My Tax Return Savings Account

It is interesting how the circumstances one finds oneself in can dramatically change their opinion of something.  For instance, 15 years ago, I was adamantly against tax refunds.  Not getting your money back, just the concept that people wouldn't pay enough attention to their finances such that they would receive thousands of dollars as a overpayment (or more likely an overwithholding) of taxes.  At the time it was obvious to me that it was much more profitable to scrutinize and adjust your withholding on a regular basis (every couple of months) so that at the end of the year you were as close to breaking even as possible.  I could put this money to work for me by investing it or at the very least put it in a savings account earning interest (as opposed to the interest free loan I would have been giving the government). I was pretty good at it for a few years, netting myself refunds of a couple hundred dollars or having to write a check for a couple of hundred dollars.

Then times changed.  I started making more money and my taxes became more complicated.  Now, at first glance one would think that making more money would be an incentive to implement my strategy above even more so.  Afterall, 15 years ago, I was only making about $25K a year.  My opinion on this issue has changed 180 degrees. Now, I would laugh in your face if you suggested the strategy above.

There are several factors that go into this.  While there is some profit to be made from investment, it doesn't come without it's own cost, namely the time necessary to adjust your withholding (or in the case of quarterly tax filers, the amount of time - ergo rigor - into estimating the taxes owed).  Couple this with exceedingly low interest rates and put a dollop of the ever changing tax code as politicians try to curry favor with this group or that group each year and you are left with a much more complicated task - so the rewards better be worth it.

In 2004 and 2005 I started a different job that had a significant amount of money made from bonuses and overtime.  Because of tax law, this income was withheld at a higher rate (remember withholding, tax owed, and tax paid are completely separate concepts and not necessarily related).  So, while my base pay was withheld at the legal minimum for federal income tax ($0), I was still being withheld on my bonus and overtime income.  And there was no way to not have it withheld.

My time was also more valuable, while as a college student I might jump at the chance to earn $10-$15/hour, I was making much more than that.  To put it in perspective, if my base rate was $30/hour and my boss wanted me to work overtime, he would have to compensate me for my time, usually at a rate of $45 per hour.  So, in effect my leisure time was worth $45 per hour.  On the other hand, if I wanted to make more money, I had to go and find that work and I might only be able to find something for $10-$15. 

The only "extra" work I ever did during this time was I was an usher at Texas A&M football games.  I was paid $50 per game (and I didn't have to spend $50 per ticket).  I was able to see most of the game - in particularly the 4th quarter since my shift was done at the end of the 3rd.  I did have to show up a couple of hours before the game, and the game was 3 hours, so figure about 5 hours total.  For $50-$100 of value (since I would have bought tickets to go to the game anyway).  And the first couple of hours, I brought a book or headphones to do what I normally would be doing at home.  This was a great gig.  To bad I didn't find out about it until my senior year.

So, only on rare occasions have I been willing to trade my leisure time for less than $25/hr.  When faced with a job that was out to defeat my tax philosophy, I decided to evaluate and determine if it was worth it to find some way around it.  Turns out, in my situation (and the vast majority of Americans situations), it's not worth it.

Let me illustrate.  For the last 8 years, I have been getting tax refunds of $3000-$7000.  Well above the national average of $2000 to $3000.  The question one has to ask is what would you do with the money if instead of getting it in one big lump sum, you got a little bit more in every paycheck?  Investing in the stock market historically has been the best performer.  I assumed that I get a refund of $5200 each year (it makes it easily divisible by 26 paychecks a year).  So each paycheck I would have a theoretical $200 to invest in the stock market (I'll use SPY the S&P 500 ETF).

	Value	$ Increase	% Increase	$/hr
2005 S&P	$5,355	$155	3.0%	$15.50
2006 S&P	$5,613	$413	7.9%	$41.29
2007 S&P	$5,177	($22)	-0.4%	($2.26)
2008 S&P	$3,814	($1,386)	-26.7%	($138.61)
2009 S&P	$6,265	$1,065	20.5%	$106.50
2010 S&P	$5,729	$529	10.2%	$52.85
2011 S&P	$5,184	($16)	-0.3%	($1.61)
2012 S&P	$5,375	$175	3.4%	$17.46
2005-2012 S&P	$42,511	$911	2.2%	$11.39

Basically, at the end of the year, hopefully you have more money than you put in.  Now, in order to game the tax withholding every couple of months you are going to need to go through and project what your tax return is going to look like at the end of the year (taking into account the money you have not yet made and the changes that the politicians have not yet proposed). Then you can adjust your withholding allowances/exemptions to change the amount that is withheld. Bear in mind that you probably want to err on the side of caution because while there is no bonus for having too much withheld, there are penalties for not having enough withheld.  So, I conservatively assumed 10 hours per year spent analyzing and adjusting your tax withholding to calculate how much per hour this is equal to.

You can see from the list above, there are only three of the eight years in which crunching numbers for 10 hours a year would exceed my $25 free time price.  Yours may be lower, but there were still three of eight years when the ROI was negative, so no amount of tinkering would have made it worth your time. Overall, $11.39/hour average doesn't sound too shabby - but remember, I make enough money to have $5200 refund each year, if you are only getting the national average of $2600, then cut this $11.39/hr in half and you have something that is less than minimum wage - in other words it would be more profitable for you to just go out and get a job at McDonalds for two days (five hour shifts) each year and then quit rather than try to monkey around with your tax withholding throughout the year.

But the 2005-2012 S&P line can be misleading.  This is calculated by just adding up each of the yearly amounts.  I did this since we plan our tax refund into our budget and mainly have it targeted to pay for big ticket items (replacing roof, buying car, etc.) that we know are happening in the next year.  What about if you plan on saving this for the long term, there could be a lot of good benefits, right?

	Value	$ Increase	% Increase	$/hr
2005-2012 S&P Yearly	$42,511	$911	2.2%	$11.39
2005-2012 S&P Combined	$48,765	$7,165	17.2%	$89.56

Well, the Combined column (assumes you don't spend it each year) is starting to look really good.  $89/hr is a heck of a lot more than I make.  Obviously, if the S&P 500 does average or even good in 2013, then this doesn't change the rosiness of this picture.  But what if instead 2013 becomes another 2008?

	Value	$ Increase	% Increase	$/hr
2005-2012 S&P Yearly	$42,511	$911	2.2%	$11.39
2005-2012 S&P Combined	$48,765	$7,165	17.2%	$89.56
One More Bad Year	$46,325	($475)	-1.0%	($5.27)
One More Bad Year Combined	$33,580	($13,220)	-28.3%	($146.89)

So, I calculated for one more bad year, assuming that you spend it every year and it is bad, but if you were using it as long term savings, then that $89/hr turns into -$146/hr.  In one year, of course the next year may be better than before. Or it could be worse.  You don't really know, so, I would suggest not using this as the basis to make a decision.  Don't get me wrong, I invest in the stock market and encourage others to as well. Its just not a place to put money that you may need in the short term.

So, let me look at something that is more stable, like bank interest rates.  I can count on this to always be positive. 

	Value	$ Increase	% Increase	$/hr
1% Savings	$5,227	$27	0.5%	$2.71
2% Savings	$5,254	$54	1.0%	$5.43
3% Savings	$5,282	$82	1.6%	$8.18
4% Savings	$5,309	$109	2.1%	$10.94
5% Savings	$5,337	$137	2.6%	$13.72

Nope, this certainly doesn't change things.  Unless interest rates are astronomically high, there is no sense in me using my leisure time to play with taxes.  In fact with some of these, I know my daughter has made more operating a lemonade stand.

So, for the last 8 years, my opinion has changed.  At one point in my life the $25 extra a year in interest I might have made sense, but I had a whole lot of extra time back then. Yes, I have been giving the government an interest free loan for thousands of dollars, but on the flip side, the actions I would need to take to not give them that loan are not worth it.  If there was no penalty for underpayment, then I wouldn't because it would make the decision easy (arrange to have nothing withheld and just write a check on April 15th).

Why Do We Still Have the Dollar Bill?

I've said in the past get rid of the dollar bill. While this is probably the 20th time in the last 50 years that Congress has looked at the proposal, perhaps we will have some sense this time and do it. Don't bet the house on it (when has Congress made a fiscally sound decision in the last decade), but I'm hoping for a long shot here!

One thing why you shouldn't get your hopes up - the Treasury is finishing up an 18 month study of this issue. Whatever money we spent on this study is a complete and utter waste. Several countries have gotten rid of their $1 bills, and not just third world banana republics - trading partners like Canada, England, and even the Eurozone have recognized for decades that the $1 bill was a money waster.

The fact that we are behind several third world countries who don't have reliable running water or electricity is an embarrassment. If we really need a study, we should have asked the Canadians for their 30 year old study and then relabeled it - total price $100K. If the study from 30 years ago showed that it was cheaper back when everyone carried money, it is going to be that much more cheaper now that hardly anyone carries money. 

If it is the metal composition, we are also behind the eight ball. Since we stopped putting precious metals in coins in the 60s, we should have immediately gone to the cheapest metals possible. No sense in trying to pretend like the money has melt value. Once again, several other countries (including many banana republics) have done this. While I am not too keen on steel from a collector's standpoint, it is very practical. I'd prefer a chrome steel or nickel steel alloy that doesn't rust. Cupronickel is good (what our nickels are made from) but expensive. If we wanted to stick with this then get rid of the penny, nickel and quarter and just have dimes and half dollars (then no one will get the dollar confused with the quarter). Several countries use a stainless steel alloy which remains nice and shiny decades later. 

So, if all of these other countries have been able to figure this out, why do we need to spend 18 months and millions of dollars on a study to come up with the same answer? And people wonder why we are adding $1 trillion in debt each year. Easy, just take this philosophy and magnify it by every item in the federal budget.

One area of the economy that would be affected is strip clubs.  I am not sure strippers would like to be pelted with dollar coins for their performance.  However, this could easily be solved by the strip clubs printing their own bills and then patrons can purchase a bundle upon entering. The workers would then turn in their gathered bills at the end of their work day for real money.  (Sure, this would eliminate a lot of the under the table transactions that probably go on, but that would mean more tax dollars - its a good thing!) Disney does this as sort of a souvenir gimmick (or at least they did 30 years ago).  I have Disney Dollars (with portraits of Mickey and Goofy) that can be used as real money in the Disney themeparks, but have no value elsewhere.

Hedge Fund Manager Ackman Goes in the Ring Against Herbalife

In recent investing news, I have been following the kerfluffle between hedge fund manager Bill Ackman (who I'll admit I had never heard of before, but I don't follow hedge funds) and Herbalife, a corporation that sells weight loss shakes and business opportunities to sell weight loss shakes (I'll admit, while I don't know exact details about this company, I am familiar with their business model and have studied it extensively).

Back in December, Ackman made a presentation to some investors where he laid out his case that Herbalife is running an illegal pyramid scheme and will be shut down by the FTC.  As part of this he announced that he had taken a short position of $1 billion with a price target of $0.  In other words, he doesn't have any intention of covering his short because he beliefs the company will be shut down by the FTC.  Herbalife has responded to this presentation with their own during they recent investor phone call. Depending on which side you are on, the news seems to indicate that this response was either a slam dunk or an airball.

In a nutshell, Ackman's presentation goes over the funny math that Herbalife uses, which, in their estimation, shows that Herbalife distributors make more money from recruitment than they do from retail sales of their product.  I have gone through their presentation, and I find their logical argument rather impressive.  But there were some numerical errors that I found along the way.  So let me go through those.

First, on slide 10 and 11 of the presentation linked to above, it compares Herbalife to other consumer product companies like Church & Dwight, Energizer, and Clorox (as a disclaimer, I own Clorox stock and have for about 12 years).  The problem I have with this comparison can be easily seen on the slide 11, is that all of these companies have several brands that span the spectrum of consumer buys: cleaning products, food, clothing, cosmetics, etc. I was familiar with almost all of the brands, even if I didn't know what the parent company name was (Church & Dwight has Arm&Hammer, Nair, Trojan, and Xtra).

One of the things that Ackman brings up is even though all four of these companies are similar in size and in the consumer products brand, Herbalife is a relative unknown. I can think of two reasons for this.  1) Herbalife primarily sells a narrow segment of the consumer products market, namely health and wellness products and advertises by word of mouth (this is a segment that I don't use much products in so am not very familiar with) and 2) although similar size to the other three, Herbalife sales are primarily international.  So, I thought I would test these hypothesis.  Since all four are publically traded the information I need is right there in their filings to the SEC.

 Below is the information that I gleaned from the SEC EDGAR site of filings. Dollars are in millions. I looked at the last quarterly report available for each company.

	Revenue	Largest Segment	Largest Segment % Revenue	US Revenue	US revenue %
Herbalife	$1017	Weight Loss/Nutrition	91.0%	$203	20.0%
Church & Dwight	$725	Household Products	61.9%	$530	73.1%
Energizer	$1124	Personal Care	59.9%	$579	51.5%
Clorox	$1338	Cleaning	45.6%	$1035	77.4%

In a nutshell, my two hypothesis are correct.  Herbalife is more concentrated in sales in a single segment than any of the other three.  And Herbalife relies on International sales far more than any of the other companies. Neither of these is inherently bad, it just shows that Ackman's comparison wasn't the best comparison. Whether or not there actually are more similar companies to compare it to, I don't know, I'll leave that to his paid researchers to figure out.

Second, slide 12 identifies Herbalife as a $2 billion brand that no one has heard of. Ackman explains how he comes up with this number, 29% of total product then adjusting for shipping costs and Herbalife's revenue/discount reporting.  I just use the 29% and look at their total sales and come up with $853 million.  So, less than $1 billion brand.  Furthermore, as shown above, most of these other brands probably have 50%-75% of their sales in the US, while Herbalife only has 20%, so their Formula 1 shake is only a $170 million brand in the US.

Third, slide 14 shows that Herbalife sells more powder drink mix.  Except does it really.  They sell more $ wise.  He doesn't include the premixed liquids, although I will all together since Herbalife doesn't offer it and my guess is if they did then their powder sales would decrease and liquid sales increase. I didn't bother to look up the actual amounts for the other brands but assumed that Ensure and Slimfast had 60% sales in the US and GNC had 90%.

	Sales	Adjusted for US
Herbalife (Ackman)	$1800	$360
Herbalife (mine)	$853	$171
Ensure	$700	$420
Slimfast	$600	$360
Leanshake	$50	$45

This is more evidence why Herbalife is relatively unknown.  No matter which numbers you believe, Herbalife isn't the most popular weight loss shake.  But lets look at these numbers in another way. How many servings of each are actually sold? Ackman gives us the information needed on slide 16.

	Sales	Cost per Serving	# Servings	US Servings
Herbalife (Ackman)	$1800	$2.87	627	125
Ensure	$700	$1.03	680	408
Slimfast	$600	$1.04	577	346
Leanshake	$50	$1.74	29	26

Sales and servings are in millions and it looks like Herbalife has an even smaller market share on a serving basis than before.  So to answer the question, why is Herbalife a relative unknown in the US? Because for every 1 person drinking their shake, there are 6.25 people drinking these other three brands.  This isn't even all of the brands available. A quick look on the internet found that Walmart has a weight loss shake - the Equate brand which is cheaper than any of the ones that Ackman lists (disclosure, I also own stock in Walmart and have for 6 years).  I doubt I could easily find sales of this brand shake, but it is possible that it and many others are a significant player on the weight loss shake market.

Fourth, slide 21 states that Herbalife products are commodities and lists several competing brands.  This in and of itself isn't enough for me to say that Herbalife is a commodity as opposed to a premium product like they claim.  So, I compared the nutrition label for the above Walmart weight loss shake to the Herbalife shake.  Guess what I found? Yep, basically identical (when the powder is mixed with 8 oz nonfat milk). Herbalife has less fat and more protein, and a few of the nutrients are different. Walmart has a full day supply of Vitamin C and Vitamin E while Herbalife only has 25%.  Comparing the ingredients, Herbalife has soy protein (accounting for the extra protein) and that is about it.  So, unless you want to pay a hefty premium (up to $2 a serving) for that extra 7 grams of protein, you would be just as well off buying the Walmart brand.  And after looking at this, I can agree with Ackman that Herbalife is not a premium product, just a premium price.

That is about all of the problems, that I see.  I think Bill Ackman could have made a stronger case by comparing with more appropriate companies.  That being said, Herbalife has responded and there are some issues I have with how they play with the numbers.

In response to Ackman, Herbalife touted the information from a customer survey they had done by Lieberman Research Worldwide (another company I have never heard of, but there isn't any reason for me to necessarily).  During an interview on CNBC, the CEO implies that 90% of their product is sold to people outside of the distributor network.  On the other hand, the 3rd Quarter conference call that Herbalife had and is referenced in the report linked above states that 90% of customers are outside of the distributor network.  These are two very different things.  So are one, both, or neither of them correct?

Let's do some more looking.  We know that this survey was conducted in the US so we'll try to confine ourselves to that market.  However, much of the information in the quarterly report for Herbalife is for the North American market.  Fortunately for us, Mexico is not part of that reporting and the numbers for North America are only a few percent higher than for the US by itself (i.e. $209 million revenue vs. $202 million).  That being said, I'll use North America as a proxy. $ figures are in the millions.

Net sales	$209
Monthly Active Sales Leaders	67,826
Total Distributors	372,000
Retail Sales	$332
Distributor Allowance	$158

So, here is the first bit of information.  The Active Sales Leaders qualify to buy product at a 50% discount. All other distributors can only buy at a 25%, 35% or 42% discount.  Retail sales is the recommended retail sales price and distributor allowance is the discounted amount of retail sales.  So net sales is then retail sales minus distributor allowance plus shipping charges.  The first thing that can be seen is that a significant amount of sales is from active sales leaders (this would be expected).  To determine exactly how much, I'll just assume there is only two discounts 50% and 25%. Using a little algebra this equates to 90% by Active Sales Leaders and 10% by the rest (so it follows the Peter Principle).

Getting back to the Lieberman report for a minute.  They found 5.5 million customers from the past 3 month period, over 90% were not in the distributor network, and 2/3 were likely to buy again. With only 372,000 distributors total in North America, if there are 5.5 million customers, then of course 90% are outside of the distributor network.

Next I'll assume that all of the non active distributors (305,000) are only in it for personal consumption, this is somewhat implied in the Herbalife filings. 10% of $332 million is $33.2 million in retail product sales over a 3 month period.  Divide this by the distributors and you have $109/ quarter or $36/mo. This is equivalent to a single 750 g bottle of the Formula 1 shake powder (30 servings).  Herbalife recommends 1 serving a day for weight maintenance and 2 servings a day for weight loss.  So, none of these distributors are using the product for weight loss, or there are a significant number of them that don't use the product regularly, or (considering Herbalife sells several products) using some algebra again 25% use $100 per month (Herbalife recommended), 20% use $39 per month (one bottle), 25 percent use $39 per quarter, and 30% use $39 per year.

So, if people are becoming distributors just for personal consumption, they certainly aren't consuming a whole lot.

Next we have the 68,000 active Sales Leaders who are buying $300 million retail (for $150 million) each three months.  And there are roughly 5.1 million customers that are buying from these distributors if all of the numbers are correct.  To begin, that is 75 customers per distributor (which is 3 times the amount from the Herbalife plan - slide 58), however, it amounts to only $1470 per month in retail (which is a little more than half of what the Herbalife plan shows of $2500/month).  So at a minimum, the standard sales pitch of the opportunity should be updated to reflect what is actually happening, of course, it is kind of hard to get someone to buy in to finding 75 regular customers.  If you figure there is one hour spent per quarter on each customer, plus meetings and other Herbalife related stuff, you have a full time job!

If there are 5.1 million real customers, what are they buying?  Let's assume that the 68,000 distributors also have a personal use of $100 retail per month (as recommended by Herbalife), that leaves $280 million being purchased by the customers - $55 per quarter.  So, that translate to two of the smaller bottles per quarter (not per month per quarter).  In other words, the customers aren't using it for weight loss or maintenance. Which means if these are the real customers of Herbalife, then Herbalife doesn't understand how its products are being used by the public. To answer the other statement from Herbalife, Sales Leaders are buying $20million per quarter for personal use (if they are using $100 per month) and all other distributors are buying $33 million per quarter for personal use.  Which means that the distributor network accounts for at least 16% of all sales, so no 90% of Herbalife product is not sold outside of the distributor network.  If it is, then the distributors themselves don't believe in the product enough to use it.

The last funny bit of numbers that I wanted to look at is one of the "X has more A than M, B than N, C, than P..." So I used the USDA food information database to find out what is in each of the items listed on the Formula 1 sales page.

	Formula 1	Mango	Banana	Chicken	Broccoli	Yogurt	Beans
Calories	180	124	105	127	15	103	237
Protein (g)	17	2	1	17	1	10	15
Fat (g)	1	1	0	6	0	0	1
Carbohydrate (g)	26	31	27	0	3	14	43
Sugar (g)	23	28	14	0	1	14	1
Fiber (g)	3	3	3	0	1	0	10
Calcium (mg)	250	23	6	7	21	366	80
Vitamin A (mcg)	210	112	4	6	14	4	0
Vitamin C (mg)	18	75	10	0	39.2	2	0
Iron (mg)	1.05	0.33	0.31	0.77	0.32	0.17	2.97

Let's go through the claims one at a time.  "More Vitamin A than a Mango." Yes, but I never thought of mangoes as a Vitamin A food, compared to carrots, it only has half as much Vitamin A.  And a mango will give you all of the Vitamin C that you need for a day.

"More Vitamin C than a Banana." Again, when did bananas become a vitamin C food?  Yes, the statement is true, but since we already got almost 4 times the vitamin C from the mango, it is moot. "More protein than a chicken thigh." Well, depends on the size of the chicken thigh, I found them to be equal.  Besides as mentioned above, this is soy protein compared to animal protein.  Is there a difference, I don't know, ask a nutritionist.

"More fiber than 1/2 cup of broccoli." Yes, but the same as a mango or a banana.  Besides, broccoli has so little calories you could eat two cups of it and have more fiber than Formula 1. "More calcium than 6 oz of yogurt." Not from what I found, but then again, I don't know what yogurt they are using as their baseline. Yogurt also has a sizeable amount of protein.

"More iron than 1/2 cup of beans." Again, not from what I found, but I don't know what beans they are talking about there are lots of different kinds of beans (I used black beans, because I eat them). Beans also have almost as much protein as the Formula 1.

If you added all of these foods together you would get 711 calories. This is a decent sized meal.  However to compare it I also adjusted them down to 180 calories.

	Formula 1	All Foods	Adjusted Foods
Calories	180	711	180
Protein (g)	17	46	12
Fat (g)	1	8	2
Carbohydrate (g)	26	118	30
Sugar (g)	23	58	15
Fiber (g)	3	17	4
Calcium (mg)	250	503	127
Vitamin A (mcg)	210	140	35
Vitamin C (mg)	18	126.2	32
Iron (mg)	1.05	4.87	1.23

Looking at this there is less protein, sugar, calcium, and Vitamin A.  Other than Vitamin A, all other nutrients could be equalized or better by simply adjusting the proportions of each food and get the same nutrition as a shake.  The vitamin A can be taken care of by adding carrots to the mix.  In other words, there is nothing special about the Formula 1 shake that can't be found by limiting your portion size of common foods. Personally, I happen to like eating a variety of foods which is part of the reason I am not into the shake meal fad.

Overall, I think the Herbalife business model sucks for distributors.  Sure Herbalife makes a lot of money from it, and as long as they can continue to get 1 million or more new people to sign up each year, this could go on forever.  All of the MLMs have proven that there is a ready and willing market of potential distributors willing to sign up for the next thing.  So, I find a bet for Herbalife going to $0 a long shot.  Add to this that there has been little enforcement of the FTC regulations for pyramid schemes over the last 30 years.  The MLM industry has jumped into the lobbying game with both feet and it has profited them nicely.  So relying on the FTC to shut down Herbalife is also a longshot.

On the other hand, I have to go back to the business model.  It sucks for distributors.  The information on the internet has exploded in the last 10 years.  Analysis of the Herbalife business model (or any MLM for that matter) with actual numbers, not the rosy picture they paint for themselves of the ideal model, looks dismal for not just the average distributor, but up to 99% of all participants.  Using Herbalife's North America numbers, 372,000 distributors, while only 68,000 are actively selling. If 99% are losing money after all expenses are accounted for, then 3720 sales leaders (5% active sellers) are making money. This matches what Ackman shows on slide 74. While it has lasted for 30 years, I can't see it lasting for another 30 years based on the information available. Which means I wouldn't bet on Herbalife going up significantly.  In conclusion, I believe the information that has been presented thus far probably limits where Herbalife is going to trade in the future (barring any action by the SEC or FTC), somewhere between $25 and $50.