The Stoic’s Arbitrage: A survival guide for modern consumer financial services products

Updated: Sep 7


Consumer financial services products, like Mortgage, Auto, Credit Card, Student Lending, and Investment help us reach our life goals. These same products, not used correctly, may inflict significant long-term financial damage. Applying a stoic’s mindset provides focus and tools to successfully navigate the complex consumer finance landscape. While thinking like a stoic is not always intuitive, with practice, it is VERY achievable! This article provides several consumer financial product arbitrage examples. I hope these examples may help you identify and implement the stoic’s arbitrage in your life!

Jeff Hulett is a financial services and decision sciences industry executive. He also has a background in behavioral economics. His roles have included operational leadership, data science, process automation, risk management, and risk consulting. Jeff is a member of James Madison University College of Business Finance and Business Law board and past chair. Jeff lives in the Washington DC area.


Article Sections:

  1. Key Points

  2. Stoicism and your purpose statement - an auto lending example

  3. Credit Card Arbitrage

  4. College Arbitrage

  5. Mortgage Arbitrage

  6. Investment Advisor Arbitrage

  7. Adaptability

  8. Conclusion - Why should I use the Stoic's Arbitrage?

  9. Notes and Stoic's Arbitrage Models available for download

Next, allow me to define the key points:


1. Key Points


First, a stoic believes knowledge fuels personal power and that education is our greatest source of that power. Also, a stoic believes in using that power to avoid getting played or taken advantage of. They tend to be practical and value-focused, and they tend to choose courage and calm over anger. Courage and calm govern the stoic's emotions. A stoic provides kindness to others. Kindness is a source of strength. By the way, Warren Buffett, the legendary investor, certainly has stoic attributes. One of my favorite stoic-like Buffett quotes is:

“Price is what you pay. Value is what you get.”

Second, almost all consumer financial services products [i] have a statistical nature to them. For example:

  • Credit loss rates are probabilities applied to loan pricing, credit decisions, or loss reserves.

  • Marketing response rates are probabilities applied to sales and marketing programs to predict demand and revenue.

  • Program breakage is a probability assigned to usage programs (like credit card loyalty programs) that predicts how much of the program is not used, thus lowering program costs.

  • Investment advisors, like Personal Financial Advisors, charge annual fees based on a percent of Assets Under Management (or "AUM")

Statistics are a key source of profitability measurement and ultimately help drive consumer financial services product growth. Third, arbitrage is the buying or selling of similar assets in different markets to take advantage of price differences. In this article, our use of arbitrage is more for knowledge arbitrage. That is, being more aware of how consumer financial services product programs work and taking appropriate action will allow you to minimize your costs or maximize your own value! The statistical nature of consumer financial services products helps create the arbitrage opportunity.


“I look forward to owning a new car because _________!”

Behavioral science teaches us that people enjoy thinking about the utility of the products and services they will buy. They generally do not enjoy thinking about the decision process for how they will achieve that utility. The Stoic’s Arbitrage encourages you to flip the script. Becoming a curator of your decisions is super important to achieving long-term financial wealth. Good decision-making habits, like any habit, is a learned behavior. Once you practice a few times, the habit will become automatic.


2. Stoicism and your purpose statement


A little later in this article, we will define the precision-based (or statistical) part of the arbitrage, but first, let’s cover stoicism as it relates to the accuracy-based purpose. [ii] Very important to reaching a goal is a well-considered purpose statement. A well-defined purpose will act as a guiding light as accurate decisions help reach any goal. In the context of consumer financial services products, related purposes cover pretty much anything you buy, like a college education, a home, a car, or furniture. As an example, the next section covers the car buying purpose.


What is your purpose for buying a car?


Practical utility purpose: "For safe transportation."


Emotion utility purpose: "Because I like the technology," "I like how it handles," "I like how fast it goes," "I like the color," or "I like the smell."


The “practical utility” auto buyer will be open to lower-cost transportation options that may not need a loan (or they may not even need a car!....if they can use public transportation, ride-sharing, or other transportation substitutes). An “emotion utility” buyer may be exposed to higher-cost decision options. Your utility purpose may include some combination of these examples. The point is, regardless of the utility derived from a purchase, you should be very clear about your utility or guiding light purpose before you enter the purchase process. The purpose of the Stoic’s Arbitrage is not to show you what to buy, but to give you decision tools for how to buy it. (Please see our Cutting through complexity: A car buying approach article for more information.)


Another aspect of the stoic’s purpose is long-term value consideration. (Please see our The Time Value Of Money Values The Young article for more information) While you have the choice of different cars to fulfill the “safe transportation” purpose, you also have a choice about the time frame your decision value is received. Let’s take the car example. If I buy a

more expensive car, I will be able to afford the payment. If I buy a less expensive car, I will be able to afford the payments, plus, save money. The issue is, our brains are more wired to favor the present than the future. So, a non-stoic may say, “Hey, I can afford both cars, so I’ll take the ‘nicer’ (more expensive) one.” A stoic's response will say, “Hey wait, what is the long-term value of my savings?” Using the example from our Auto Buying article, both cars provide “safe transportation” However, one of the cars also provides $500,000 for retirement! Doesn’t this one sound much better? Now, depending on your utility purpose, you may want to release some of that retirement saving to fulfill an emotion-based purpose. The point is, taking a long-term financial view to our decisions is a beneficial mindset. This will add realistic significance to your savings and a bunch of money for retirement! The reason this is difficult for people relates to cognitive biases, especially salience. We discuss loan payment-related salience in our article The College Stoic: The Stoic's Arbitrage and making a great college decision.


3. The credit card arbitrage


The precision (or statistical) part of the Stoic's Arbitrage is a little more conceptually challenging, so the following is a credit card example to help frame the general approach. I formerly worked for credit card companies, especially in the behavioral economics-based credit and marketing testing areas. For more background on behavioral economics and "nudge units," please see our article Every bank needs a nudge..... As such, I have a good sense of the card industry's profitability mechanics. Credit card profitability, like most products, is measured as revenue minus costs. They will also discount cash flows (the timing of the revenues or costs) to take into account that a dollar received or spent today is worth more than the same amount realized in the future. Credit card companies create very sophisticated statistical models to estimate profitability and related business drivers. Some of those drivers were mentioned in the initial key points section. The credit card customer's arbitrage occurs because the bank applies statistics at the credit card program level to measure profitability. The bank will often utilize averages for each profitability driver to calculate whether a credit card program is successful. Also, importantly, they make decisions at the margin to decide whether to expand or reduce a program. [iii] Your individuality as a divergent data point provides your arbitrage power!


The nature of this divergence is the result of the difference between a credit card revolver and a credit card transactor. The Stoic's arbitrage punchline is a few paragraphs ahead. Fine to skip ahead or stay with me for some stoic-enabling knowledge. So, let’s say a credit card program has, on average, 40% of its customers revolving their balance.

  • A Revolver is a customer that does NOT pay off the balance every month and pays the bank interest. A non-delinquent revolver is a very profitable customer. By their nature, transactors have higher credit risk behavior than transactors.

That leaves, on average, 60% of its customers transacting their balance.

  • A Transactor is a customer that pays off the balance every month so the bank gets NO interest. A non-delinquent transactor is a slightly unprofitable customer. By their nature, transactors have much lower credit risk behavior than revolvers.

As a group, revolvers are so profitable that as long as the credit card program has some non-delinquent revolvers, the entire program will be profitable.


Another important dynamic between the revolver and the transactor is what I call the Denominator Effect. This is caused by the significant scale benefits associated with the credit card business. Generally, the bigger the card issuer, like Capital One or Citibank, the lower the cost per account and the higher the profitability. This is because of the relatively high fixed costs associated with credit card processing. In fact, it is really challenging for de novo credit card issuers to compete unless they have an incredibly compelling value proposition. You may think a credit card issuer would want to get rid of its transactors. Quite the opposite, credit card issuers need transactors as a means to scale. This provides more accounts in the denominator of key profitability measures. For example:

  1. More transactors decrease the cost per account by spreading fixed costs across more accounts ($ fixed cost / # of accounts)

  2. More transactors improve net credit loss ratios by increasing the number of "good" accounts. (# of accounts defaulted / # of accounts.)

As an example: Let's use 20% revolvers as an example floor needed to achieve program profitability breakeven. This is the minimum percentage of revolvers needed to offset the transactor’s slightly dilutive impact on program profitability.

So, the bank will continue to market and add customers until they reach the marginal break-even point at 20% revolvers. That is, the point at which adding one additional lower profit transactor breaches the point at which the portfolio of credit cards falls below target profitability. The important point is related to the difference between stock and flow. Existing customers are already part of the credit card portfolio stock. All a credit card company can do is change the flow of new customers. So a rational credit card company will stop adding customers as it nears its revolver breakeven. Also, it is challenging for credit card companies to prospectively distinguish between revolvers and transactors when they are marketing to new customers. While their models do attempt to predict payment behavior, there is a statistical error. Also, because revolvers provide more revenue than transactors, banks can afford monetary incentives to encourage usage, like cash back programs. Think of loyalty programs as an incentive to convert a transactor into a revolver. (Or, to convert a lower balance revolver into a higher balance revolver.) For example, Citibank has a “double cash back” program that gives cardholders 2% of their spending back as a cash incentive.


The important Stoic's Artbitage punchline to glean from the last few paragraphs is this: The arbitrage is being a transactor in credit card programs that provides cash back or some valuable incentive. The value of the arbitrage is:

  1. You will pay no interest or fees,

  2. You will get the convenience utility of a card for purchases, and

  3. You will get paid an incentive.

In effect, you are arbitraging the statistical nature of the credit card business with your transactor discipline. To be fair, there is a downside. We are all human, so if we mess up one month and forget to pay, it could cost us. This is something that you need to watch carefully!


Also, as a stoic, given the choice of value equivalent cash back or some other loyalty incentive program, like airline miles, ALWAYS take the cash. Cash is fungible, airline miles are not. Thus, cash has more utility. Also, people are more likely not to use an earned airline miles incentive than not to use an earned cash incentive. (In the industry, a customer not using an earned incentive is called “breakage.”) Breakage is an important part of profitable credit card loyalty programs. Credit card companies depend on breakage. Better to arbitrage credit card loyalty programs by using low breakage incentives. Alternatively, one may arbitrage a higher than average breakage incentive by behaving with lower breakage.


Now, let’s consider what credit card arbitrage is worth. Let’s assume you revolve a balance on a card and pay the minimum due. Generally, the minimum due payment is just enough to pay your interest. So if you pay the min due, your balance should not grow (unless you spend more).

 

As an example, say you revolve a $10,000 balance at 18% interest to buy really nice furniture. As a result, you will pay $1,800 a year in interest. But let’s apply our stoic’s long-term value principle. What if you acquire used furniture instead of that really nice new furniture? As a result, you did not revolve that balance and instead invest the $1,800 that would have otherwise been paid as interest. Let’s follow and compare the scenarios, assuming each is run for 10 years while you are in your 20s. By retirement at age 65, the opportunity cost of the 10 years of interest on a $10,000 purchase is foregoing a retirement of about $300,000! [iv]

 

So, is the really nice furniture you financed (and is probably long gone) worth the $300,000 you gave up at retirement? I think you know how the stoic would answer that question!

Also, think of your payment capacity as filling a bucket. You have a choice of how you fill your payment bucket. The challenge is, if you fill your payment bucket with credit card payments, there will not be room left for the good stuff (economists call this phenomenon “crowding out” and the choices we make as having “opportunity cost.”) Endeavor to fill your payment bucket with savings and appreciating asset debts like housing. Being mindful of not letting your payment bucket crowd out the good stuff is at the core of The Stoic’s Arbitrage. More on this to come.


4. The college arbitrage

Now, let’s turn to student lending, and, more importantly, the college choice itself. To begin with, student lending has become a BIG problem in the United States. Long-term student loan default rates are almost 20%, graduation rates are down, and college costs are way up. (For a satire about the strange and challenging student lending program incentives, please see the article The Road to Absurdistan. Also, please see the article The College Decision: Proceed at your own risk for more information)


Making the choice of going to college and which college to attend has become increasingly important to long-term financial health. As a former recruiting leader of a Big 4 firm, I do have a unique perspective on the value of college. To illustrate my perspective, the following is my typical Q&A exchange:


If I am asked the question: "What is the difference in value between a more expensive private college like Drexel and a less expensive in-state school like Virginia Tech?" [v]


My answer is simple: "About $200,000 to graduate and over $4 million for your retirement...that's it!"


The reason is straightforward. I simply cannot think of a good reason to pay more money for the same value. My Big 4 recruiting experience will help clarify my reasoning. Think of the Big 4 firms’ recruiting approach as a representative model for all industry recruiting. The Big 4 recruits highly capable college graduates, at scale, and across almost all business, STEM, and related disciplines. Here is the thing. The Big 4 recruits broadly, from big schools and small schools, public schools and private schools.

The Big 4 has figured out, 1) it is the individual student that matters, more so than the individual school and 2) no one school has a monopoly on high quality students. Said another way, all schools have a subset of good students, the hard part is identifying and recruiting them.

So the Big 4’s recruiting approach is to target colleges broadly and target high-quality students narrowly. In the case of the Drexel/Virginia Tech example, the Big 4 has a long history of recruiting excellent students from both schools. From this recruiter’s standpoint, other than price, there is no difference between the schools. In the article Why buying a car is so similar to buying a private college education, we discuss the concept of economic price discrimination and suggest tools to help make the best college decision.


If you are choosing a school, my advice is:

  1. Do not get too hung up on the college’s brand name,

  2. Pick a state public school (or a school with the equivalent of or lower than in-state tuition), and

  3. Pick a school you are committed to getting good grades.

College grades are an important recruiting signal suggesting readiness for the working world. Think of grades as the “3Cs” recruiting signal. That is, your grades signal recruiters the trinity of:

  • intellectual Competence → ability and willingness to learn

  • Conscientiousness → hard worker

  • Collaborativeness → team player

Said another way, if you are not ready to commit to getting good grades, do not waste your money. Just wait until you are ready! By the way, if you are not ready for a four-year college, I am a big fan of the community college system. Done appropriately, it can be a lower-cost way to build study habits and good grades, as preparation to transfer to an undergraduate institution. (Please see the articles Be like Rudy: Community College as a smart, lower-cost path for Higher Ed and Diamonds In The Rough - A perspective on making high-impact college hires for more information.)


Now, let’s consider the stoic’s college arbitrage value, based on annual tuition, room, and board estimates:


 

The difference in total cost between the schools is $50k / year or $200k total for 4 years. Assume the difference is invested and is available for the student’s retirement at age 65 (graduate at 22, retire at 65). The future value at 7% (after-tax annual yield) available for retirement is $4,662,484! Important to note: This calculation does not include student lending. Assuming a student loan is more likely needed for a more expensive school, the arbitrage opportunity could be significantly higher. [vi]

 

To some degree, society makes the college decision more difficult than needed. The confusing decision dynamics are influenced by our desire to help our kids, societal pressure, the college recruiting process, college marketing, loan considerations, etc. Even former Maryland Governor and presidential candidate Martin O’Malley fell into financial difficulties because of his children’s college decisions. His experience is worth reading as a cautionary tale.

"We can second-guess the wisdom of the O'Malleys' decision, and I do. But now that they've made it, I hope the family given their public platform– will use their experience as a cautionary tale that, for most families, it's not okay to cave to an 18-year-old whose dreams of a particular college will create decades of debt."

-Michele Singletary, Washington Post reporter


5. The mortgage arbitrage


There is an important distinction between a mortgage and other consumer loans. The collateral of the mortgage is generally a long-term appreciating asset. That is, a house usually increases in value over time. With other loan types, the collateral (or loan proceeds

usage) generally depreciates in value. [vii] As such, my mortgage mindset is different. While I try to minimize exposure to other loan types (card, auto, student loans, etc), a case can be made that housing debt creates a positive net interest margin. That is a positive difference between the after-tax interest rate one pays on the mortgage and the appreciation rate of the house. As such, a mortgage can make good financial sense as part of an overall investment strategy. It has the added benefit that one lives in their home! Thus it has multiple points of utility. Driving a low-rate arbitrage strategy requires periodic refinancing to maintain the positive interest margin. Also, keep in mind that your mortgage servicer owns what is called a Mortgage Servicing Right (“MSR”). An MSR is the value of the servicing and fees created by your loan. Here is the thing, the value of an MSR is extremely sensitive to interest rates. Why? Because, when interest rates drop, there is a higher probability of you refinancing elsewhere. As such, the Mortgage Servicer is very motivated to keep your loan. In a low-rate environment, they can lose significant MSR value as loans refinance.

 

Here are a few suggestions to make the most of the mortgage arbitrage:

  • In most cases, Adjustable Rate Mortgages (“ARMs”) have lower rates than their fixed-rate cousins. While you will need to refinance more frequently, you will generally get lower rates to maintain a positive interest margin.

  • Refinance when new mortgage rates drop .25% below your current rate. As a pro tip: Keep in mind that the interest rate truism is that “Interest rates feather down and rocket up.” As such, one may wish to delay finalizing a rate until just before closing. Many mortgage companies will lock mortgages early in the application process but allow a one-time float down. Watch out for the rocket!

  • Refinance by pricing mortgages with no out-of-pocket costs. That is, roll all costs into the rate. By doing this, you make it easier to compare your current mortgage rate and competing mortgage rate alternatives. After you find the best deal, you may wish to pay some closing costs in cash.

  • Remember to think at the margin. Any costs you previously paid for your current loan are sunk. Your analysis should consider what you are currently paying for a mortgage to what a new mortgage loan offers.

  • Check with your current mortgage servicer, they should be very motivated to refinance your loan at an attractive interest rate.

  • I’m a fan of interest-only (“IO”) ARMs. Only use IO ARMs if you have the discipline and staying power to invest the additional cash flow. If not, it is fine to get a regular amortizing mortgage and build more equity in your home.

Fun Fact: The word “amortization” originates from the Latin stem “mort,” which relates to death. So making an amortizing loan payment literally means “killing the loan!” In this case, amortization is a form of killing the loan and investing in your home by paying down the loan principal.

(See the article Investment Thoughts For My Children for more information.)

 

Now, let’s consider the stoic’s mortgage arbitrage value. First, let me tell the story of two prospective homeowners, Jack and Jill.


Jill is a conscientious 25-year-old. She graduated from college not long ago and is ready to buy a home. Based on her income, she qualifies for a $400,000 loan with 5% down. She has been saving. She is also going to get an IO ARM because she feels comfortable she can invest the payment difference.


Jack is a hard-working 30-year-old that has been working for 10 years. He has built his expertise in the construction industry. Based on his income, he qualifies for a $400,000 loan with 5% down. He has been saving. He is going to get a standard ARM because he feels more comfortable building equity.


They both want to retire at 65. The good news is that they will both create retirement value through homeownership, but they will do it differently. See the following comparison table. (This is also available in my Stoics Arbitrage Models in the file at the end of this article.) Jill’s value at retirement is about $3.6mm! She will get a 5-year longer period to build investment value. Also, Jill’s discipline to invest in the payment difference will effectively increase her retirement value. Jack is also in good shape, he will create a retirement value of about $2.1mm. He does this primarily through home value appreciation and paying down his mortgage. Notice the assumed appreciation rate and investment rate are higher than the mortgage rate. This demonstrates the positive net interest margin referenced earlier.

In this section, we are comparing Jack and Jill's approach to homeownership. But what if they desire to rent instead? In certain seller's markets, when there is not much available housing supply, home buying may be challenging. In our Homebuying compared to renting article, we apply our stoic thinking and show how Jack is far better off owning than renting.


6. The investment advisor arbitrage


What is the value of a personal financial advisor (or a PFA)? These are advisors with significant education and experience in finance, investment products, and portfolio management. They work with their clients to make optimized decision recommendations for your long-term financial health. Recently, the value of the PFA has come into question. With low-cost ETF and mutual fund firms coming into vogue, like BlackRock and Vanguard, one may maintain a passive approach to investing without paying higher PFA fees. A PFA will charge about 1.25% of Assets Under Management and that is after the cost of administering the underlying funds they manage. Also, PFAs often have minimums that make it hard to get started with a PFA until you have already built some wealth. A bit of a "chicken or egg" problem. (By the way, some PFAs charge different AUM fees. It depends on the size of the AUM balance. For this article, we are assuming a relatively high AUM fee because most investors start with a lower AUM.)


From my standpoint, a good PFA does a few things very well [viii] that a low-cost passive fund cannot.

  1. They create "set it, and forget it" investment strategies. These are sensible, risk-based strategies that rely on automatic payments and payroll deductions to ensure proper and consistent investment funding. Even when the market is cratering, these automated mechanisms fire to buy low and help manage down your basis in market corrections. While psychologically challenging, this approach helps build long-term wealth.

  2. They automatically rebalance portfolios across multiple fund types to maintain your long-term investment risk tolerance. Over time, funds will grow at different speeds, so periodic rebalancing is important to maintain your risk strategy.

  3. They manage your fund strategy in a way that optimizes your tax liability. The Tax Loss Harvesting approach swaps similar funds at the appropriate time. This approach purposefully reduces your tax liability and improves your after-tax yield.

Could you do this yourself? Yes, but it would take a decent amount of a) technical understanding, b) self-discipline to overcome the fear-based psychology mentioned earlier and c) the desire to regularly balance trade mutual funds and ETFs. Also, there is a risk that you miss a key trade or otherwise become occupied with other pressing matters. It would be really great if there was a lower-cost way to automate the PFAs "3 key things" at a lower cost and without those annoying minimum investment requirements. Well, you are in luck! There is another solution. That is called a Robo-advisor.


In our article Budgeting like a stoic, we discuss how Robo-advisors work and we reference Robo-advisor companies we have previously used. In this article, we focus on the Robo-advisor's much higher long-term value in the context of the Stoic’s Arbitrage. The Robo-advisor has a higher long-term value because its costs are significantly lower. The PFA cost can be 1.25% of assets, whereas the Robo-advisor cost is around .25%. A 1% difference may not seem like very much, but as we will show below, it may be worth many $millions over your life. The problem is that people do not really think in terms of percentages or naturally understand the time value of money. Our brain has no way to ground 1% as a meaningful number plus the exponential functions associated with the time value of money are not naturally intuitive. But this is where the Stoic's Arbitrage thinking comes into play. It is important to educate yourself and take actions to impact the long-term. This could mean projecting decades in the future to your retirement or even multi-generationally.


Let's use an example, let's say you are like Liam from our article They kept asking about what I wanted to do with my life, but what if I don't know? Liam is in his 20s and recently graduated from college. He is ok with some career uncertainty and works for a company in a high-growth industry. Also, Liam was able to graduate with little or no college debt. After he sets aside money in his company 401(k), he still has some money left over to invest in a taxable account. Liam is consistent and able to increase his taxable account distribution every year. Also, he periodically makes and maintains a few bigger annual increases.


By consistently investing over a 45-year career, Liam's investment outcome at age 67 is north of $20 million! Please see the attached excel spreadsheet for the model. This is our contribution to inform your stoic's mindset.


The key drivers are:

  1. He started young,

  2. He did not have significant student loan debt,

  3. He worked in a growth industry and was not afraid to periodically change companies.

  4. He was consistent in his contributions and financial discipline, along the lines of the "3 key things" discussed earlier.

So, if a PFA and a Robo-advisor can both do these "3 key things" equally well, what is the value of using the less expensive Robo-advisor? In Liam's case, the Robo-advisor approach is worth $6.3 million at retirement! To be clear, Liam will receive over $6 million more at retirement simply by using a Robo-advisor instead of a PFA. This is an example of the Stoic’s Arbitrage in action.


You can see why the PFA markets their costs as obscure-sounding percentages instead of long-term value opportunity costs.


A PFA saying:

"Come work with me, I only cost 1.25% of assets and you will never have to write me a check!"

is a very different marketing message than:

"Come work with me, I will cost you over $6 million at retirement!"

You may be wondering, what if you have a college loan and are not as comfortable changing companies as Liam? As such, your situation is more like Bob's. Bob has student loans, so he can not start taxable account investing until he is 30. Also, he does not change jobs as often, so his escalators are smaller than Liam's. Even so, investing using a lower-cost Robo-advisor is still meaningful. In Bob's case, the arbitrage is worth $1.8 million at retirement! Still very worthwhile!


The following are some notable investment stoic-based rules of thumb:

  1. Start saving as young as possible. Even small amounts of money invested when you are younger may be worth many multiples at retirement. One of the greatest gifts a parent or caregiver may give a child is the savings habit. The time value of money is powerful! [ix]

  2. The investment discipline, like the "3 key things," is important to maintain for decades. Consistency is important.

  3. Managing college costs is critical. Unfortunately, there is significant misinformation floating around about "College as an investment." Please see our article The College Decision: Proceed at your own risk for more information.


7. Adaptability

Being adaptable is a beneficial arbitrageur's mindset. The previous consumer finance-based arbitrage examples have certain long-term assumptions that may change. Keep in mind that a “bad” year or 2 does not mean the assumptions are wrong. These are long-term assumptions and you should expect some years will be below average. But what if your analysis suggests different long-term trends? For example, the prior mortgage arbitrage example uses an assumption of 4.5% annual appreciation. But what if your favorite city is different? This Case-Shiller graph [x] demonstrates a pretty wide home appreciation dispersion between Phoenix, at almost 10%, and Chicago, at just above 1%. To achieve arbitrage value, your adaptability may mean:

  1. Geographic Flexibility: Willingness to move to higher appreciation rate areas. Again, a couple of bad years may not change your perspective, but taking a long-term view and adapting is helpful to achieving arbitrage value.

  2. Arbitrage Risk Management: Your adaptability will also help you manage risk. If a change occurs, your ability to adapt will be helpful to maximize your long-term arbitrage value. For example, from a home value standpoint, the pandemic may cause long-term trend changes. That is, from a housing standpoint, dense urban areas may not be as attractive as less dense areas.

  3. Adapting for the long term: In some cases, you may not immediately be able to complete your desired arbitrage. It is important to take a long view and implement as possible. For example, in the mortgage example, what if Jill does not qualify for the IO ARM? That’s ok, she can take out the closest qualifying product and seek an IO at her next refinance opportunity. Thinking in terms of “process, not perfection” is a stoic’s mindset. [xi]

Stoic’s Arbitrage adaptation example: In 2022, my son and daughter-in-law moved from the higher cost, high appreciation Washington DC housing market to the lower cost, emerging higher appreciation Richmond, Virginia housing market. Richmond is only 90 miles away but is a very different housing market than Washington DC. My son and daughter-in-law are both accountants and have employers that are mobile workforce progressive. This housing trade enables:

  1. More house (or lower cost/square foot) for the total housing spend.

  2. Higher savings and wealth-building capacity.

  3. Participating in a growing housing market like Richmond, Virginia.

  4. Living in a vibrant and diverse neighborhood.

This is a classic Stoic’s Arbitrage trade!


8. A concluding thought: Why should I use the Stoic’s Arbitrage?


So far, we have covered the Stoic’s Arbitrage framework, in terms of the stoic’s mindset, including education and learning deeply about your environment. Keep in mind that your long-term financial health is not necessarily aligned with the profitability of consumer financial services companies or related providers. Once in the habit, you may apply stoic principles to your financial life. We provided a few high-impact examples in terms of building your consumer financial products knowledge and demonstrated a few stoic’s arbitrage scenarios to help you build significant long-term value. As shown in the table [xii], the Stoic's Arbitrage is real money and can be realized across multiple financial services products. Thinking long-term, or even multigenerational, is very helpful in clarifying consumer loans and related decisions. Remember, a stoic believes in using the power of knowledge to avoid getting played or taken advantage of. You may have also noticed, the Stoic’s Arbitrage framework will be helpful for most major decisions. While not all decisions are financial, most do have a financial impact.


You still may be wondering “why?”….what is the purpose of building long-term value using the Stoic’s Arbitrage approach? This is where the stoic’s kindness to others principle comes into focus. To be clear, your "why" statement may be different than the Stoic's teachings. What is important is that you clarify your own utility for building wealth. Think of this as a time-tested suggestion for your consideration. A stoic believes kindness to others is central to life. Building value and your wealth capacity enable kindness to others. While there are certainly other means to provide kindness, wealth will likely give you more options to deliver kindness to family, friends, and/or the community. Our time-tested world religions are aligned on this stoic principle. World religions share common humanity for serving others. Our notes provide world religion examples and their rich guidance for serving others. [xiii] World religion examples include Islam, Hindu, Jew, Christian, and more. The following is a favorite related bible verse from 1 Peter 4:

“Each of you should use whatever gift you have received to serve others, as faithful stewards of God’s grace…”

Further Reading:


The Stoic's Arbitrage: Your Personal Finance Journey Guide


Core Concepts

1. Our Brain Model

2. Curiosity Exploration - An evolutionary approach to lifelong learning

3. Changing Our Mind

4. Information curation in a world drowning in data noise


Making the money!

5. Career choices - They kept asking about what I wanted to do with my life, but what if I don't know? - Part 1

6. Career choices - They kept asking about what I wanted to do with my life, but what if I don't know? - Part 2

7. Career success - Success Pillars - A Life Journey Foundation

8. Career choices - Do I need to be a Data Scientist in an AI-enabled world?

9. Career choices - Diamonds In The Rough - A perspective on making high impact college hires


Spending the money!

10. Budgeting - Budgeting like a stoic

11. Home Buying - Homeownership is an important wealth-building platform

12. Car Buying - Cutting through complexity: A car buying approach

13. College choice - The College Decision - Framework and tools for investing in your future

14. College choice - College Success!

15. College choice - How to make money in Student Lending

16. Event spending - Wedding and event planning guiding principle


Investing the money!

17. Investment thoughts for my children

18. Our Investment Barbell Strategy

19. Using the Stoic's Arbitrage to choose a great investment advisor

10. Anatomy of a "pump and dump" scheme

21. The Time Value of Money Benefits the Young

22. How Would You Short The Internet?


Pulling it together!

23. Capstone - The Stoic’s Arbitrage: A survival guide for modern consumer finance products

 

9. Notes


[i] Consumer loans are the class of loan products provided directly to people, like credit cards, auto loans, home equity, mortgage, and student loans. A broader class of consumer financial services products includes investments and loans.


[ii] In the context of decision-making, "accuracy" and "precision" are not the same. They are easily confused. For a more fulsome explanation and examples in the decision-making context, please see:

Hulett, Good decision-making and the nuances of accuracy and precision, The Curiosity Vine, 2022


[ii] See List, The Voltage Effect, 2022 for a fulsome explanation of the use of marginal thinking for business decision-making. It would seem the credit card industry is ahead of others regarding the use of marginal costs or marginal revenue when making business program decisions.

(iii) I picked Drexel and VA Tech as examples, but I could have used many others. I picked them because my kids and immediate family members considered both of them, but did not attend either of them. They are both excellent schools.


[iv] See my Stoics Arbitrage Models found at the end of this article for assumptions and calculations. The end of year 65 accumulated principal balance is $303,997.


[v] The tuition, room, and board amounts assume full payment is required. If scholarship or grants are provided, it is assumed each school and student has equal access so the comparative effect will net to 0. See my Stoics Arbitrage Models for assumptions and calculations.


[vi] Or, in the case of student lending, the usage appreciation rate is uncertain. That is, some students graduate to underemployment.


[vii] A PFA may claim they can beat the market. There is a tremendous amount of literature that suggests this is simply not true. But, even if they could, then they certainly would not be working as a PFA and chasing your business. They would be among the mega-billionaires living a life that likely does not include chasing retail business.


[viii] See our article The Time Value of Money Benefits the Young for more information.


[ix] Sources: S&P Dow Jones Indices and CoreLogic, data through August 2020


[x] This reminds me of the Pareto Principle and Voltaire's famous aphorism, "Perfect is the enemy of good." See my Jeff's Favorite Aphorisms.


[xi] This table is aggregated from the prior examples. See my Stoics Arbitrage Models for assumptions and calculations.


[xii] Wilson (editor), World Scripture, A Comparative Anthology of Sacred Texts, 1991

In the case of "helping others," our world religions demonstrate common humanity.

The following is an excerpt from Wilson's book related to the Stoic's Arbitrage:

  • Do nothing from selfishness or conceit, but in humility count others better than yourselves. Let each of you look not only to his own interests, but also to the interests of others. Christianity. Philippians 2.3-4

  • The best of men are those who are useful to others. Islam. Hadith of Bukhari

  • All men are responsible for one another. Judaism. Talmud, Sanhedrin 27b

  • The ignorant work for their own profit, Arjuna; the wise work for the welfare of the world, without thought to themselves. By abstaining from work you will confuse the ignorant, who are engrossed in their actions. Perform all work carefully, guided by compassion. Hinduism. Bhagavad Gita 3.10-26

  • If I employ others for my own purposes I myself shall experience servitude, But if I use myself for the sake of others I shall experience only lordliness. Buddhism. Shantideva, Guide to the Bodhisattva's Way of Life 8.126-128

  • The man of perfect virtue, wishing to be established himself, seeks also to establish others; wishing to be enlarged himself, he seeks also to enlarge others. Confucianism. Analects 6.28.2

  • Rendering help to another is the function of all human beings. Jainism. Tattvarthasutra 5.21

  • Without selfless service are no objectives fulfilled; In service lies the purest action. Sikhism. Adi Granth, Maru, M.1, p. 992

  • I tell you these things that you may learn wisdom; that you may learn that when you are in the service of your fellow beings you are only in the service of your God. Church of Jesus Christ of Latter-day Saints. Book of Mormon, Mosiah 2.17

  • Grant other people something also. The Yamana do not like a person who acts selfishly. Native American Religions. Yamana Eskimo Initiation



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