Reading Between the Lines

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.

negativeyields070516

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.

Conclusion

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.

20 thoughts on “Reading Between the Lines

  1. JC says:

    I was just having a conversation with Bryan about that this morning. Many companies mention the GAAP earnings but then quickly move on to their own internal adjustments that are always going to look good. It’d be one thing if the same adjustments were made each report, but chances are the adjustments are changing so that things always fall in line. The sad thing is that the people that should be calling companies out on it are the ones that preach about how the adjusted earnings are stellar.

    • Hi JC,
      It is astounding how accounting standards are being discarded these days. For all I know, this may continue for a few more quarters or years, but sooner or later, the masses will come to a realization that this is insane. I was Bryan as well this morning and he was filling me in on the details from the Boeing results — what a load of BS! Just goes to show that even the “blue chip” DJIA components arent really safe anymore.

      R2R

    • Haha in case it didnt come out strongly enough, heres an exercise — watch how many times you hear the word “adjusted” this earnings season. Its a house of cards, I tell ya! 🙂

      R2R

  2. Bernie says:

    I don’t believe in taking out a loan to purchase a depreciating asset. Since the 70’s I’ve only purchased vehicles with money from savings.

  3. Hi R2R,
    Thank you for the thought provoking article. The study of biases is really relevant here – perhaps that car dealer is incentivized to push clients to get a loan versus paying with cash. The old Charlie Munger saying that you should never ask a barber if you need a haircut is quite relevant here.
    On the other hand, the chart you showed is interesting in itself – someone puts up some data, makes it sound “official”, and the lemmings buy it. It might be a perfect illustration of confirmation bias. Too many people hold a certain view, and they then look only at the evidence that supports it. This could be dangerous. On the other hand, I am also afraid of trying to be too smart, because any time I do that I lose money. Either way, the ability to read numbers critically is a skill that is difficult and time intensive to develop.

    • Well said, DGI.
      It takes time to develop the skill and you sometimes come out on top or sometimes lose out. But it is a skill we all need to develop nonetheless if we want to protect our assets.

      I really like that saying from Charlie Munger. I keep repeating over and over and its definitely one of my faves 🙂 The car dealer definitely has a higher incentive…I know a few people who own car dealerships (Unfortunately they dont run dealerships for the type of vehicle we wanted) — and it is the financing and the insurance/protection products where they see the biggest margins.

      Best
      R2R

  4. I hope you were polite to the salesman upon turning down the offer. I had someone recently turn down an annuity, but making stupid jokes and telling me he’d rather do it with anyone but me because the rates were too low. But he had no problem monopolizing my time to play around with imaginary numbers and joke about mailing the annuity quote to Donald Trump (customer was likely retarded). I eventually told him I was busy and sent him out; I’m a banker, not a babysitter.

    Outside of that, I agree with you. And with Bernie. I think debt should be considered a major undertaking and not be taken on so clearly. Someone I knew once advised me to get my master’s degree (in what and for what, I don’t know). When I said I didn’t have the money, she said to just go into debt. It’s amazing how willing we all are to bury ourselves under mountains of debt for depreciating assets (and yes, even the value of a degree is bottoming out fast).

    Sincerely,
    ARB–Angry Retail Banker

    • If someone is discussing your products and says that the offer isnt good enough, that sounds fair to me. Its called shopping around and finding what is right for you. If your bank does not offer the best products in the marketplace and isnt competitive enough, there is no reason to call your potential customer “retarded”. I agree that your time is probably better spent in trying to win more customers and some work out and some dont — thats just the matter of business.

      Debt is a double edged sword. Some can use it to their advantage while most get burnt. People tend to say that education and mortgages are always good debt, but it may not necessarily be true. What if you are buying a house at market top just before a crash? What is your four or more years of education is rendered useless by improving technology and/or automation? As is usually the case, one single word of advise may not apply to everyone and every situation.

      R2R

        • It was the way he did it. He was intentionally monopolizing my time, and yes, I know when someone is doing it intentionally rather than cluelessly. I had customers waiting for me but he “desperately” needed a pen and paper to work out all sorts of scenarios in which he would be getting “screwed” by me (such as if he got hit by a car immediately after signing the paperwork….,,.despite his wife being a beneficiary who would be entitled to every penny he put in). He knew others were waiting for me and didn’t care, showing blatant disrespect to myself and to those other customers. He was well aware of the fact that he was done with me, but decided that his time and mine were both so worthless that they were spent playing around and telling me he’d rather buy an annuity “with anyone but [me]”, which is out and out intentionally disrespectful (especially when mentioning it multiple times without provocation). If a person doesn’t want to do business with me, that’s fine, but there’s a right way and a wrong way do not do business. As a business owner, he should know this and I should imagine that he would never tolerate the same level of disrespect towards him and his business that he showed. I made a mental note of his business; I will not patronize it as I won’t with many others whose owners have shown me that they are less than desirable individuals to interact with.

          He also would NOT STOP with this really confusing joke about mailing the annuity quote to Donald Trump. I didn’t understand it at all, and by the fourth attempt at it, I was pretty much convinced that he was just retarded.

          R2R, you’ve read my blog. You know that I don’t JUST call people retarded. Not simply on the grounds that they found a better deal elsewhere or something like that.

          Don’t ask me why I separated that into two comments. I’d say that was pretty retarded 😉

          Sincerely,
          ARB–Angry Retail Banker

  5. Completely agree with you R2R, I’ve read quite a few stories recently how car salespeople just want you to look at the monthly amount, not how much it’s costing them or the interest rate. We’ll always buy with all cash for this reason (among others). I think the amount of creative accounting is getting worse to make it seem like each result is better, but they’re stretching the truth to beat last year’s result more and more. The valuation of ‘normal’ earnings is probably the highest it’s ever been.

    Tristan

    • Thats the better way to purchase. You have to make sure you get your cash discounts too — car companies (and dealers) incentivize cash payments as they are capital intensive industries. So, you have to drive hard bargains if you are handing over all that cash to them.

      Glad you enjoyed the article. Thanks for stopping by and sharing your thoughts
      R2R

  6. Great post R2R, it is always hard to tell exactly how much of an article or analysis to believe. Particularly if you do not know much about the topic.

    What comes to my mind first on this, is all those Motley Fool articles, saying ‘this is the buy!!’ ‘Make huge money on this stock!!!’ Then to see the the next article down on Google Finance being also from Motley Fool to ‘SELL SELL SELL!’ The article is just about always going to have some sort of slant or bias from the writer, whether intentional or not.

    If you are interested in learning more about that sort of thing, see if you can find a free online copy, or library book on Research Methods; I had a course on it in Uni that talked a lot about trying to get rid of bias when making surveys, and I think it also applies nicely to writing.

    • Haha you said it, DW. Its hard to know what the ulterior motive is. Even when ratings agencies or banks upgrade or downgrade a stock, you have a wonder what the reason is. Case in point, Goldman Sachs — which is notorious for recommending something to investors only to find out that they sold later or downgrade something so that the negative news creates better entry prices for their insiders. We always have to stay vigilant.
      Thanks for the recommendation — I’ll have to check it out.

      R2R

  7. Hi R2R,
    Interesting post and I’m glad that you got a better deal on your vehicle!

    I seem to remember that most communication is non-verbal; one common estimate is that only 7% is verbal; the rest is tone and body language.

    I do try to keep the phrase “Consider the Source” in mind when reading online since most articles aren’t balanced / impartial. There’s usually always an underlying bias whether the article is well-intentioned or trying to sell something. Plus I think people tend to gravitate towards articles / sites that reinforce their own confirmation bias.

    Best wishes,
    -DL

    • Another example that jumps to mind is when you read something like “According to a study”. No one really cares what that study was, how it was conducted, were proper techniques used and who funded them. More often than not, you can find that the sponsorship of the study has a huge conflict on the results touted by the headlines.

      R2R

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