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The Un-Bankable


I prefer the un-bankable, and they're a lot more fun at a dinner party.

"Money often costs too much." ~Ralph Waldo Emerson

Pawnshops and Payday Lenders live behind our eyes. We drive right past them all the time but never really look at them. Most of us have never been in one but assume what must be inside. They are some things we do not want in our neighborhoods but could not live without. The politically correct response at a dinner party is to wish they went away because they prey on the low income worker, trapping him into usurious rates.

I often wonder if the economist or journalist condemning these ferocious capitalists and pitying their victims have ever done the math on the $40 his son or daughter ATM'ed last weekend. There could have been a $2.50 charge at the machine and maybe another $1 from the bank. Of course it might be lower, and I've seen it higher. But in this typical example, that's $3.50 to get $40. Paying 8.75% to get your own money is less offensive than paying someone to borrow theirs? At least a pay day lender is providing a service not available elsewhere. Yet one rate is called usurious, the other is called a convenience fee.

Next time you run into your local banker (odds: -150 golfing / even eating / +500 banking) ask to see his profit and loss statement at the end of the year. Offer to bet him a free cookie at the next chamber of commerce meeting (he'll ask which chamber) that NSF fees are double digit percentages of the bank's profits (response odds: -150 "how'd you know what NSF's are?" / -120 "what are NSF's?" / +180 "what kind of cookie?") You don't hear too much about the $25 Non-Sufficient Funds fee as a 31.25% rate calculated on the $80 check written to a plumber from the wrong account or before a deposit hit the right one. Plenty of middle class (and…shhh…yep, upper class as well) "accidentally" get hit with NSF fees all the time. Even more often, this same high income group of consumers willingly pay late fees on credit card charges. Pay day loans on street corners carry egregious costs but bouncing checks and cards in the suburbs is merely a lack of sufficiency at the present time?

Pointing fingers at pawnshops and payday lenders recently, the executive director of a southern state's Poverty Law Center said, "They set it up so you have to pay the whole thing off in two weeks, and they know you can't…the worst part is they trap you. They are taking advantage of poor people. They are taking advantage of people that are desperate." But contrary to this convenient conclusion, poor people can and do pay them off or else these shops would not flourish. What's better - I'd ask the director - interest only loans where your neighbors are paying nothing off? At least they get to host nice dinner parties hypocritically worrying those poor souls who don't know any better. When investigating usurious rates, regulators found that 85% of payday customers returned to the same store in the same year. Last time I checked return customers makes a business not a crime.

The business of money is big but we spend too much time thinking about those who have it, instead of those that need it. I like following demand and avoiding supply. In financial services, some of the best operations are often what we least like think about. As a money manager or investor, this uncomfortable topic for many is an under-analyzed and I believe an under-appreciated set of businesses for a few others. Money flows from the many to the few for a reason. My firm has owned, for many years, a large position in First Cash Financial Services (FCFS) but this is not about one stock and certainly not a recommendation. There are others that might be better or worse, but as a group they are too often overlooked. Only a handful of analysts even follow these stocks that are up several hundred percent in recent years. Analysts would rather look at the banks catering to the same consumer their own economists worry the most about.

The best investors fix problems and let others argue about them. Many folks are too prejudiced against a business with the cleanest math of all – a profit for a product that's in soaring demand. Everybody points to the problems of immigration, the surging number of have-nots, the mounting debt. Yet they go back to the their office and invest in the Stock Market which is built more by big banks than any other industry, catering to the group we all agree is shrinking. I prefer the un-bankable, and they're a lot more fun at a dinner party.
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