to clarify my goals, think ahead and hopefully help others in the process.



Before I delve into how 2018 went, here were my stated goals from last year.


Goals for 2018


I have not been happy with the inventory channel software available currently that aren't $500+ monthly.  My sales on other channels just can't justify that type of expense, though it might get closer if I had one.  My plan is to work with a developer to create my own that suits my needs.  I hope to have that done early in 2018.


Private labeling.  I haven't done it yet but the plans are already in the works.  I am in the testing phase now.  The thought of getting suspended for an Intellectual Property claim on someone else's product scares me a ton.  I would like to have a full line of my own products on Amazon (and maybe my own site?) at some point but I will start with one :)  In order to not spend a ton of money importing a product that I don't know I can sell I am starting to slowly build a listing from scratch and once I have proven I can do it, it will be time to go the overseas route.



I have also stated:

Store Less at Amazon, Fulfill Less via Amazon


Storing outside of Amazon is more important than ever.  If you buy 300 of something and you only plan on selling 30 a month, don't send all 300 in.  In addition, if you fulfill orders on your own (FBM, Seller Fulfilled Prime or other marketplaces), you will avoid these fees entirely. 


Once you have your own facility and are doing more fulfillment on your own, other marketplaces will start to become more attractive, especially if sellers start to have to raise prices on Amazon to keep their margins within reason.  Customers may start looking elsewhere for better prices.

Part of doing more fulfillment on my own was to bulk up on my eBay and Walmart sales (I don't even consider Jet to be a marketplace on my radar at this point) and I'll break those down for you.



2018 Goals 


Develop my own Software for other selling channels 

This has not happened as quickly as I would like.  It is still in the development stage.  At this point I do have an inventory management software.  As items come in, my staff can scan what comes in and scan it as it goes out so I have an accurate count of what I have at the warehouse (as long as everyone is using it properly of course).  

I am in the process of adding Amazon FBM (and prime) so that inventory numbers on Amazon are automatically synced with the warehouse and adding my product to a particular ASIN can be done from within the software in bulk.  I am hoping to be do some live testing this week which is the last step unless there are bugs.  

We are also adding the Walmart API currently so that listings can be created and inventory synced to the warehouse. 

eBay will come after Walmart and once eBay is added I hope to add automated multi channel fulfillment as well.  Bye bye Joelister, eventually.


Private Labeling


I had a few conversations with companies about private labeling products but I am honestly no closer now to actually having a product than at the beginning of 2018 but that doesn't mean I haven't done anything.

I have been working with 2 companies as a consultant to build their companies own products on Amazon using their Amazon seller accounts (I have user permission for my regular login - similar to what you would set up before you give access to a 3rd party for shipping or email reviews, etc.).  It has been a wonderful opportunity for me to see if I can build a product without the risk of purchasing large amounts of inventory.

I've already learned a few tricks with creating listings (multipacks, bundles, GTIN exemptions), optimizing listings, optimizing advertising campaigns along the way so even if neither of them explode (I am on a commission basis), it has been a good learning experience for me and the plan is to continually learn the process while getting paid.  If all the products work out I can then feel comfortable doing it for my own product as well.



Store Less at Amazon, Fulfill Less via Amazon

This was my last stated goal for 2018.  Building out my fulfillment by merchant operation.  

How did I do?

Here are my 2017 stats from Shipstation.



My eBay sales were mostly not existent, my Walmart stats were ok and my Amazon stats (just FBM) were decently solid and 544 orders overall between everything.

Here are my 2018 stats:





You can see that the number of orders fulfilled directly by me doubled this year compared to last year. My Amazon sales went up about 47%.  My Walmart sales just about doubled.  My eBay sales went up by more than ten times and Jet is dead to me.

In addition to that, I started doing seller fulfilled prime on Amazon which was a significant reason for the increase on Amazon but hopefully I can do a lot more with that this year.

Only 12 days through January and I already have more than 100 orders and over $1000 of sales on both Walmart and eBay but January is often a good month for me as I am selling off my leftovers from Quarter 4 and stores haven't replenished yet.


Website

I also said I wanted to start my own eCommerce site in 2018.  That did not happen but the process has already begun for 2019.  I hope to have that finished by June or July of this year.


Overall sales in 2018 on Amazon

I had an almost 60% increase in overall sales from 2017 to 2018 on Amazon and had more than $1,000,000 in sales for the first time which is great!  I'm very proud of that.  That being said, it is not all good.  My profits barely increased.  I only had a 4.1% profit increase from 2017 to 2018.  

What the heck happened?


Shipping Credit - I prepaid $5,000 to a prep facility which is a credit I will use over 2019 but it took $5,000 off my profit numbers for 2018.  This is more of an accounting issue than anything else since I still have access to the credit.

Jewelry - I decided to enter the jewelry category on Amazon.  Amazon has a $5,000 non refundable fee for laboratory testing when you enter this category.  This so far has been a spectacular fail but to be honest I haven't given it the focus it deserves. 

Software and eCommerce development - I spent about $7,000 on this in 2018 and $0 on this in 2017.  As opposed to the first two, these expenses will likely continue in 2019 but hopefully less but when comparing 2018 profitability to 2017 it made a huge difference.

Reimbursements way down - reimbursements went from 4.3% of my sales to 2.4% of my sales.  My understanding is that this is a problem for sellers across the board as Amazon has been much more stingy in granting reimbursements.  Please let me know your experiences in the comments.  I actually had less money in reimbursements in 2018 despite the 60% increase in sales.

Inventory Writeoffs -  I overbought on some groceries and they expired.  This is a poor purchasing choice and ended up costing me a couple thousand dollars.  Until I have a better inventory process for items that can expire I will hold off on larger purchases of those items.

Transitioning to an out of country seller -  since I live outside the US I rely on prep services more than I used to.  I spent a lot more money on prep services but that is not changing anytime soon although I have a new deal with my current service.  I will pay less per unit and a larger per month fee.  As long as my volume stays as high as it is now or higher it will be cheaper for me and more predictable fees for them.

Amazon loan interest -  I took an Amazon loan (I'll write up a post about my experience when it is fully paid off) to increase my purchasing ability in the 4th quarter and I paid a bit more than $2,500 in interest on it in 2018.  I've already paid 2/3rds of the loan and I would have fully paid it off if not for a tax quirk related to having to start a new company.   A new loan  may or may not happen in 2019 as well.


Goals for 2019

As I showed, 2018 was a mixed bag for me.  I made more money but I should have made a lot more money than I did so what are my goals for 2019 and how will I make more money??!!

Storage Fees - I spent 1.6% of sales on monthly storage fees and long term storage fees.  Last year I actually spent 1.7% so that is a slight improvement.  I have a lot of room for improvement on storage.  Things were getting much much better after the summer but I am now in a bad storage place because of the 4th quarter.  I have made a conscious effort to send less in and allow myself to go out of stock more.  I have found that I get in trouble when sales are great for a short period of time and I send in more assuming that will continue for the next month or two.  I can always send in more every couple of days if sales continue or use SFP if I am out of stock.

Even though my percentages of revenue were lower this year, I consider my storage fees a fail for 2018 since I know I could and should be doing much better.  With a concerted effort I hope to get that number closer to 1.25%.

In addition, Amazon rules for storage fees have changed for the better of sellers starting in mid February.  Long term fees will not apply until items have been at fulfillment centers for more than 1 year.  I paid an extra $1,000 in long term storage fees in 2018 compared to 2017 and I hope to have that mostly eliminated after February 2019.

Refunds - Last year I lost 4.3% of my sales to refunds.  In 2018 it was 3.9% but this can still be improved.  Picking the right products is the most important factor here.  As I have moved further and further away from electronics and into lower price point items my refund percentage has come down with it.  

Even More Self Fulfillment -Walmart has been a real revelation for me.  There have been items that have not sold well on Amazon and have sold nicely on Walmart or have sold well on both but the price on Walmart has been much better.  The only problem is that I really have no idea of how to tell before I purchase so I still can't make purchases for Walmart until I test it.  It allows me to leave more inventory at my warehouse set aside for Walmart and lower my storage fees or to increase my price on Amazon if it is selling well on Walmart.  My goal for Walmart in 2019 is $50,000 in sales.

I've also removed unsubscribed from Geekseller which saves me about $20 a month and 1% of revenue from Walmart.  You can apply for Walmart as well but my understanding is that they need proof of about $1 million in sales to be accepted which is a big hurdle for most sellers.

eBay has been great as well.  I don't make a ton of money on eBay but it has really helped my frequency of sales and lowered my storage fees on items that weren't selling well on Amazon.  When I can finally get rid of JoeLister my monthly fees will come done as well.  My goal for eBay in 2019 is $35,000 in sales.

My own site - once this is built out hopefully my margins will be better since I won't be giving commissions out and I can have another place to sell which can lower my storage fees as well.  My goal for my own site in 2019 is $1.

Avoid Loan Interest - I am happy I took the loan and so far it has worked out but hopefully I do a better job of not having so much money stuck in inventory and I don't need a loan for 2019.  A full post about the loan will be forthcoming.

What are your goals for 2019?  I would love to hear them.