Paying for Value

“How did you go bankrupt? Two ways. Gradually, then suddenly.”

— Ernest Hemingway, The Sun Also Rises

After the first test was complete, I decided my game was absolutely addictive to youth, and sure to be the hottest new investing simulation to hit the shelves. So I was thrilled, but not entirely surprised when my subject asked if she could play again the next day.

We programmers have a tendency to draw conclusions that everything is going fantastic based on limited test results. “Short-circuit evaluation” mindset, let’s call it: hey, it worked the first time it ran! Mic drop. Nailed it. Guess I’ll move on to a new module. It’s not always bad to assume the best. It keeps development rolling. Testing can really be a drag. It derails the whole mojo. It stifles creative pace. But circling back to test is essential, and the more complex the program, the more testing is required. Mine was a stout 14 files of code.

Things had gone exceptionally well. Technically speaking, no problems were found. No glitches, calculation errors, or otherwise catastrophic failures. But the data suggested a problem: by the time my subject reached the “game over” screen, she was nearly a billionaire (with a “B”). Now, she’s incredibly smart. It’s not a knock on her. But I couldn’t help but wonder if I’d made things too easy. As an avid gamer, she was quick to find opportunities to exploit. But she didn’t even really need to in this case. She just repeated the same couple of moves that rewarded her the first time. They always worked, like she had the Midas Touch. That’s not real investing. I’d done her a disservice.

I used the opportunity to recalibrate a few things. Spending money was tighter this time, and rates of return on investments a bit smaller. Then I left her to it. A few minutes later I got a text from the other room, “This is NOT good!! IM IN DEBT!! (On the game)”.

I rejoined her. “What happened?”

“Well, everything was going fine, but I really wanted to buy this property. It was going to take a long time to get, so I just took a loan. But when I did, then I didn’t have enough cash to pay the interest. So I took another loan to be able to keep up on the interest. Now the interest is even bigger, and I have negative cash! What do I do?”

“The only thing you can do: sell whatever you can to dig yourself out of the hole. That will ease the bleeding.” I went on, “look more closely at what you’re paying for. If you take a loan with 10% interest to buy an investment that will give you only 6%, well, you just promised to pay 4%. That’s not going to make you money. That’s how you lose it.”

Warren Buffett put it more succinctly: “Price is what you pay, value is what you get.” Bottom line: make sure you’re getting your money’s worth!

I left again. A few minutes later, though, my curiosity got the best of me. I came back to find her debt free, but she’d aged 20 years!

“How’d you play so fast?!”

“Well, I could only pay the loan a little each year, so I just clicked and clicked and clicked “end year” without doing anything.” It appeared that she’d been doing some short-circuit evaluating of her own.

I had mixed emotions. My heart went out to her when I realized, just like the rest of us, she hated being in debt. She wanted out as quickly as possible. No one wants someone else spending their money before they earn it. While I wanted to feel proud of her for bearing through the struggle, she let that struggle blind her to any and all opportunities along the way. Twenty years slipped by in which she could have done more with the little she had, even at a disadvantage. Here she was, now only ten years from a forced retirement, and she’d saved only 50,000 or so. Would she have enough saved in time before then? It wasn’t clear.

This is a situation all too real for many these days. Guaranteed pensions are the exception to the norm, and social benefits aren’t guaranteed to the children of today with ever rising government debts. With over 20 trillion and counting, every man, woman, and child currently owes around 60,000 to the U.S. Government’s lenders. That’s more than an average U.S. family has saved. Who, after all, will pay them off? Bottom line, saving for retirement is not easy, but it is essential. It is not fast either. There are rarely shortcuts. And the brutal truth is there’s no easy way out of debt. It requires patience, hard work, and resourcefulness. The math suggests there will come a time when each retiree is required to pay for their own retirement as well as someone else’s, if not several others. How will we ensure our children can be prepared for that responsibility?