price discrimination

Price discrimination? No, it has nothing to do with racism. I was reading an article from Reuters about how Microsoft will charge it customers for its new operating system, "Vista". In it the author explains how Microsoft is using a scheme similar to airliner's pricing discrimination:

Going to fly soon? Here's an exercise for you: While getting to know your fellow passengers, ask how much they paid for their ticket. Airlines follow a complex scheme for ticket pricing that tries to figure out the exact maximum that you're likely to want to pay, and then charges you for it. If you need to fly tomorrow, non-stop, you'll get charged more than the person who booked a month in advance with a stop-over. Interestingly, if you book too far in advance you'll be charged more than the month fellow as well, because it's likely that you're planning a trip and have a certain budget for the whole shebang that the airline will gladly plunder. The practice is called price discrimination (as in consumers discriminating value at various price points).

Readers shouldn't be surprised about these schemes. After all, they are everywhere in the hospitality industry. Try to book a hotel room? Tell them different time you get different prices. These are ways for companies to maixmize their revenue.

Random thoughts

The other day I visited the Cheap Stocks blog (one of my favorite blogs). In it the owner recent has a post about Cracker Barrel and the reasoning why it's a "cheap stock". While I agree that the real estate value that CBRL has is under-represented in the book value calculation, I can't help but wonder if that along should be enough to buy the stock. Sure, there is value there, but the business value itself isn't very good. CBRL has terrible gross and operational margin. But their business is just good enough to limp along, but great, but good enough to survive and maybe expand a little every year. For me, in order to play the book value game, the business will have to be so terrible, that I can get into that business at below book value, and completely reinvent the business into something else. Think Berkshire Hathaway, think K-Mart. Buffett bought BRK at less than 1/2 of its book value, just basically got as much operational cash flow out of the business and not bother to invest much in capiture expenditure. What happened was the textile business was slowly bled to death, while the value was transformed into a collection of minor ownership in other excellent business such as Coca Cola, Washington Post Inc, etc...

Right now, Eddie Lampert is doing the same thing to K-Mart and Sears. I just don't see CBRL is ready to take that route. Comes to think of it, isn't it funny that sometimes it's better to invest in something terrible than something that's average?

Today, my portfolio handily beats the market again, all the joy was ruined by SHW. Sherwin-William as part of 3 companies in a case defending against the state of RI, lost today. The charge was the lead paint that they produced in the 80's is still in the building in Rhode Island. The stock lost 25% of its value, putting me back right at square one, around where I bought it over a year ago. At this point, I have way too many positions in my portfolio to follow each one of them closely. Things like this should've never slipped through my research. Maybe I had too much confident in the company. After all, it's one of the most solid companies out there. There is a lesson there. When I bought SHW, I got in at a fair price, not cheap price, according to my own calculation. By that alone, the margin of safty wasn't great at all. But I thought because of the quality of the business, I should have reduced the strick factors in the quantitative analysis, and that itself is a margin of safety. I probably should've stuck to my gun and not pull the trigger. But than again, it's slim loss at this point, just barely below what Buffett called the first law of investment "don't lose money". Margin of Safety at work?