Tuesday, July 08, 2008

The Golden Toilet

Justin here. Meir Statman once said that rational investors are investors who “always prefer more wealth to less and are indifferent as to whether a given increment to their wealth takes the form of cash payments or an increase in the market value of their holdings of shares.”

I don't know when we started misquoting him, but in our office we are constantly reminding each other that "rational investors are not concerned with the timing or form of wealth."

For example, a rational investor would be indifferent to $50 won on a lottery ticket, $50 in a Christmas card, $50 from the Home Depot returns desk, or $50 from a paycheck. I don't know about you, but for whatever reason, I spend the Christmas and Home Depot dollars very differently.

I thought about Professor Statman as I read this article in the Wall Street Journal about Lam Sai-wing, a Hong Kong entrepreneur who built his fortune around a golden toilet.

Mr. Lam owned a jewelry manufacturing company and was contemplating how to turn it into a successful retail venture. His idea to make a golden toilet (when gold was $200/ounce) eventually snowballed into a golden palace that, at its height, attracted 100 tourist groups per day and did $100 million in sales annually.

Mr. Lam seemed to be doing the rational thing when gold hit its peak at $1,003.20 - he started selling off the palace bit by bit. See if you can find where the rational turns to irrational.
He is melting down golden chandeliers, armchairs and armored knights and selling gold by the ton to fuel growth plans that include hundreds of new retail outlets in mainland China. But even with the selloff, one thing is certain: the toilet stays.

"I don't care if gold hits $10,000 an ounce," Mr. Lam says. "I'm not melting it down."
Interesting. He'll sell everything else at a gain somewhere under 200% but won't sell the toilet, even if it goes up 4,900% or roughly 10x the historic peak! Talk about flushing money down the toilet.


  1. But setting aside the fact that I (probably like you) already spend too much money at home improvement stores, wouldn't you agree that the Home Depot return card is a little less liquid than the others you mention? You can't spend it on gas, for instance. I know, it replaces cash dollars you would otherwise spend at Home Depot, but still ...

    And let's not even get into currency risk, given the state of the U.S. dollar these days.

  2. You're right, it is a bit less liquid (though not as much as, say, a Chuck E Cheez token), but not really for someone who goes there often (like you and me.)

    If I know I'm going to go in the next six months to buy something I need (propane, light bulbs, faucet parts, etc) then I should hold onto the gift card like I hold onto a dollar bill.

    But I don't. I tend to spend it sooner on things I don't really only tell myself that I need (like drill bits, spare lighting for my shed or plants.)


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