Whirling Thoughts

Chewing, swishing, and spitting thoughts out. Personal blog of Nicholas Chan.

Month: April 2018

Book Summary: The Automatic Millionaire

Recently picked up the personal finance book “The Automatic Millionaire” by David Bach. It’s core concept revolves around the importance of paying yourself first, automating your finances, being rich vs. looking rich, and how humans are naturally bad at budgeting / saving.

He also discusses the importance of buying a home, which I found interesting, considering it directly contrasts the teachings of Robert Kiyosaki from “Rich Dad, Poor Dad”. Bach believes in home ownership and considers a home to be an investment. Kiyosaki believes that a home is a liability. I’ll discuss this at the end of the post after the summary.

Paying Yourself First

Bach points out that we’re often happy to pay everyone else before we pay ourselves. That means that people will pay the government, utilities, and big corporations before even thinking to pay themselves. This has enormous consequences in the world of compound interest.

Here’s a thought. Earning a salary of $100,000 doesn’t mean you take home that much. There are taxes, which are often deducted from your salary. For every dollar you make, the government can easily take away 30 cents of that dollar.

But you can take advantage of your RRSP or a company plan to keep a little bit more of that dollar. Since contributions to these plans can be considered pre-tax income, contributing to them means you aren’t really missing out on too much of the money you need for your day-day expenses.

Another concept brought up was the possibility of paying yourself one hour’s worth of wages a day. If you earn $20/hour, then just save $20 a day. It’s totally doable. Within a week, you’ll have saved $120. Within a month $480. Within a year $6240. That money is going to compound and earn more.

Automating Your Finances

People forget things. People get lazy. It is almost impossible for someone to remember to deposit $20 a day into a savings account or investment.

So instead, Bach recommends that you stop trusting yourself, call your bank, and set up an automatic contribution. Every time you deposit a paycheque, maybe 10% will automatically be put away in a savings account without you knowing it. Every day, $20 will go from one account into another.

This takes the laziness out of the equation and ensures that you will actually be saving, even when you may not necessarily want to.

The interesting thing that happens when you start doing this is that you will hardly notice the money is gone. You won’t have to make the painful decision every day to put away a few dollars. That money is stockpiling away without you noticing and you can do whatever you want with what’s leftover.

Being Rich vs. Looking Rich

We associate wealth with the idea of owning a Rolex, driving a nice car, and owning nice clothes. When we see someone with all of that, we automatically assume that they are rich and can afford it.

While there are certainly some people who can afford all of this, in reality, many of the people flashing their Rolex may be living paycheque to paycheque. If you want to look rich, it’s actually really easy. Get a credit card, put yourself in debt, and buy yourself everything you’ve ever wanted.

So why bother being rich if you don’t buy all that stuff? Shouldn’t we live in the moment and treasure the present? Of course, there are a wide range of opinions on this. One of my favourites comes from finance blogger Mr. Money Mustache who was a former software engineer who retired at 30. His philosophy revolves around spending money on the things that actually make you happy.

The bottom line is this: by focusing on happiness itself, you can lead a much better life than those who focus on convenience, luxury, and following the lead of the financially illiterate herd that is the TV-ad-absorbing Middle Class of the United States (and other rich countries) today. Happiness comes from many sources, but none of these sources involve car or purse upgrades. -Mr. Money Mustache

At the end of it being rich is about financial freedom, which means less stress over your finances and having the ability to choose how you live your life.

Another book that touches on the idea of looking vs being rich is “The Millionaire Next Door” by Thomas J. Stanley.

A House Is The Best Investment You Will Ever Make

Bach discusses how a house will likely be the best investment you can make throughout your life. It can act as a forced savings vehicle, appreciates in value, and gives you a pride of ownership. In Bach’s world, everyone should own a house.

Interestingly enough, this flies in the face of the beliefs of Robert Kiyosaki, who was the author of “Rich Dad, Poor Dad”, where he discusses how a house is a liability rather than an asset.

Kiyosaki defines an asset as something that increases your cash flow and a liability as something that decreases your cash flow, then the house that you live in is a liability. You have to pay the interest on a mortgage, there’s property taxes, maintenance costs and the opportunity cost of living in the same place, which makes you less willing to pursue opportunities elsewhere. Finally, when you choose to sell a house, you end up having to buy another house, likely during a time when house prices have increased elsewhere as much as the price of your house has increased.

While Kiyosaki believes in real estate (he made his fortune through real estate), he wants us to realize that the house we live is not an investment and more of a liability. I would tend to lean toward Kiyosaki’s principles than Bach, so this is the part of the book that I question and would love to discuss with other people.

Hope you enjoyed the summary. Would appreciate any other recommendations!

Why Are Muji Pens So Popular?

In the past few years, Muji has gotten a lot of attention for their pens. If you look around a classroom of university students, it’s likely you can find a good portion of them using a Muji pen or highlighter.

Something else that I’ve noticed is how some of my friends have purchased enough of these pens to cover the whole spectrum of the rainbow, and they take pride in using all these variations of colour when taking their notes.

Why have Muji pens become so popular? People have extreme brand loyalty to them, give them as gifts, and use them to write everything. It’s not something you’ll find with other brands such as Pentel or BIC, which people just buy for convenience.

I would argue that it comes down to minimalistic aesthetic, functionality, and the tactile experience of writing.

Minimalistic Aesthetic, Beautifully Functional

When you really look at the materials of a Muji pen, none of it really screams “premium”. The pen is made of translucent plastic with a metal tip. There’s nothing shiny about it. It’s just simple.

This is a widely documented stance from Muji, and their design philosophy invokes the idea that “Muji is enough”. This minimalistic message is a counter to the Western idea that “more is better”.

With other pens, you can find their packaging stuffed with features and benefits. In bold colours, they gloss about their soft-hand grip, the smoothest ink ever, and how it will last you for the next year.

But really, no consumer who is searching for cheap pens needs all that information. It’s arguably more than we need.

When you buy a Muji pen, they don’t even bother with the packaging. They leave them out in boxes and let you test them on paper pads before you buy them.

The pens are just your perfect, generic writing tool. They don’t have extra features. They’re perfectly round and smooth. There’s nothing you need to click to start writing, just pop off the cap, store it on the top of the pen, and start writing.

The simplicity is all you need.

The Tactile Experience of Writing

Before my own appreciation for Muji started, my friend commented that Muji pens just seemed to “make me want to write more.” How can such a basic pen possibly make me want to write more?

After a few years of working with these pens, I’ve realized it comes down to the combination of the ink’s consistency and the subtle vibration of the pen when you start writing.

Some pens are really inconsistent with their ink. They will dry out or flow too quickly, leading to faded colours. It’s more of a microfrustration than anything, but it’s something that rarely happens with Muji pens unless they run out of ink. The consistency of the colour in Muji makes writing with it really pleasing to the eye and makes people want to keep on writing.

I think that the most interesting part about a Muji pen is its subtle vibration and sound when you type. With many other pen brands, they are focused on creating an ink and writing experience that is smooth and frictionless.

Something that I’ve realized is that when a pen is too smooth, it is very easy to get sloppy with your writing. On top of that, the ink starts to run and blot too much.

With Muji pens, two things happen when you write. As the pointed tip moves across the paper, it makes a subtle scratching sound. The friction between the pen and paper causes this scratching sound while also causing the pen to vibrate subtly. There is a pleasurable tactile feedback to the pens that make you want to keep on writing. To me, the sensation is almost like carving words into the paper.


Beautifully functional design and the realization that smoother isn’t always better, make Muji pens one of my favourites. Would highly recommend.

Musings on Amazon’s Whole Foods Strategy

An informal discussion on Amazon’s long term strategy and fun theories.

The big news  a few months back was the takeover of Whole Foods by Amazon. It was a deal valued at $13.7B dollars, and caused a panic among retailers. All of a sudden, Amazon was entering the brick and mortar retail business.

At the time of purchase, many people were highly skeptical of the deal. What would Amazon end up doing with Whole Foods? Isn’t Amazon in the business of selling stuff online? 

Yes they are. But outside of your typical online purchases, Amazon actually does a lot more than that. Their business is multi-faceted. In fact, Amazon makes most of their money off hosting cloud computing and servers through their AWS platform. AWS actually made up close to 75% of their operating income in 2016. The other facets of the business you can add into that mix is their Amazon Prime subscriptions, hardware such as the Echo Speakers, and software such as Amazon Alexa. Amazon isn’t afraid to diversify and grow.

Was It A Bad Purchase?

In a conversation, someone raised the point that they believed that the Whole Foods purchase was a poor financial decision. They pointed out that Amazon has razor-thin margins on their retail business already and that entering another low margin retail business was a poor use of their money. Why not invest that money into improving AWS, the higher margin-cash cow?

From a purely financial perspective, his perspective is correct, and Amazon did enter a low margin business, a problem made worse by the fact that it slashed prices on some of its food items by more than 40%. It makes little financial sense, why doesn’t Amazon just double down and try and build their AWS into an industry dominating giant? Why don’t they return some of that cash to shareholders if they don’t figure out what to do with it?

To answer that, I think it’s important to understand the philosophy of Bezos and where he’s coming from. He wants Amazon to take over the world. It’s not there yet, which is scary considering that its already one of the largest companies in the world.

To conquer the world, you’re going to have to do a little bit more than grow a business a few percent a year. You need something explosive, double-digit if not triple-digit growth.

So how does Whole Foods fit the bill? As it is right now, it definitely doesn’t seem like you would be driving double digit revenue growth. Before the purchase, Whole Foods was actually seeing a decrease in sales per store (same store sales).

Declining same store sales – making less money for every store (https://www.theatlas.com)

I would theorize that you can break down who Whole Foods will drive explosive growth into a few separate strategy areas: data collection, distribution centres, and ecosystem strengthening.

Data Collection

Amazon collect huge amounts of data on their consumers. They know your preferences, what you are most likely to buy, when you are most likely to buy, and what items would be complementary to your current purchases. All of this is collected from your time spent on the site, analyzed, and stored. Frankly Amazon probably knows you better than you know yourself.

Whole Foods lets Amazon take that information to another level.

Retail outlets already have a variety of methods for tracking your activity in store. Free WiFi? It’s not just so you can sit down and Snap your friends while you shop. Connecting to WiFi lets stores figure out where you and your phone are in the store. Then they can determine how you are making your way through the store, what products you are looking at, and how often you end up visiting the store.

Let’s connect that with another concept, the cashier-less Amazon Go store. While it’s been hyped up as something that is revolutionary, magical, and convenient, what is glossed over in the conversation is how much data Amazon will be collecting on you the entire time.

Image result for amazon go

When you walk in, Amazon connects you to an Amazon account, so they know exactly who is walking in. They are going to have cameras monitoring what products you are taking off the shelves, how long you hold them, and whether you end up putting them back. Did you hold something for more than 30 seconds? In the future, it wouldn’t be surprising to see you getting an email about whether you want to purchase the product you were considering in-store on Amazon.

Realistically, it would have been a stretch to ask Amazon to build a couple hundred of these stores around North America. With Whole Foods, Amazon purchases those stores, enters the grocery market, and gets a digital playground their developers can go crazy in.

All this information and data allows Amazon to keep growing their business. Data is the new resource and powers Amazon’s machine learning algorithms and recommendations. These drive a significant portion of Amazon’s sales. More data = more revenue.

Distribution Centres

Amazon’s largest competitor in the retail space is arguably Walmart. They are the largest big-box retailer in the world, and are standing between Amazon and industry domination. Walmart has actually starting to make strides into the e-commerce space, leveraging the expertise of their Jet.com purchase and aiming to grow e-commerce sales by 40% for 2018.

Prior to Whole Foods, Walmart had an advantage that Amazon couldn’t easily replicate. Lots of stores.

Wait, aren’t physical stores supposed to be dying? Isn’t everyone supposed to be shopping online?

Well, there are two ways to look at this. Not every one is shopping online yet, and most people still opt to buy say their groceries in person.

Another problem that comes up is delivery time. Sometimes, I want to buy a chicken right now. I need to do a last minute gift purchase. Ordering online takes too long, so I go into stores.

Not only are delivery times really long, they are also very expensive. Amazon’s shipping division lost them $7.2B in 2016. With real estate and physical locations, especially since Whole Food’s stores are within 10 miles of 80% of the American population, you have the ability to

a) quickly deliver from your retail stores

b) enable in-store pickup

c) keep groceries and produce fresh during delivery.

The ability to keep groceries fresh and deliver them promptly has been an ongoing challenge for Amazon. Whole Foods gives Amazon the ability to bring e-commerce to the grocery market right off the bat.

whole foods geographic distribution

Heatmap for the Whole Foods store locations.

Ecosystem Strengthening

One of Warren Buffett’s principles in identifying a great business is how “sticky” their business model is. Is the business effective at capturing consumers into their system and making them stay? This is the main reason we see companies like Apple and Amazon investing into content such as exclusive television shows and artists. They are giving you another reason to stay on their platform.

Amazon Prime is Amazon’s extension of this strategy. They offer you free shipping so you end up buying more. Prime gives you access to a library of videos and content, so you keep browsing on Amazon.  You also have exclusive partnerships with companies such as Twitch, Audible, and even offer their own VISA card. None of these are cheap investments, but all serve to keep Amazon customers locked into their ecosystem.

Whole Foods is just another acquisition that strengthens this ecosystem. Moving forward, it’s easy to see Amazon continuing a rollout of their Amazon Fresh and Pantry. These services deliver food and groceries to Prime Members only, and are another incentive to stay locked into their ecosystem.

Was Whole Foods A Good Buy?

From a purely financial perspective? Maybe not. But I’m no finance major. From the perspective of strategy, strengthening the Prime ecosystem, and growing the business, Amazon’s purchase of Whole Foods was spot on.

A quick summary of the changes, courtesy of Business Insider, can be found here: http://www.businessinsider.com/amazon-changes-whole-foods-2017-9.

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