Why a Black-Coffee Management Style Would Have Saved Starbucks

In a waiting room magazine I once read that Howard Schultz, the founder and CEO of Starbucks, ironically prefers black coffee to any of the outrageous hot or cold drinks offered by the morning/afternoon/evening "fix" giant. The pied piper of java himself sticks to the core of coffee, and I think that says a lot about him as a person. Black coffee is strong and bold; it is foundational and pure; it's as American as Lewis and Clark; and though it is so incredibly simple, it's almost against-the-grain. Now I understand that not everyone likes black coffee. Some think it's bitter and rather plain, which is why Starbucks' overhead menu is bigger than that of McDonalds. And just as their menu appears to be slightly cocky and over-the-top (a 13-shot venti soy hazelnut vanilla cinnamon white mocha with extra white mocha and caramel? You've got to be kidding me!), in recent years their business plan started to follow suit by adding dozens of stores to every corner of the globe. Today, with profits down an astounding 97%, the executives at Starbucks are starting to feel an awful lot like mortgage lenders, cleaning the gum off their faces from a freshly-popped bubble.

Now that the economy is looking like a typical season for the Pittsburgh Pirates (they suck, BTW), consumers are cutting back on spending like never before. And luxuries -- like Starbucks -- are hurting the most. We're through with our smoke-'em-if-you-got-'em (and-borrow-'em-if-you-don't-got-'em) spending habits and have moved to a more conservative way of living, as if we just discovered that we can actually brew coffee at home. We're starting to treat fru-fru coffee as a luxury now as opposed to an everyday entitlement. And guess what -- if Starbucks had stuck to a simple, black-coffee management style, they would've seen it coming.

Am I saying that we should never drink Starbucks because it's a luxury? Absolutely not. Actually, I almost always drink Starbucks when I'm at the mall watching my wife spend money on clothes that cost a hell of a lot more than my cup of coffee. I can probably count on two hands the amount of times that I visit a Starbucks each year. But when I think of coffee spending getting out of hand, a story comes to mind. While enjoying a hot drink with my in-laws at their local 'bux, I spotted a woman waiting in the 15-person line. She carried her own purple mug (going green -- nice), but it had a homemade sticker on it; I investigated. On the sticker was printed the exact specifications of her favorite [complicated] drink, the details of which I will not bore you with. I couldn't believe it! This seemingly frivolous experience (which we recognize with every $4 coffee joke we make) had become an obvious daily habit of this woman. After I watched her pass her mug across the counter, I noticed many of the other patrons in line ordering their drinks without even glancing at the menu. They were hooked, too.

A big reason that the economy is where it is today is that people spent outside of their means for several years. Today, the average amount of household credit card debt is over $8,000. And though the woman with the purple mug may have very well been wealthy and within her means while indulging in her $100/month habit, I've got to imagine that at least half of those people in line were part of the startling outside-of-our-means American spending statistic.

Did Starbucks know that consumer debt was spreading like a California wildfire? They must have. Did they know that their coffee was expensive? Umm, does a bear shit in the woods? Despite evidence that Americans were becoming poorer and the clear and present fact that their product was expensive and easily replaced by a much less expensive homemade substitute, Starbucks continued to build store after store after store. Now, with profits down for the count, they're closing hundreds of their locations to make up for their grossly overestimated forecasts that, frankly, were as ridiculous and pretentious as their holiday coffee selection.

I'm sorry to pick on Starbucks. What's happening to them is happening to a lot of businesses, which is why so many Americans are losing their jobs and, subsequently, their mortgages. When Americans as a whole strayed from a reasonable and symmetrical expense/income ratio, businesses like Starbucks saw the desert mirage of infinite exponential growth that, in reality, was merely dust. This is why I preach, day after day, the covenants of responsible spending.

Responsible spending helps individuals by allowing them to save for the future. It allows them to keep more of their own money and to live a sustainable and healthy financial life. Responsible spending helps the entire nation by eliminating these false forecasts of eternal growth and profits for businesses. It keeps the economy in check, managing inflation and stabilizing cash flow. Keep in mind that I am an absolute proponent of spending money. Spending is the be-all-end-all of a capitalist society. And if we as a people bought only the bare essentials, we'd eat nothing but rice and all live in caves. But by buying the things that we don't need day after day for years and years, we become a gluttonous society that cannot sustain itself, much like a balloon. Now, because of America's overspending -- much like overeating -- we must reduce our consumption to below normal levels to get back to the point of a healthy equilibrium.

So while irresponsible customer spending helps companies like Starbucks in the short term by giving astounding inflated profits for a few years, it can destroy them in the long term. If Howard Schultz had stuck to a black-coffee, back-to-the-basics management style, he would have recognized the looming bubble and directed the company proportionately. Like black coffee, it would have been simple, yet against the grain, to slow expansion -- but it would have saved his ass. Instead, for years he and his stockholders were swooning over the streams of cash and credit pouring through the doors and laughing all the way to the bank. But who's laughing now?

Prosper.com: Convincing My Wife, Part 2

...she ain't convinced yet.

In my continued efforts to convince my wife that Prosper.com is a good investment, I'll analyze another aspect of the website today. Today I'll study what makes the successful lenders successful, what makes the average lenders average, and what makes the biggest losers, well, the biggest losers. I'll be moving my analysis platform to a fabulous website that focuses solely on Prosper.com lender and loan data, EricsCC.com.

To get things moving along quickly, consider the following graph that shows all lenders' rates of return on a seemingly normal distribution curve (please click any graphic to enlarge it):
As you can see, the majority of lenders are making money, and a significant majority are also earning a higher rate of return than they would earn in a traditional savings account. However, of all the non-average lenders, there are more that are doing exceptionally poor than doing exceptionally well. This indicates that if you do not follow a reasonable, disciplined investment strategy, you are more likely to lose at a high rate vs gain at a high rate. I guess the same could be said about the stock market. Essentially, it's easier to make mistakes than it is to get lucky.

Do you ever watch that show called The Biggest Loser on NBC? Well meet the biggest loser on Prosper.com: scoobydoo. Here is a graphical representation of his investments:
As Antonio from the Merchant of Venice would say, His "ventures are in one bottom trusted." This guy has invested a lot of money into Prosper.com and has given several large loans to people with C-grade credit. If one or two of those loans defaults, his ship will have sunk.

Let's look at another big loser's profile. How about jasonpeery:
Here's another guy that has a poor, lazy investment strategy. He has invested over $50,000 in Prosper.com listings and has scores of late payments and defaults. This guy has made several individual loans over $1,000, including one that is in default for $11,000! Why in the hell would you EVER loan $11,000 to a person with high-risk credit? And without even asking them a question! I sure hope that jasonpeery is better at personal finance than he is at determining to whom he should lend his money. As Neil Boortz would say, I bet that this guy has a lot of rent-to-own furniture in his house. My guess is that this guy's grandmother died recently and left him a bunch of money. No one that worked for $11,000 and saved it would ever be that careless in giving it to a single high-risk stranger.

One thing to remember about Prosper.com's fee structure is that all individual loan fees are passed along to the borrower except for a 1% loan servicing fee which is paid by the lender. This means that, statistically speaking, there is no reason to invest more than $50 in ANY candidate. Period. If I lend $500 to one person or $50 to ten people, I will pay the same loan servicing fee. And though I may save a little time by investing more money in lower-risk candidates, it's just plain silly to not diversify to the max with sub-prime borrowers.

OK, so let's look at someone with an average return. Consider the portfolio of helpishere777:
Ahh, this is refreshing. This user is right in the middle. He is earning about 11% interest, which takes into account the probability of his late payments going into default. He has invested the same $50,000 that our last big loser had invested, but in a completely different way. Look at the nice even relationship between all of the blue and green lines. Do you know why they're all equal? Because he invested the same $50 into every single loan. He understands that in order to mitigate his risk, he needs to diversify -- especially if he can do it at no additional cost!

Now let's look at the best lender. I'm not going to evaluate the person earning the highest return on his money. Currently that person is DrakeCO, who is earning about 33.6% interest. However, the average length of his loans is less than one month and most of his loans have been large amounts (max of $1,500) to high risk borrowers. Because of the youth of his loans and the nature of his strategy, he is bound to fail. Instead, I'm going to look at someone earning about 20% return with a reasonably large average loan period (if it's not old, the borrowers don't have time to be late!) and a significant amount of money. It looks to me like the golden child of Prosper.com is brother_tam. Here is his portfolio:

brother_tam is obviously smart and probably a little lucky. He has invested a little more than $10,000 in Prosper.com, mostly in $50 increments. Of his 224 loans, he has given more than $50 only 13 times, probably just to spice up his account. As a lender that understands the need to diversify. He is aware that he can invest in lower-credit borrowers because of his discipline. But he doesn't invest in only low-credit borrowers. He has a nice normal distribution of his loans that has a mean slightly on the low-credit side.

To be a successful lender on Prosper.com, you need to stick with a disciplined strategy that is formulated around the values of diversification and a normally distributed loan strategy. When choosing which loans to bid on, consider your current portfolio and establish a quota. "Right now, 75% of my loans are to high-risk borrowers. I should invest in some low-risk borrowers."

Remember: there is no penalty for investing the minimum amount in a person. And with more than 2,300 active listings, you shouldn't run out of people to lend to.

If she's still not convinced, I'll have to write more tomorrow.

Add some zing to your site (or cash to your pocket) with stock photography

If you're a photographer or a the owner of a website, you should check out iStockPhoto.com. iStockPhoto is a Canadian site that allows photographers to upload their own photos to a platform that sells the royalty-free photos to designers. Note: In this case, royalty-free means that the designer pays a single flat fee for the usage of a photo and does not pay the photographer or site each time it is used.

Here's how it works:

For designers:
You can purchase stock photography for one of two prices: an ad hoc price and a subscription price. Only site-proprietary credits may be used to pay for photos. Credits cost up to $.94 apiece with an on-demand purchase, and as little as $.29 apiece with a $521/month 60 credit/day subscription (which are use-it-or-lose-it credits). $.32 credits are also available with a $96/month 10 credit/day subscription.

The price of photos then depend on the size and resolution that you would like to download. Low-res photos cost one credit. Extra high-res photos cost 20 credits.

For photographers:
As you might imagine, there are a lot of photographers out there that believe that their work is cunning and genius and that graphic designers would gladly give a left leg (or something else) to get their hands on one of their photos. The truth is, there are lots of good photographers out there and iStockPhoto is very particular about the photos -- and types of photos -- that they post on their site. In fact, just to be able to post photos on the site, photographers must fill out an application, read about several of the site's guidelines, take and pass a quiz on the material, and submit three artistic samples. I've always considered myself a skilled photographer, but my own application was denied.

Remember, this is a stock photography site. Most of the photography is non-controversial and geared toward a corporate environment. The models are attractive, the kids are cute, and the colors are bright. Before you submit any of your photos, browse the site to see what has been the most popular. From what I can find, this is the most popular photo on the site.

Photos are heavily screened before being listed, and guidelines are clearly posted for the types of pictures that are in highest demand (currently businesspeople and sports). If you decide to submit some work, I would recommend taking photos specifically for the purpose of selling them as stock photography, ensuring that they are at high quality with a low ISO and not over or under exposed.

Photographers are paid 20% of the selling price of the photo. If your work is popular, you may become an Exclusive Contributor and earn 40% instead.If you have professional photography equipment, a good eye, and the ability to capture the types of photos that are demanded by graphic designers, iStockPhoto may be right for you. If you're like me and have less than $2,000 worth of camera equipment and take photos only of your friends (unless all your friends are smiling businesspeople with folded arms), iStockPhoto may simply be a place for you to explore others' art and get some ideas.