Category: Wisdom

EDITOR’S NOTE: If the math formula doesn’t render correctly in your reader, check the website at this link.

Introduction

In advantage play (gambling with an edge over the house), the Kelly Criterion or Kelly Formula gives a simple calculation for the best amount to bet to maximize earnings. We can draw an analog for resellers, whether it’s the buyer’s group kind or the gift card arbitrage kind.

The Propeller Head Part

The generalized Kelly formula, rewriting a bit to express terms familiar to resellers, is:

\%_{float} = \frac{(1-p_{loss})}{\%_{loss}} - \frac{p_{loss}}{\%_{gain}}

Where:

  • %float = The percentage of your budget to float
  • ploss = The probability that you’re going to lose your profit
  • %loss = The percentage you’ll lose if a loss happens
  • %gain= The percentage you’ll gain if you don’t lose

A Simple and Specific Example

Let’s look at Pepper, which may or may not pull the rug out from under you at any point in the next year. With Pepper, you’re probably earning about 3.9% from your credit card (4x Membership Rewards, worth 4.4% cash back, times 90% due to Pepper’s convoluted redemption). Assuming your buy rate equals your sell rate after rewards are paid out (buy at 90%, sell at 90%), then we’ve got a simple calculation:

  • ploss = 10% (pick your own number here, but let’s say there’s a 1 out of 10 chance of Pepper failure)
  • %loss = 10% (worst case you lose all of the discount Pepper gives)
  • %gain= 3.9% (the percentage you’ll gain if you don’t lose, in this case Membership Rewards)

Then run the numbers and get:

  • %float = (1-0.10)/0.10 – 0.10/0.039 = 644% (when probability of loss = 10%)

What the hell, you might ask? Why is that number over 100%, and how do I invest that much? Well, the answer is either (1) you should float all of your bank roll to maximize profit because you’re much more likely to win than lose, or (2) you need 5.44 other players to help you.

Increasing the Chance of Failure

What if you think there’s a 30% chance of Pepper failure though? The calculation is again simple:

  • %float = (1-0.30)/0.10 – 0.30/0.039 = -692% (when probability of loss = 30%)

What the double hell, you might ask? Why is that number over 100% and also negative? The formula is telling you that if you think Pepper’s got a 30% chance of failure in the next 30 days, you shouldn’t invest anything; “kill it with fire” says the formula.

Finding the Middle Ground

So, what’s the cut-off at which the formula switches from LFG to hells-to-the-no? I’ll spare you the algebra, but it’s easy to find by setting %float=0 and solving for ploss. Doing that gives:

  • ploss (cutoff point) = 0.2806 = 28.06%

In other words, if you think Pepper is < 28% likely to fail before you can cash out your rewards, you’ll maximize your profits by playing the resell game. If you think Pepper is ≥ 28% likely to fail, stay away. (I generated a boring graph illustrating how float percentage varies with the probability of loss for turbo-nerds here).

Conclusion

The Kelly criterion is surprisingly insensitive for churning problems, switching from above 100% (1.0) to below 0 very quickly. But, if you’re 3/4 certain that Pepper isn’t going to fail before your rewards are paid out, keep going.

Special thanks to John Reeder for poking me on the subject, and another special thanks to John for the idea for a follow-up piece on the subject: what if you know they’re gonna steal your money, but not when? Stay tuned, or, like yesterday, don’t; you do you.

Another helpful MEAB plot.

EDITOR’S NOTE: If you’re viewing this on a platform that doesn’t properly render the math formulas, pivot to the website for this article.

Introduction

When calculating the cash value of points redeemed for a free night at a hotel, a surprising number of blogs ignore the parking fees and resort fees charged by most programs. That disingenuously inflates the value of a hotel point, unless you’re able to talk your way out of a resort fee and you can get to the hotel without a vehicle.

Fees on Award Stays in Major Programs

Let’s interlude with a quick refresher on major programs’ rules about fees on award stays:

  • Hilton: no resort fees on points redemptions, but parking charged
  • Hyatt: no resort fees on points redemptions, parking may be charged depending on elite status
  • Marriott: resort fees and parking charged
  • Choice: resort fees and parking charged
  • Best Western: resort fees and parking charged
  • IHG: resort fees and parking charged

Calculating Cents per Point

Taken at face value, you’ve effectively got a cash co-payment on award redemptions in the form of fees with most major loyalty programs, which reduces the value of your points. The naive formula that you’ll typically see for cpp (cents-per-point) is:

cpp = \frac{rate*100}{points}

But, the total cash value of your stay is the nightly rate plus fees, not just the nightly rate. And as a result, we ought to include resort fees and parking in that valuation. Let’s introduce a MEAB reduced comparative value cv, which is a reduced overall cents per point that takes fees into account for redemptions:

cv_{meab} = \frac{(rate-fees)*100}{points}

Looking at the JW Marriott Austin for a concrete example: For a Saturday night, one-night stay in the cheapest room, the cash price next weekend is $235, plus a $25 destination fee, plus a $54 self-park fee. An award night for the same room on the same weekend is 43,000 Bonvoy points. That means we’re getting a reduced MEAB comparative value (cv) of:

cv_{meab} = \frac{(\$235-\$25-\$54)*100}{43,000} = 0.36

That works out to a whopping reduced comparative value of 0.36 cents per point, which is bad even by Marriott standards. Side note: If you instead booked this Marriott stay via the Chase Ultimate Rewards portal with a Sapphire Reserve, the $25 resort fee would be included in the cash rate and you’d end up paying 17,333 points and $54 for parking, instead of 40,000 Bonvoy points and $79 in fees. Remember this example when you’re looking the Ultimate Rewards 70% transfer bonus to Bonvoy.

So What?

Looking at reduced value comparative calculations lets you compare currencies across different programs in a more genuine and equitable way. The results aren’t always pretty, but they do make Hyatt and Hilton look better than other programs ceteris paribus.

Happy Tuesday friends!

Don’t worry friends, there’s always something more at MEAB.

In sales, computing, and likely a dozen other disciplines, there are two commonly accepted types of scale:

  • Vertical, which means making a single thing do more
  • Horizontal, which means using more things to do more

A simple example for a rideshare business owner is: do you buy a school bus or more cars to move more people, and nearly as important, does your business earn 10x on a Sapphire Reserve?

In manufactured spend, scaling is possible in both ways:

  • Vertical MS: Open more cards, visit more grocery stores, run bigger charges
  • Horizontal MS: Using more accounts, usually with more players

There’s a third type of scale for manufactured spenders too, which is often a great way to make fintechs go further, and that’s what we’re going to call diagonal scale because reasons. Examples of diagonal scale:

  • Multiple players, each with multiple phones
  • Multiple players, each with 99 employee cards
  • Multiple players, each with multiple virtual assistants
  • Multiple players, each with multiple FinTech accounts
  • Multiple players, each of whom calls the CEO simultaneously, collectively known as a basket of Jimmys

For scale, always go diagonal, and remember, a bunch of diagonals = a plaid, and a plaid = a FinTech (we’ve gone full circle friends; now, we just need another square geometry joke or two. Oh wait, we definitely don’t need that.)

Manufactured spenders going plaid.

EDITOR’S NOTE: I’ve been out of the country for a couple of weeks, but I’m now back. I tried to keep up on responding but fell woefully behind. I’ll do my best to catch-up by the end of the week though.

You won’t find many cliches at MEAB, but some days it can’t be helped despite a herculean effort, and today is one of those days. So, let’s shoot our (second) shot after the Zigening:

You miss 100% of the shots you don’t take.

– Wayne Gretzky, a former stick-puck legend

In manufactured spend, travel hacking, reselling, and churning often the most profitable plays come from trying something unique. That uniqueness often manifests with bewilderment if there’s another party:

Churner: Can you help me reconsider my application for a Business Cash Unlimited card today?
CS Rep, bewildered: I see seven applications today, did you really mean to do that?

Manufactured Spender: I want to buy $40,000.00 in Mastercard gift cards today.
CS Rep, bewildered: Will my register even let me enter that many zeros?

Travel Hacker: I want to add a partner intra-Brazil flight to my transatlantic itinerary and reprice.
CS Rep, bewildered: Uh, wait what?

Reseller: How many pallets of those Mr. Beam lights can you deliver to my house?
CS Rep, bewildered: Do you know how big a pallet is? Did you mean a box?

On the face of it, generally people don’t expect that any of those examples would work in the real world. But, they might, and it might be really profitable too.

Good luck, and happy Monday!

MEAB, but as a stick-puck guy.

Last week we had a brief interlude about how an unredeemed point is worth nothing. It’s definitely true, but there’s a corollary for travel hackers:

Outsized Value Requires a Baseline Stash of Points

Chapter 6 Title from MEAB’s fictitious book, “Churning, Travel Hacking, and Selected Croissant Recipes”

Most bank points can be converted to cash for around 1 to 1.5 cents each, and most airline points have a baseline value in the same ballpark too. With that metric it’s easy to say that a credit card sign-up bonus of 90,000 points is worth somewhere around $900 to $1,450.

When you get a stash of points, it’s almost never a bad idea to cash out, invest that cash or use it in your velocity roll, and start earning a new stash. Then the value of your cashed out points grows with other investments.

You can take cashing out too far though. What if, for example, you’re in Germany on vacation and looking to fly home in the nose of a 747-800 in Lufthansa First? You could buy a ticket for over $10,000, or if you’re lucky you can grab a First Class award ticket for about 90,000 points with Avianca Lifemiles; but only if you haven’t cashed out all of your points. That redemption is rather outsized at more than 10 cents per point in replacement cost value, obviously more than the 1 to 1.5 cents value on a cashing-out basis.

It’s easy to see a strategy emerge: Keep a baseline of points big enough to meet your short term travel needs, and cash out the rest. What does short term mean? That depends on how quickly you earn points I suppose.

Happy Thursday!

A sample recipe from “Churning, Travel Hacking, and Selected Croissant Recipes”.

Introduction

Since 2021 or so, an odd brokerage named Moomoo let crafty churners earn several thousand dollars with relatively convoluted promotions and bonuses, the kind that needed a few pages worth of text or 10 minutes worth of talking to wade through; also known as “A Churner’s Delight.”

Moomoo has now become semi-mainstream, so much so that they’ve appeared on DoC three times this year, with less convoluted promotions to bring more funds into the FinTech which is simultaneously part bank and part brokerage.

Safety

Churners are good at probing the most dank, web ridden, smelly corners of the financial world. They’re often emboldened to do so because they’ve got protections like:

  • CFPB for credit instruments
  • FDIC for deposit account insurance
  • SIPC for brokerage account insurance

For most financial products if everything fails, you’ll get everything you’re owed paid back in full thanks to the above.

FinTech Weirdness

FinTechs lean on the perceived safety to give you confidence in working with them, but as the Synapse shutdown and bankruptcy has shown, just because there’s an FDIC or SIPC insured account somewhere, you’re not necessarily protected in the event of failure. A few nuances that you should know:

Remember, “we keep all your funds in an FDIC insured account” doesn’t necessarily mean that you have any protection. Check the FDIC website to be sure.

Have a nice weekend!

Few know that the original Churner’s Delight recipe came from a cafe in Portland. (Thank to Elaine)

If there were a “Churning and Travel Hacking 101” textbook, one of the first chapter titles would be:

The Value of an Unredeemed Point is Zero

Chapter 3 Title from MEAB’s fictitious book, “Churning and Travel Hacking 101”

The reason this book doesn’t exist though is because I’m not sure what else to write about the topic; if you never redeem a point, it never had any monetary value and you probably should have earned cash instead.

Happy Wednesday! #tiniestblogpost

Shining example of a pulitzer class chapter title, for future reference.

Introduction

The Coase theorem, winner of the just made up MEAB award for “best theorem with the most obtuse Wikipedia description possible” award, says essentially that the value of something can be measured by what you’d have to pay someone to give it up. (Editor’s note: Take a couple of minutes and read the first paragraph of the linked Wikipedia article, wowza that’s bad!)

Example

Let’s illustrate with America’s favorite fruit, bananas. How much are bananas worth in your life? Would you give them up forever if I paid you $1? What if I paid you $10,000, or maybe even $40,000? The smallest number that causes you to swear off bananas forever is, according to the Coase theorem, their total worth.

Making it Real

When assessing how risky a manufactured spend stunt is, the Coase theorem gives a concrete way to assess whether or not one should attempt the stunt, knowing that it might lead to a bank shutdown.

Let’s say, for funzies, that there’s an opportunity to earn 7-8x transferrable points for a cost of ~3%, with effectively unlimited capacity (yes, this has happened, and yes, more than once; no, sorry, I can’t share a play like that right now). If a manufactured spender went as hard as possible with 8x earn on 3% cost, most banks or credit unions would axe that account within weeks or months, and the relationship with that bank would likely also be fried for at least 7-10 years if not forever.

So, can that manufactured spender earn enough in weeks or months to make the play worth frying the relationship? If yes, LFG I guess.

A Case Study

What’s MEAB’s Coase theorem valuation for a few things?

Have a nice weekend friends!

Honorary MEAB award for Wikimedia, Inc.