If you’ve been reading this blog for a while (and paying attention), you have probably noticed a few things about me: 1. My TV has a bizarre power over me, and 2. I procrastinate with everything, including going to sleep. These two facts imply that I see a lot of infomercials. Some of them are pretty entertaining- who wouldn’t be intrigued by the possibility of airbrushing on her makeup or making a meatloaf in a blender in 30 seconds?- but there is one in particular that makes me want to punch someone in the face. It’s called “The Art of Making Money” by Russ Dalbey, and apparently good old Russ has a system called “Winning in the Cash Flow Business.”
Like all sketchy infomercials worth their salt, this one is pretty vague about the how part of the making piles and piles of money, but is very careful to point out how easy the system is. (It’s complete with the not-overly-intelligent people bragging about how they made $200,000 with one phone call or whatever.) It even enlists Gary Collins to act as a straight man for Russ’s schpiel, which goes as follows:
“Gary, let me show you how easy winning in the cash flow business really is. Take these two bills for example. (Holds up $50 bill and $100 bill) In my left hand I have a $50 bill, and in my right hand I have a $100 bill. Which would you rather have?”
Gary: “The hundred, of course.”
“Okay, of course. Now, what if I said you could have the $50 bill today, or I’ll give you the $100 bill over the next 5 years. Which would you choose?”
Gary: “I’d take the 50.”
“There you go. Ansolutely, it’s all yours. And that’s how easy the cash flow business is, and that’s how cash flow notes work. Many people who have these notes would love to have cash now, to pay off their bills, to take that dream vacation they’ve been talking about, they don’t wanna wait years for their money. It’s a win-win situation for everybody.”
Hm. So I kind of get how the system works: you call people with some form of structured settlement to be paid out over time (cash flow notes, in Dalbey’s words) and convince them to accept an up front payment in return for the stream of payments. You then sell the stream of payments to an investor for a higher up front sum and pocket the difference.
I’m sorry, all I really heard from that was “you take advantage of people who can’t do math and don’t understand the time value of money”, and apparently Gary Collins doesn’t get it either. Let’s do some math (sorry, it can’t be avoided) to compare the up front $50 to the $100 over time:
What this basically means is that, for the $50 offer and the $100 offer to be equivalent, the interest rate that you get on your savings (or that you pay to borrow) has to be in the neighborhood of 29%. Seems a bit high, last time I checked. If the interest rate is lower than 29%, the $100 over time is the better deal. I’m guessing our buddy Russ is hoping that people don’t realize that.
Let’s put this another way, for sake of comparison. Let’s say you had the $50 up front and you invested it at a reasonable 6% interest rate (though even that could be considered high nowadays). How much would you have after 5 years?
You would have considerably less than $100…and this was even assuming that you didn’t get yearly payouts like in the first example.
Russ brings up the fact that people want to purchase things now, such as vacations, cars, boats, small furry woodland creatures, whatever, so there is a specific benefit to the up front payment. However, given the astronomical foregone return, this would only be a sensible choice for people that can’t get conventional loans, credit cards, etc., since all of these items typically have an interest rate of lower than 29%. Which brings me to an additional point that Russ would like to address:
“If it’s so easy, why isn’t everyone doing it?”
Well, let me see…Russ says that it’s because not everyone knows about it, but I beg to differ:
- Some people don’t want to target those who either don’t understand math or can’t get credit, since it seems somehow wrong. (Let me address those who accuse me of being anti free market: One of the assumptions required for the conclusion that free markets are the most efficient way of organizing is that all participants have the same information. If one party can’t do math, this assumption doesn’t hold.)
- The process is a lot harder than Russ makes it seem, if for no other reason than a lot of actual companies are carrying out similar transactions.
- According to the interwebs, Russ doesn’t actually give you enough information to implement the system successfully, even if it is theoretically possible.
- In a lot of states you need some sort of broker’s license to legally carry on this type of business.
Need I continue?
I didn’t write this because I really thought that anyone reading this site was going to rush out and purchase this magical moneymaking pot of gold. I wrote this to make the point that it’s important to consider not only your own incentives but the incentives of the other party when engaging in a transaction. Perhaps you should even be thinking to yourself “If this is such a good deal for me, why is this guy so happy to give it to me?” Don’t get me wrong, there are some deals that actually do create value for everyone involved, but a deal that is merely transactional is by definition a zero-sum game. And that means that if you can’t look out and see the sucker, it’s because you’re the sucker.
For the record, I would venture to guess that Russ Dalbey makes more money from selling these packages than he does actually conducting the business that he says is so amazing.