Overdiversifying, underdiversifying, and practicing what I preach

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I recently had the pleasure of redeeming 30,000 American AAdvantage miles for a $290, one-way domestic plane ticket, which gave me an excellent opportunity to reflect on some travel hacking wisdom I never get tired of preaching: the least valuable point is the one you don't redeem.

The real risk of underdiversifying is paying cash

The point of travel hacking should be to pay as little as possible for the trips you want to take. I'm absolutely indifferent to whether you want to travel domestically or internationally, by plane, train, or automobile, with your family or alone, in first class or in steerage. I just want to help you spend as little money as possible to do it.

Diversifying your points balances is a way of achieving that. With no rewards currencies at all, you'd pay the retail cost for all your travel, minus any savings achieved by booking through online portals, paying with discounted gift cards, taking advantage of best rate guarantees, and the other techniques we have available.

With a single rewards currency, you can start to save money when you're able to find award space with that loyalty program. If you only collect Hilton HHonors points, you're in good shape as long as you're visiting a city with a Hilton property, and that property has award space. You'll still pay cash for your airfare, but hotels can often be the biggest expense on a trip, so the savings there can quickly add up.

With multiple rewards currencies, you can start to bring down your costs considerably. If you earn Ultimate Rewards points with an Ink Plus card, then you'll be able to save money by redeeming Hyatt Gold Passport points when you visit a city served by Hyatt, and by redeeming United, British Airways, Flying Blue, and Southwest points when those airlines and their partners make award space available. Even better, when award space isn't available, you can still get a 20% discount on revenue flights by redeeming Ultimate Rewards points at 1.25 cents each.

I won't belabor the point: having more rewards currencies reduces the chance that you'll have to pay retail for your travel. As long as those rewards currencies are acquired cheaply enough, that means each redemption saves you money on your travel, which, again, is the point of the game.

The real risk of overdiversifying is unredeemed balances

Many travel hackers and bloggers believe that "earning and burning," or keeping points balances as low as possible by redeeming award currencies roughly as quickly as they're earned, is the best approach. The reason normally given for this is that regular devaluations decrease the value of earned miles and points, so your balances will never be worth as much in the future as they are in the present.

Meanwhile, I spend no time thinking about devaluations, and don't think you should either. Your travel hacking practice should be giving you big enough savings on each redemption that even substantial devaluations won't affect the calculus of redeeming miles versus spending cash.

But the logic of diversifying your points balances really can be taken too far!

Above I said that when you don't have the right currency to pay for the trip you want to take as cheaply as possible, you run the risk of having to pay cash and not save any money at all. One way to react to that possibility is to accumulate high balances in as many programs as possible, to ensure that you always have enough of the right currency for the job.

The problem with that approach is that it exposes you to the real risk of overdiversifying: unredeemed balances. From hundreds of interactions with readers and friends in the community, I have come to believe that accumulating large, unredeemed balances is the single biggest mistake made by even experienced travel hackers.

There's no mystery to how it happens: a new credit card is launched, or refreshed, or suddenly has a much higher-than-usual signup bonus. Once the credit card affiliate bloggers get their links, you see two or three weeks of blanket coverage online. Sometimes the coverage even runs over into the mainstream media. Even those who are disgusted by the orgy of profiteering start talking about the orgy of profiteering, bringing the offer in front of even more eyeballs.

And then, like clockwork, people start asking: "I have all these Wyndham/Membership Rewards/Amtrak/Choice/Trump Shuttle points. What do I do with them?"

The answer, unfortunately, is usually "nothing."

Pay as little as possible for the trips you want to take

Without travel hacking, most of us couldn't afford to spend a week in the Maldives. But even without travel hacking, many of us could afford to fly home for Thanksgiving.

Paying $150 for a $600 plane ticket you'd otherwise pay cash for is a savings of $450.

Spending $2,500 for a trip someone else paid $15,000 for is an expense of $2,500.

I've heard that the Maldives are lovely, and I'm sure I'd enjoy visiting. But speculatively accumulating huge balances at random as signup bonuses change and cards are launched or discontinued, instead of targeting programs that save you money on the trips you want to take is a way of spending money, not saving it!

Again, this says nothing about the merits, or lack thereof, of the Maldives, of your favorite Park Hyatt, or of Emirates First Class. I'm sure they're lovely. But being talked into taking someone else's idea of the perfect trip is an expensive mistake — travel hacking just makes it less expensive.

Conclusion: my fantastic AAdvantage redemption

All of that brings me to my 30,000-mile, $290 one-way American Airlines ticket. If you believe that the goal of travel hacking is to get the highest dollar value from each redeemed mile, this is a preposterous redemption — less than a penny per point!

But I had a different problem: an unredeemed American Airlines balance. I'd earned the miles cheaply, through Barclaycard US Airways anniversary miles, a negative-interest-rate loan I took out, and some experiments I'd been running through the American Airlines shopping portal, so I was certainly saving money on the ticket compared to paying cash.

But even more importantly, I judged ridiculous the idea of paying $200 (the cash value of the 20,000 US Bank Flexpoints I'd need to redeem) or $232 (the cash value of the 23,200 Ultimate Rewards points I'd need to redeem) when I had more than enough AAdvantage miles sitting in my account unredeemed. I didn't have a plan for the miles because I had earned them more or less accidentally: I had overdiversified into AAdvantage miles, and was sitting on a balance of miles that were, unredeemed, worthless to me.

The point of travel hacking is to pay as little as possible for the trips you want to take. I wanted to take a $290 flight and $5.60 in taxes and fees was as little as I could pay for it. Mission: accomplished.

On thought leadership

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As regular readers know, I'm a podcast fanatic. The only thing better than being able to conveniently manufacture spend is being able to listen to great audio content while you do.

One podcast I've given a few chances to, but haven't yet been blown away by, is the Ezra Klein Show. Klein is a great interviewer but has the absolute worst taste in guests to have on the show, which makes most of the interviews ultimately boring unless you're personally interested in the area the guest specializes in.

Back on April 19, 2016, Klein interviewed Ben Thompson on "how to make it in media in 2016." Well heck, I'm trying to make it in media in 2016! So I thought I'd give it a listen.

If you don't know who he is (I didn't), Ben Thompson is the motive force behind Stratechery.

Ben Thompson is a Thought Leader in Technology

About halfway through the Ezra Klein interview, Thompson begins talking about what makes people willing to make a site a "destination," and how to build an audience willing to sign up for subscriptions to get even more content (Thompson seems to have the same model I do, providing lots of free content as well as subscribers-only access to his inner-most musings).

Thompson's theory is that when you have a single, internally consistent vision of the topic you write about, it makes it easy to fit new information into your worldview, allowing you to generate "fresh" content based on the news without taking the time or effort to actually examine the facts on their own terms.

Listening to this interview, I immediately recognized the genre he was talking about, because travel hacking has its own Thought Leader, right in our very midst.

Gary Leff knows one big, stupid thing

When you visit View from the Wing, you are immediately informed that you're in the presence of a Thought Leader In Travel. And after listening to Ben Thompson cooly describe the anatomy of the Thought Leader, it's obvious what Gary Leff's single, internally consistent vision of the loyalty industry is: loyalty programs are the single greatest invention in the history of marketing, and travel companies tinker with them at their peril.

There are many reasons this is stupid, and I encourage you to come up with your own.

But the lowest common denominator explanation for why this is an incorrect world view to drive thousands of words per week is this: if loyalty programs can, through public signaling to one another, devalue more or less simultaneously, then all the programs can individually and jointly spend less on marketing expenses without ceding a marketing advantage to any other program.

And, amazingly, this is precisely the pattern we see in the real world, where the rest of us live.

I know a bunch of small, true things

Clearly, I'm not a Thought Leader in the terms Ben Thompson described. I don't have a single overarching philosophy, and I don't try to cram every new piece of information into my preconceptions. Instead, I know a handful of small, true things. For example:

What are Thought Leaders good for?

This post isn't meant to be an attack exclusively on Gary Leff (although, of course, also on him), but more generally to call into question the species of Thought Leader as a whole.

What is the point of using an overarching philosophy to interpret facts when you have the actual facts in front of you?

On the one hand, Gary Leff really is invited to attend, and even host(!), awards galas and loyalty conferences.

On the other hand, his insistence that the loyalty programs are sabotaging their own success through devaluations and a focus on revenue seems to fall on completely deaf ears, possibly because a graphomaniac internet enthusiast has no influence over the business practices of massive global enterprises.

Conclusion

Looking around today, it's clear that the future of the internet belongs to the Thought Leaders. Mr. Money Moustache is a Thought Leader in Financial Independence. Meb Faber is a Thought Leader in Value and Momentum Investing. Tyler Cowen is a Thought Leader in Condescension.

I imagine there are lots of reasons why people find these Thought Leaders comforting. They repeat the same nostrums over and over again, building a cushion of the familiar, the wise, the sensible. And who doesn't want to live in a familiar, wise, and sensible world?

But there is an alternative to Thought Leadership: taking the world on its own terms. Understanding that loyalty programs will continue to devalue, with or without notice. Understanding that passive, low-cost investing is the only method yet devised that will secure as much of the market's return as possible. Understanding that Tyler Cowen is a twit.

A big, false theory may be comforting, but a small, true fact is even better.

Quick hit: my content around the web

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Although my posts this week have had a little bit of a focus on the personal finance side of travel hacking, I primarily use this website to write about the travel side of travel hacking. But if you're interested in hearing my take on topics both near and far from travel hacking, there are a few other places where you can find me thinking out loud and otherwise.

Saverocity Observation Deck

I (famously) listen to podcasts while I run my travel hacking errands, and it's especially fun to listen to podcasts about travel hacking while I do so. The Saverocity Observation Deck podcast has been hospitable enough to invite me on to contribute to episodes 11, 15, 26, and 38. Listen to those, and other episodes, and you'll be able to decide for yourself if you like it.

Saverocity Forum

While I personally feel that travel hacking and personal finance hacking are closely related, I know not all of my readers do, so my tendency is to post my reflections on personal finance hacking over at the Saverocity Forum. You have to create an account first, but then you should be able to use this link to find all the threads I've created there.

Twitter

Twitter is the greatest invention since flying cars, and I'm always on Twitter. I find it pretty difficult to find Twitter users worth following, but the good news is that the more worthwhile Twitter users you follow, the more likely you are to find additional worthwhile Twitter users.

My Twitter handle is @Freequentflyr. Incidentally, that's arguably an even better way to get in touch with me than e-mail, as long as you're not asking or disclosing anything you'd like to keep private.

The many flavors of negative-interest-rate loans

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A negative-interest-rate loan is one which, over the course of the loan, requires the borrower to repay less than they originally borrowed. Such loans have received a lot of attention in the business press lately since countries like Germany and Switzerland began issuing bonds with negative yields.

But negative-interest-rate loans aren't just for industrial and financial superpowers anymore! Here are three flavors of negative-interest-rate loans available to the enterprising travel hacker (and one bonus flavor), sorted by the duration of the loan, and suggestions for how to maximize their value.

25-55 days: manufactured spend

Most people think of the profit from manufactured spending as coming from the rewards earned on their spend, and that's true if you liquidate your spend directly back into the cards used to manufacture it.

But when you manufacture spend on a rewards-earning credit card, you're also borrowing money that can be used for other purposes. If you manufacture and liquidate spend on the day your credit card statement closes, you may be able to use the funds for up to 55 days, depending on how long your statement cycle is and how many days your bank gives you to pay.

Possible uses: Besides short-term liquidity, you can get even more value from these short-term negative-interest-rate loans by funding bank accounts that require large deposits in order to trigger signup bonuses. For example, Citi is currently offering a $400 signup bonus for opening a checking account with $15,000 in new money, which has to be kept with Citi for 30 days. $15,000 manufactured on a 2% cash back card and 1% "all-in" cost will net $150 in credit card rewards and $400 from Citi. Since the money was borrowed, that's the equivalent of a negative 44% APR loan.

6-12 months: interest rate arbitrage

If you're anything like me, you're constantly getting balance transfer and cash advance checks in the mail from your credit card companies. For the last year it felt like I was getting two or three offers from Discover every week! The offers can take many forms, but usually include a promotional interest rate on the amount you write the check for, while charging a balance transfer or cash advance fee in the range of 2-5%.

These offers are very bad for short-term liquidity because those fees act as an up-front interest charge which can't be avoided by paying off the balance early, as is the case with manufactured spend.

Possible uses: for medium-term needs, these offers can give you the opportunity to swap out higher-interest-rate debt for lower-rate debt, while generating valuable liquidity. For example, if you have 12 months remaining on a car loan at 5% APR, and are sent a 12-month 0% APR cash advance offer with a 3% cash advance fee, you will not just save money on the total interest you'll pay, but also have the option to swap equal-installment car loan payments for 11 minimum credit card payments and a "balloon" credit card balance pay-off in the 12th month. That added liquidity can be plowed back into manufactured spend, reselling, or any other high-value investment you have available.

12-21 months: savings and investment

There are a range of cards available that offer 0% APR on purchases and/or balance transfers. When those cards are also rewards-earning credit cards, these act as longer-term negative-interest-rate loans. For example, a new application for a Chase Freedom Unlimited will earn 1.5 Ultimate Rewards points per dollar spent and charge no interest on purchases for 15 months. $10,000 manufactured with that card will earn 15,000 Ultimate Rewards points. If you redeem 10,000 points to cover your manufactured spend costs, the 5,000 remaining points are the negative interest on your 15-month loan.

Possible uses: Depositing the same $10,000 in a 4.59% APY checking account will produce another $459 or so per year, driving the APR on your borrowed funds even further below 0%.

This technique may also be useful if you don't have the funds to maximize your annual contribution to an IRA or other tax-advantaged savings vehicle: using negative interest rate loans to cover your expenses while deducting retirement contributions from earned income can generate valuable savings on federal and state income taxes.

Up to 20 years: federal student loans

Whether or not you think college students should have to borrow to pay for higher education, for many students there is in fact a stark choice between borrowing or not attending college at all. The good news is that as long as long as students borrow exclusively from the federal government's Direct Loan program, they're eligible for the income-based repayment plan, or IBR. Under an IBR plan, any principal and interest balances that aren't repaid after 20 years are forgiven.

This too meets our definition of a negative-interest-rate loan: for borrowers whose repayments after 20 years don't add up to the amount they borrowed, the difference between the amount repaid and amount borrowed will constitute the negative interest they earned during the repayment period.

Possible uses: I don't know if there are actually any ways to leverage these negative-interest-rate loans, so just consider this an advertisement for the income-based repayment program and Federal Direct Loans.

On the other hand, no one should ever take out private student loans, which can be almost impossible to discharge in bankruptcy and offer few or none of the alternative repayment options the federal government makes available.

Conclusion

For now, we live in a low-interest-rate, low-yield world. Juicing your investment returns and reducing your interest payments with negative-interest-rate loans is one way to squeeze higher yield from a market that has run out of low-hanging fruit.

What's the return on a diversified portfolio of hip alternative investments?

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There's a healthy overlap between people with an outside-the-box attitude towards funding travel and those interested in alternative approaches to savings and investment:

  • Kiva has long been a (controversial) tool used by travel hackers and outside-the-box thinkers to earn miles, points, and cash back by making short-term loans funded with rewards-earning credit cards.
  • More recently, Greg the Frequent Miler has been doing yeoman's work (followup here) reporting out the similar, albeit much riskier, possibility of funding Kickfurther (my personal referral link) "Consignment Opportunities" with credit cards to earn both credit card rewards and investment returns.
  • At some point I must have signed up for a Fundrise account, and they've been badgering me to invest in their "Income" and "Growth" eREIT's for weeks now.
  • Finally, if you listen to any popular ad-supported podcasts you've likely heard about Wunder Capital and their solar power investment funds.

Now, the last thing you want to do is put all your speculative eggs in one basket, so I got to wondering, what kind of return might you get from an equally weighted portfolio of all these investments?

Annualizing "target" returns

The first thing to take into account is that the investment horizon for each of these vehicles is different, so we need to adjust the various returns appropriately. I'll use $1,000 investments in each example for ease of comparison.

  • Kiva loans funded with a 5% cash back credit card might earn more or less than 5% because of the varying term of Kiva loans. A recent search for short-term, high-quality Kiva loans returned 15 loans, all of which had a duration of 8 months. Assuming you wait to reinvest your Kiva repayments until all your loans have been repaid, and you suffer no defaults or delinquencies, you could invest $1,000 1.5 times per year, for a total annualized return of 7.5%.
  • Kickfurther consignment opportunities funded with a 2% cash back credit card will yield 2% cash back, plus your total Kickfurther principal and interest payments, minus 1.5% of your Kickfurther principal and interest payments. In other words, a 12-month consignment opportunity offering a 16% return on a $1,000 investment will pay $20 in cash back plus 98.5% of $1,160 ($1,142.60), for a total annual return of 16.26%. Assuming the four currently available consignment opportunities are typical in both length and rate of return, we can mechanically compute an average annualized return of 14.65%.
  • Fundrise works a little bit differently since you're investing in eREIT's which are designed to be held for the long term and which pay out throughout the life of the investment and then return remaining (potentially appreciated) principal at the end. Under the "accountability" tab for each eREIT, you can see the returns Fundrise seeks from each investment fund. For the Income eREIT they will charge no management fee if the annualized return is less than 15%, and for the Growth eREIT they'll pay a penalty if the annual return is below 20%, so we can use those as the "target" returns for each fund.
  • Finally, Wunder Capital is currently offering a "Term Fund" with a target return of 8.5% and an "Income Fund" with a target return of 6%.

Building a diversified hip alternative investment portfolio

If I were interested in building a portfolio of these alternatives, my model would be diversifying across the four platforms somewhat like this: by putting $1,000 in as many suitable Kiva loans as possible, $1,000 across as many Kickfurther consignment opportunities as possible, $1,000 in each of the two Fundrise eREIT's, and $1,000 in each of the Wunder Capital funds.

That would produce a $6,000 investment with a target annualized return of 11.94%.

This would be a very stupid thing to do

There are at least two questions worth asking about such a diversified portfolio of hip alternatives:

  • How likely am I to make more money with this portfolio than I would with conventional investments?
  • How likely am I to make any money at all, versus losing some or all of my principal?

The first question speaks to the question of whether the higher target return you're seeking will adequately compensate you for the added risk you're taking with these bizarre, untested investment vehicles. After all, Vanguard will sell you a low-cost mutual fund invested in corporate junk bonds any day of the week. Why buy untradable junk from strangers when Jack Bogle will sell you relatively liquid junk?

The second question is whether you'll be compensated at all, or whether an economic downturn, poor management, and/or fraud will wipe out your investment completely with little or no warning.

But, gambling is fun

There's a painful irony to the fact that these alternative investment vehicles have been legalized and are being aggressively promoted at a time of low interest rates and pessimism about future returns in the stock market, because those conditions have retail investors desperately fishing around for investment opportunities with a higher return than their passively managed index funds. Frantically taking bigger and bigger risks makes the problem of low returns worse for all the investors who pick the wrong alternatives to invest in (and there are a lot of wrong alternatives).

On the other hand, for the dwindling number of investors with a secure path to retirement and enough money left over to gamble with, these alternatives seem like they'd be fund to play with. And who knows? You might even make some money.

How to think about the "single best" rewards currency

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Last week I joined Joe Cheung for a recording of the Saverocity Observation Deck [edit: now available for listening!] and among the many subjects we touched on was the idea of the "most valuable" loyalty currency. I pointed out that affiliate bloggers are forced by their business model to argue that Starwood Preferred Guest Starpoints are worth at least 2 cents each because Starpoints can only be earned in any volume through the Starwood Preferred Guest American Express cards, which earn 1 Starpoint per dollar spent.

If Starpoints were worth any less than 2 cents each, it would be impossible to promote the card to unsuspecting customers, since there are no-annual-fee cards that offer 2% cash back on all purchases.

A few illustrative examples of this Starpoint value game:

If you're curious, Hotel Hustle pegs the median value of Starpoints redeemed for hotel stays at 1.849 cents each.

The fact is, the impulse to identify a "single best" or "most valuable" rewards currency is fundamentally misguided: the most valuable rewards currency may not be the single best rewards currency — and vice versa!

Three "single best" rewards currencies

Knowing everything you know about loyalty programs and travel hacking, what credit card would you sign up for if it you had to pick just one? I think these are three reasonable choices (feel free to suggest others in the comments):

  • If you have access to unlimited grocery store or gas station manufactured spend, the US Bank Flexperks Travel Rewards Visa earns "up to" 4% on airfare and up to 3% on hotel stays, and charitable spend earns "up to" 6% and 4.5%.
  • If you have access to unlimited unbonused manufactured spend, the Amex EveryDay Preferred offers 1.5 flexible Membership Rewards points per dollar spent everywhere.
  • And if you have access to unlimited unbonused manufactured spend, the Starwood Preferred Guest American Express cards earn 1 Starpoint per dollar spent everywhere.

The Flexperks Travel Rewards card has obvious advantages: a high earning rate and the ability to redeem your points on any flight and at any hotel means you're unlikely to experience orphaned points or be unexpectedly forced to pay cash for travel.

The Amex EveryDay Preferred isn't of much use when redeeming for paid flights or hotels, since Membership Rewards points can be redeemed for just one cent each towards those reservations. On the other hand, British Airways Avios transfers (1000 Membership Rewards point for 800 Avios, for an earning rate of 1.2 Avios per dollar spend everywhere) give access to high-value American Airlines and oneworld reservations, and both Delta SkyMiles (Skyteam) and Air Canada Aeroplan (Star Alliance) are Membership Rewards transfer partners at a 1000:1000 transfer ratio. Even transfers to Hilton HHonors would be worthwhile at redemption values above 0.44 cents, after taxes, thanks to the 1000:1500 transfer ratio, since at that rate you'll be better off booking with transferred Hilton points than directly with Membership Rewards points.

The Starwood Preferred Guest American Express cards allow you to earn Starpoints, which can be valuable for hotel stays if you frequently stay in cities with Starwood Preferred Guest properties. They also give you access to American Airlines AAdvantage miles, Air Canada Aeroplan miles, and Delta SkyMiles at a 1:1.25 transfer ratio when you transfer Starpoints in multiples of 20,000. Finally, the SPG Flights award allows you to book paid flights at valuations of between 1 and 1.4 cents per Starpoint.

"Single" is doing all the work in this analysis

At this point the game I'm playing should be clear: no travel hacker should have just one of the three cards described above, because having just one credit card makes travel hacking nearly impossible!

  • A Starwood Preferred Guest credit card is great for Starwood stays, but it's a lousy way to pay for flights, leaving you to pay cash for all of your non-award flights and all of your non-Starwood hotel stays.
  • An Amex EveryDay Preferred card is great for earning 27,000 Membership Rewards points per calendar year at grocery stores, but it's a lousy way to build up the balances you need to book a whole year's worth of travel with unbonused spend.
  • A Flexperks Travel Rewards card is great for booking paid domestic flights, but lousy for booking premium-cabin international flights or expensive hotel stays.

Earn the "best" currency for the job

In the above analysis I completely excluded my favorite travel hacking tool, the Chase Ink Plus. Why? Because it's almost useless without access to other, complementary tools. It's true that it helps you purchase Ultimate Rewards points at 0.59 cents each, and allows you to redeem them for 1.25 cents each, or a 52.4% discount off retail.

But a 2% cash back card, used to manufacture unbonused spend, generates virtually the same discount off retail, and gives you the flexibility to spend your rebate on things besides travel, as well.

Meanwhile, the vaunted transferability of Ultimate Rewards points means you can book Hyatt stays with ease, but under virtually no circumstances are Marriott Rewards or IHG Rewards points worth 1.25 cents each, leaving you to book full-price stays without even earning rewards or triggering hotel promotions. Long-haul premium-cabin United awards may cost less with Ultimate Rewards transfers, but you'll give it all back booking full-price domestic economy awards.

Putting together a travel hacking strategy should be as holistic a process as possible, and trying to decide in advance which rewards currencies is "most valuable" is likely to sabotage that process. Over the course of a year you may need to take into account all sorts of conditions:

  • if you're trying to qualify or requalify for Hyatt Diamond status, you might want to book Points + Cash awards, which may require a flexible Ultimate Rewards-earning credit card for the points portion, plus a co-payment with cash or a Hyatt gift card;
  • if you have access to grocery store manufactured spend, you may be able to pay for your hotel stays more cheaply with a Hilton HHonors Surpass American Express card than with a Flexperks Travel Rewards card (the Hotel Hustle median value of HHonors points is 0.448 cents each);
  • if you book deeply-discounted or weekend leisure travel, you may not be able to qualify for airline elite status without triggering an elite-qualifying dollar waiver using a co-branded credit card.

Conclusion

Never lose sight of the ultimate purpose of travel hacking: to pay as little as possible for the trips you want to take. The "most valuable" currency you earn isn't the "best" currency unless it helps you pay for those trips more cheaply than you could otherwise.

A real travel hacking strategy can be mostly indifferent to the supposedly objective "value" of any given currency. Ultimate Rewards points are "worth" 1.25 cents each when redeemed for paid flights with an Ink Plus or Sapphire Preferred, and 1.5 cents each with a Sapphire Reserve, but can be worth two or three times that when redeemed for Hyatt stays, Southwest flights with a companion pass, or United or Flying Blue award tickets. Delta SkyMiles are "worth" 1 cent each when redeemed for "Pay with Miles" tickets, but far more when deployed strategically for high-value redemptions.

When you are just getting started in the game, it really does make sense to pick one card to focus on — a 2% cash back card! That's not because 2% cash back is the most you can hope to earn in this game, but because until you thoroughly understand the parameters of the game, any "single best" credit card is virtually guaranteed to leave you worse off than that 2% cash back card will.

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This weekend I’m off to my ancestral homeland for a family reunion up in the Rocky Mountains, and I assume I’ll be mostly out of communication until Monday night.

While I’m gone, you have the chance to reflect on the gaping hole left in your blog reading routine by my absence! You see, this site only exists because of the support of readers, just like you, who sign up for a monthly blog subscription.

There are lots of revenue models used by different kinds of websites. Some travel hacking websites are ad-supported, and require a huge number of page views in order to make money. Unfortunately, my peculiar brand of no-nonsense, hard-headed analysis and advice doesn’t attract that number of visitors, so my monthly ad revenue remains humbly in the 2 digits. By the way, thanks to all my readers who whitelist my site in their adblocker, and to those who don’t know that adblockers exist.

Other websites accept money from banks and credit card affiliate networks to promote their products. Long-time readers may remember that I actually briefly tried that model, but when you enter into those kinds of relationships, you turn over editorial control of your content to the people cutting the checks. For obvious reasons, that wasn’t going to work for me, and I was soon cut loose. I never even got paid, not that I’m sore about it.

Because I know I have a core group of dedicated and loyal readers, I finally decided to go a different direction, and allow readers to support the site directly by signing up for a blog subscription. This way, my readers always know exactly who I’m working for (hint: it’s you).

Today, I’m lucky enough to have over 100 monthly subscribers, some of whom have been supporters for over 2 years. I’m incredibly honored to have the lasting support of so many travel hackers for what started as a side project to promote an ebook. The ebook never took off, while the website and blog have become my full-time gig.

Unfortunately, the model is starting to show signs of strain. Earlier this month I moved from an affordable Midwestern city to a gentrifying East Coast metropolis, and my rent went up correspondingly. While the plan was never for this site to make me rich, grinding poverty doesn’t have much appeal to me either.

Fortunately, there’s an easy solution: readers just like you can sign up for a monthly blog subscription. You see, if everybody who appreciates this site thinks somebody else is going to pay for it, then the site won't get paid for at all. If that happens, it means I'll go get a job doing something else: a classic lose-lose situation. On the other hand, if readers just like you individually decide that this site is worth keeping around, together your blog subscriptions will make sure the lights stay on around here.

Additionally, it’s always a good time to sign up for a monthly blog subscription, because the sooner you sign up, the sooner you lock in your price. Since the price of a monthly blog subscription goes up every 6 months (the next increase will be November 1), the longer you wait to subscribe, the more you’ll pay in the long run, or even in the not-so-long run.

Besides the fresh, honest takes on the world of travel hacking that you already enjoy here on the blog, as my small way of expressing thanks for the support of my beloved readers, subscribers also receive my occasional subscribers-only newsletters, access to the entire archive of past newsletters, and invitations to subscribers-only meetups around the country. So far I’ve met up with readers in Chicago and New York City, and additional meetups are always in the works — hopefully coming soon to a city near you!

As always, thanks for reading, and for your support.

—The Free-quent Flyer

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Hacking business travel: the good, the bad, the ugly

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Last night I was chatting with a friend who's going to be in town next month for a work conference. Even in my spare time I'm always trying to help people save money, so I quickly checked whether I could offer him a better rate than what he'd paid for the conference hotel. I offered to book the stay for about half of what he had reserved the same room for, and then he asked the fateful question: "will the hotel still give me a receipt?"

Most people travel mostly for business, and business travel is expensive

Loyalty programs have a fundamental genius in their core value proposition: direct your company's travel business to us during the week, when hotels and airlines are engaged in a cutthroat competition, and we'll give you free flights and rooms on the weekends, when we're empty.

Credit cards directed at business travelers have a similar premise: use our product, instead of our competitor's, for your reimbursed business expenses and we'll share our cut of the transaction fees with you.

The travel hacker would ideally like to complete this circle by redeeming loyalty currencies for his reimbursed business expenses, thereby monetizing his points balances precisely when those points are most valuable.

Taxes make hacking business travel difficult

The core problem with hacking business travel is taxes: taxes make business travel cheap.

The marginal federal tax rate on a self-employed person is between 14.13% and 50.93%. That means a self-employed person who pays for travel in cash already gets a huge discount off retail simply by excluding the cost from her self-employment income. A nominal 3 cent-per-point redemption therefore becomes a 2.58 cent-per-point redemption for someone in the lowest tax bracket, and a mere 1.47 cent-per-point redemption for a self-employed person in the highest federal income tax bracket. Accounting for state income taxes would make the situation correspondingly worse.

For employees, the situation is similar. Even if you were able to negotiate with your employer for higher pay in exchange for making your own travel reservations (I'm not even sure this arrangement would be legal), the increase would have to be higher than the retail value of your travel expenses to account for federal and state income taxes.

But we think outside the box around here, so here are three approaches to hacking your business travel: the right way, the wrong way, and the illegal way.

The right way: just ask

If you work at a company where travelers book their own travel and are later reimbursed, then you could simply ask your supervisor or boss whether you could redeem miles and points for your travel and be reimbursed with cash. The human resources and accounting departments would probably have to sign off on the idea, but at a small company those might be the same person, and they might agree.

They also might not, so you have to be willing to risk flat-out rejection (and potential followup questions about your sanity) to go this route.

The wrong way: spoof reservations

Another option I consider moderately unethical would be to in fact book paid reservations, print off your receipts and, if necessary, your credit card statements, then cancel the reservations and rebook the same reservations with points.

Naturally, this would only work if the travel department doesn't require, or doesn't check, that hotel folios and boarding pass ticket numbers match the supporting documentation.

There are two reasons I believe this approach to be at least moderately unethical, even though at face value the outcome is identical to the "proper" method of paying cash and being reimbursed for travel expenses. The first is that I regard any technique that requires you to obscure your activity is inherently suspect. Now, we all may hem and haw and come up with circular explanations for carrying around thousands of dollars in gift cards, but the fact is that money orders are, in fact, perfectly legal to buy and use in the United States — if pressed, no one would feel the need to deliberately conceal their use of gift cards to manufacture spend.

The second reason I'm wary of this technique is the potential consequences for the travel hacker's employer in case of audit. While the travel or bookkeeping department might not bother to compare PNR's, ticket, or reservation numbers, that's precisely the kind of information an audit team might notice, or even look for. If your behavior puts your employer in legal or business jeopardy, I regard that behavior as ethically suspect.

The (il)legal way

While misleading your employer about your travel reservations may be unethical, trying to do the same thing with the IRS is an excruciatingly bad idea. If you're deducting business travel from your Schedule C or other business tax form, you'd better have supporting receipts showing what you actually paid for your travel. Redeeming miles and points, then claiming the cash value of your trips as a deduction, is a recipe for disaster.

On the other hand, it's also true that miles and points are treated as having a cash value in other situations. For example, when you win a stash of miles and points in a sweepstakes, or when they're awarded as a bonus for signing up for a checking account, you're issued a 1099-INT or 1099-MISC for the value of the points.

If you have a large enough business, and travel enough, it may be worth consulting with a tax attorney and getting some formal advice about what values you might assign to the miles and points you redeem for your business travel.

For example, if you could convince a tax attorney to advise you that Hyatt Gold Passport points are worth 1 cent each, then a 15,000-point redemption for a $400 hotel night would yield a $150 deduction, compared to a $400 deduction. Applying the same 14.13% tax rate to both deductions yields $21.20 in tax savings for the point redemption and $56.52 for the cash rate, for a total redemption value of 2.43 cents per Hyatt Gold Passport point (an out of pocket cost of $400 minus $56.52, compared to 15,000 points minus $21.20).

Again, that's an avenue that's only worth pursuing if you have a large enough business that the savings involved comfortably cover any fees you pay to your tax attorneys.

"Common Stocks and Uncommon Profits" is a beautiful, not-very-useful book

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This is a review of "Common Stocks and Uncommon Profits" by Philip A. Fisher. You can find all my previous book reviews here. If you're interested in buying a copy, I hope you'll consider using my Amazon Associates referral link.

In my May review of the "Masters in Business" podcast I mentioned that the host asks his guests for book recommendations, and one extremely common recommendation is "Common Stocks and Uncommon Profits," by Philip A. Fisher. In it, the legendary fund manager describes his investment philosophy and, in great depth, his strategy for selecting stocks he believes will dramatically increase in price over a period of many years.

"Common Stocks and Uncommon Profits" is a book about late-1950's America

It is rare to come across a book that is so strongly rooted in a particular time and place. When reading "Pride and Prejudice" you notice some quirks of English law (like perpetual entails) but you basically get the idea that it's a story about a bunch of young people growing up and getting married.

"Common Stocks and Uncommon Profits" is not like that. Here's Fisher writing about labor unions:

"In this day of widespread unionization, those companies that still have no union or a company union probably also have well above average labor and personnel relations. If they did not, the unions would have organized them long ago. The investor can feel rather sure, for example, that Motorola, located in highly unionized Chicago, and Texas Instruments, Inc., in increasingly unionized Dallas, have convinced at least an important part of their work force of the company's genuine desire and ability to threat its employees well. Lack of affiliation with an international union can only be explained by successful personnel policies in instances of this sort."

That is an almost-unrecognizable vision of the American labor movement, but it's listed as one of the most important considerations when deciding whether to invest in a company!

Needless to say, an investor today should not base their decisions on 1958's union environment, which we now know was almost literally the peak of union membership as a percentage of the American workforce.

This is also a book about America as a manufacturing powerhouse. Fisher describes with wonder the almost-miraculous invention of titanium and exciting new uses for aluminum. Even DDT gets a nod as an exciting new insecticide, guaranteed to increase American agricultural production for many years to come (it's now illegal).

Importantly, Fisher is describing a world where the only investment choices for working Americans are actively-managed mutual funds and stock brokers. Because of that, the book can be read in two ways: if you're an active manager of a mutual fund, it's advice on how to do your job. If you're in investor, it's advice on how to select an active fund manager: pick one who agrees with Philip A. Fisher!

"Common Stocks and Uncommon Profits" provides no useful information about picking stocks

If you picked up a book like Michael Covel's "Trend Following," and read it cover to cover, you could start trading stocks using the strategies in that book.

You'd lose a lot of money, perhaps slowly at first, and then all at once, but the book does give you instructions on how to trade according to Covel's theories.

"Common Stocks and Uncommon Profits" isn't really like that. Fisher's strategy requires you to gather information about companies that is not publicly available. I don't mean "insider" information, but simply information that is not knowable without spending a lot of time hunting down employees, customers, vendors, and competitors and communicating with them at length. It's a strategy that could only be followed by a wealthy, well-connected mutual fund manager with a lot of money to invest.

The problem, of course, is that identifying the disciple of Philip A. Fisher (the author died in 2004) who truly and correctly follows his investment principles is impossible in advance. The successful fundamental fund manager will naturally say that he "correctly" applied Fisher's strategy, while his unsuccessful competitors "incorrectly" applied it, and give you all sorts of reasons why. Unfortunately, there's no reason to believe past performance is any indicator of future results.

Fisher has some interesting insights about dividends

Fisher makes two interesting arguments in his discussion of whether dividend-paying stocks are better or worse investments than companies that retain most or all of their profit for further investment.

The first is a straightforward mathematical insight that's frequently glossed over: the dividend yield that should matter to you is the yield on the price you purchased a stock at, not its current price. If a company pays the same 2% of its share price in dividends, but its share price quadruples over 15 years, the lucky owner over that time period will be earning an 8% yield on the price she paid for it, despite the stock never paying a "high" dividend at any point in the entire period.

The second point has to do with transaction costs. The high historical stock market yields you frequently see quoted in investing propaganda require the reinvestment of all dividends paid. If you, quite rightly, plan to reinvest all your dividends, you have three problems: first, until very recently, fixed commissions on stock purchases meant it was as expensive to make small purchases as large ones. If you immediately reinvest dividends, purchase commissions eat up a higher percentage of your capital. If you wait to invest a large amount, you suffer from having more time out of the market, losing some of the benefits of compounding.

The second problem is that it can be cumbersome to reinvest dividends because of the need to buy integer values of stocks.

And third, you also have to find a stock to invest in! It may be your current stocks have already gone up too much in value to be good candidates for further investment, which means you have to find something new to buy. That friction imposes another transaction cost. Retained earnings reinvested in a quality business, on the other hand, eliminate all those transaction costs by (hopefully) increasing further the value of your existing shares.

Basically, Fisher is not a big fan of dividends.

Conclusion: read this book for nostalgia, not for advice

This may sound like I'm being harsh on the author: after all, what period was he supposed to write about if not the period he was living in?

On the contrary, I actually found "Common Stocks and Uncommon Profits" to be a beautifully written description of the world our Baby Boomer leaders grew up in. When Donald Trump says he wants to make America great again, this is the America he has in mind: heavily unionized, highly-paid, a manufacturing powerhouse, with exciting research developments that would only years later prove to be toxic to humans and the environment. Men work in labs and factories, women purchase previously-unheard-of consumer goods, and during periods of economic recession the government runs a deficit of "25 to 30 billion dollars."

It sounds like a lovely place to visit, but I'm not sure I'd like to live there, and I definitely wouldn't recommend investing as if you did live there today!

Is this how UberPOOL is supposed to work?

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On our return from Germany last month, we stayed overnight in New York City, flying into JFK on airberlin Saturday evening and out of LaGuardia on Delta the next morning. Traveling between the two airports and midtown Manhattan should be easy on public transportation, but when we boarded an E train Saturday evening in Jamaica, we discovered after 30 seconds of panic and 2 minutes of confusion that E trains were running on F tracks in Manhattan.

Unrelated: is there another city in the world that phrases their maintenance-related inconveniences in this way? On every other system I'm familiar with, if such a rerouting were required, they would announce that "this train is an F train between such-and-such stations." Why do New Yorkers insist on saying that it remains an E train while behaving in every way like an F train? Is it for union-related purposes, so E-train drivers can continue to operate what are obviously F trains?

Rather than try to figure out which E trains were E trains and which E trains were F trains, Sunday afternoon we decided to take a car to LaGuardia instead.

UberPOOL was strange, but cheap

This taxi fare guesser suggests a yellow cab would have cost $26.70, plus tip, for our Sunday trip to the airport, and the Uber app estimates an UberX would cost $32-$41. Then, since I'd never seen the UberPOOL icon in my Uber app before, I decided to check how much that would cost, and was offered a fixed price of $26.27.

This ended up feeling like an even better deal than those numbers suggest because Sunday was also the day of the New York City Pride march, and 5th Avenue was tied up with revelers. So instead the driver took what I guess you would call the scenic route under Central Park to avoid the parade. This longer route would have run up a higher UberX or yellow cab fare, so we benefited from locking in our UberPOOL rate in advance.

That's not the strange part. The strange part is that since the driver ignored the directions Uber was feeding him, he was forced to ignore all the other UberPOOL users trying to hail him. For Uber to add people to a pool they have to be able to predict where a driver will be, and when. But since our driver was never where he was supposed to be, he ignored all the additional UberPOOL requests he was given, and we enjoyed a private ride to the airport.

Conclusion

I will definitely use UberPOOL again, if I'm ever in a city where it's offered as an option. Their prices seem extremely competitive, and I consider being able to lock in prices in advance regardless of traffic and route to be a big convenience.

Now, I'm perfectly aware that having a fixed up-front price does not save anyone money, on average, and indeed allows Uber to apply "sneak" surge pricing and quiet rate increases. I'm totally fine with that — if the ride's too expensive, I'll take a different form of transportation. You should too.

This is what Uber's promise should be: identify the most annoying practices of the existing cab monopolies, and eliminate them. Then, some people will be willing to pay higher prices to avoid experiencing those inconveniences and some people won't. I consider the constantly-ticking taximeter and attendant fear that a driver is taking you on the long haul and deliberating missing traffic lights to be one such inconvenience, and I'll happily pay a premium to avoid it.