Smart Trades
We all end up buying or selling something at some point in our lives and the way we feel after each transaction depends on how we think we fared in the end. Sometimes we’re left scratching our heads and wondering how we got into the deal in the first place and, at other times, we may feel gleeful at what we perceive to be a great bargain or windfall depending on whether we are buying or selling. The sad truth is that all business transactions are prone to risks and it is very important to understand the nature of these risks in order to protect yourself from the frequent mishaps people often encounter.
A business transaction (a trade), in its simplest form, involves a buyer and a seller and the two are involved in the exchange of value. In his book, The Science of Wealth, Amasa Walker determines that an article or service has value:
“when it is an object of man's desire, and can be obtained only by man's efforts. Anything upon which these two conditions unite will have value, that is, a power in exchange. Value is the exchange power which one commodity or service has in relation to another.”
An online dictionary (http://ardictionary.com ) defines value as follows:
“Worth estimated by any standard of purchasing power, especially by the market price, or the amount of money agreed upon as an equivalent to the utility and cost of anything.”
The first definition is more comprehensive and covers all forms of trade including trade-by-barter. The second is just as accurate but narrows its scope down to modern trade transactions that are effected with money as the instrument that conveys value.
The seller offers something of value to the buyer and it could be a product or service. The buyer also offers something of equivalent value, as determined by both parties, to the seller and both desire an exchange. In the old days, this was the classic system of trade-by-barter but in modern times, the buyer simply has money to pay for whatever the seller is offering. In this latter case, the buyer offers to acquire the product or service at a mutually agreed price. The prices of goods or services may be determined by a range of factors with complex interactions between them and these may include the economic, geographical, political, regulatory, social, cultural and environmental conditions prevailing at the time and place of the sale. Once both parties agree on a price for a product or service in a sale, it becomes the value of the product or service at that time and that’s what’s transferred in the transaction. Note that this does not say whether the value is fair or not.
We are all confronted by a barrage of potential business deals everyday ranging from the mundane like buying bread or a pair of flip-flops to the specialized like acquiring stocks. In most cases, we simply try to get by relying on our instincts, feelings, desires, assumptions etc. vis-à-vis the product or service on offer and the seller. These filters create the prism through which we perceive business situations and make critical judgments relating to buying or not and also how much to pay. Most people would admit that buying can sometimes be a nerve-racking activity with the potential for tremendous loss or gain. In many cases, buying is easy as prices are stable and generally accepted eliminating the risks associated with price fluctuations. In extreme cases, prices are even regulated by the government such as the case of fuel and bread in some countries. These are low-risk to no-risk business situations. But there are many cases in which uncertainty reigns in many respects such as the purchase of used goods and paying for novel unconventional services. I believe it’s important to approach these situations a bit more systematically and methodically in order to minimize the associated risks.
In a legitimate business transaction, the following conditions must be met:
1. There must be at least two clearly identifiable parties involved i.e. the seller and the buyer
2. Equivalent value must be determined, agreed upon and exchanged by the parties
3. It must be a win-win situation for all sides involved
When one or more of these conditions is either absent or violated, the transaction generally ends in tears for one or all of the parties.
Life in the twenty-first century is high-paced with increasing and dramatic shifts in virtually all domains. In the old days, trade-by-barter required the physical presence of both parties together with the goods at the point of sale and the goods were tangible. Even when services were involved, the parties got in physical contact with each other before carrying out the transaction. In today’s Internet world, things are orders of magnitude more advanced and sophisticated. Goods, services and money hurtle round the world at incredible speeds and parties to deals are increasingly faceless and the deals more and more impersonal. The trade systems work with admirable efficiency but there are problems that arise when one deals with sellers or buyers they can’t fully identify or track. Internet scammers exploit this violation of the first condition mentioned above to wreak havoc on unsuspecting people. It is simply very important to know as much as possible about people or organizations you intend to buy from. Likewise, sellers need to know their customers as much as possible. The more both parties know about each other, the better the chances of effecting successful transactions.
The issue of value is a painful one especially when it comes to services. When you buy a product and later discover that you overpaid, it does not mean that value was not exchanged. It simply means that you did not get what can be considered fair or equivalent value for your money. In some cases the acquired product ends up not meeting the specifications agreed upon during the sale or all the specifications of the buyer and in others, the product is simply worthless. In this case, condition 2 is violated. When someone offers to use chemicals or some strange substances and processes to double any amount of money you care to provide in order to make you rich, they are offering a service, albeit an illegal one. Condition 1 may be met in such cases but what about conditions 2 and 3? What value is the “money-doubler” really offering? Is it a win-win situation for all involved? You may genuinely desire to double your money but what effort are you required to engage to do so in this case? The lack of effort means there’s no value involved. If you believe in the saying that there’s no free lunch, then you can easily see through such a scheme. Put another way, if the “money-doubler” could really do that, why bother to “work” at all? Stories abound of people taken in by such peddlers of illusions and the common and most enduring thread in each of these stories of deceit is that the “buyer” is always separated from his/her cash with nothing to show for it in the end. Conditions 2 and 3 are not met and that was the “money-doubler’s“ intention from the start.
There’s a multitude of sales transactions involving products and services that fail to meet the value test. It is very important to watch out for value because its presence or the lack of it can sometimes be very subtle and hard to detect. Pyramid schemes are egregious violators of condition 2 and they fall squarely under this category. WIKIPEDIA (http://www.wikipedia.com ) defines a pyramid scheme as “… a non-sustainable business model that involves the exchange of money primarily for enrolling other people into the scheme, without any product or service being delivered.” Some years ago I ran into a friend who was offering to sell me some certificates for
There is a whole range of schemes similar to Pyramid schemes e.g. Ponzi schemes and Matrix schemes. These are variations of the pyramid approach and the con men who develop them go to great lengths to disguise them as more and more people get to know about pyramid schemes. It is worth noting that these are schemes developed primarily to defraud unsuspecting people and they must not be confused with Multi-Level Marketing (MLM) also known as Network Marketing. MLM is often legitimate and actual products and services are involved. WIKIPEDIA says “… pyramid schemes take advantage of confusion between genuine businesses and complicated but convincing moneymaking scams.” They are true destroyers of innocent people’s hard-earned wealth. I am definitely not suggesting that everyone should run off and get into MLM because there are no guarantees you’ll make money no matter the rosy picture often painted by the marketing literature. The MLM model has its own weaknesses and problems that a participant needs to understand before engaging in the business and some practitioners sometimes engage in deceptive practices. A US Federal Trade Commission (FTC) Consumer Alert of October 2002 states clearly that only “some multi-level marketing are legitimate” and proceeds to offer tips for evaluating the plans offered by MLM businesses. MLM schemes meet the first two conditions but, due to their inherently unstable and unsustainable design, they wind up violating the third condition as their success and reach grow leading to failure and financial loss for the vast majority of participants. Some studies indicate figures as high as 99% of participants losing their investments.
The third condition is the trickiest because we often fail to ask ourselves one simple question when faced with a seller: what does he/she expect to get out of the deal? It is true that in business greed tends to rule and it’s usually everyone for himself. In this frame of mind, it can be difficult to pause and reflect on that question. This simple move can raise serious red flags on a deal that may seem perfectly good. Many people erroneously think that setting up the seller to lose their shirt should be the ultimate goal. Nothing is further from the truth. The most successful business relationships in the world have that element of win-win in them and the more of it there is, the better. Imbalances in the win-win scale would eventually manifest as problems in the relationship over time. A company that acquires products or services and fails to respect the payment terms by dragging out settlement over unreasonably long periods, penalizes the supplier in many ways usually through interest payments at the bank. There may be legitimate reasons for this but that does not eliminate the negative effects on the transaction. In some cases, the company simply sits on the payment and resists settlement all the way to the courts. This is surprisingly quite common and, to me, amounts to outright robbery. Another case of shameless thievery is when someone sells the same patch of land to multiple buyers setting them up for brutal battles for ownership. These win-lose or lose-win arrangements never end well and must be strenuously avoided.
Examples abound of cases where business transactions fail to meet the conditions outlined above. The examples presented here are just for illustration purposes. Evolutions in technology, sales techniques and marketing technology mean that business transactions continue to grow in sophistication. These advances enable sellers to present their products and services to potential buyers using a bewildering array of techniques and communications media. They are used by legitimate as well as crooked business people out there. Today’s customers are therefore expected to be more and more sophisticated first, to avoid being duped outright and second, to enable them get fair deals as often as possible. The three conditions outlined above provide a simple framework from which to work each time you are stumped by a deal. It provides a quick and easy way to vet a deal and thereby improve your chances of always making smart trades.
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