BBRG: Cheap Is Great, But Free Will Cost You

Cheap Is Great, But Free Will Cost You
Whenever a company offers something at no charge, that means the price is hidden and out of sight.
Bloomberg, October 17, 2018




Today’s discussion is based on something that should  be obvious, but in our haste to save a buck often gets overlooked. The basic, fundamental foundation upon which all economics is built is simply this: everything has a cost. Colloquially, we know this as the “ain’t no free lunch.”

Economics is neither that obvious, nor straightforward, and the nuance is that while everything has a cost, at times, it can be hidden from view.

On the internet, “There ain’t no such thing as a free lunch” is best known by its acronym, TANSTAAFL. Popularized by sci-fi writer Robert Heinlein (“The Moon Is a Harsh Mistress,” 1966), it enjoyed a resurgence a decade later when Milton Friedman used it for the title of his 1975 book, “There’s No Such Thing As a Free Lunch.”

What is a “free lunch”? It was quite literal, dating to the post-prohibition 1930s, whereas we were reminded by William Safire: a free lunch was a bartender’s enticement to get you to buy drinks; the economic lesson is “you are paying for that so-called free lunch.”

Let’s compare “cheap” and “free.”

“Cheap” is less expensive then dear. We understand cheap, and appreciate all of its advantages. Experience teaches us that cheap is indeed good for investors, as costs compound over time acting as a drag on returns.

“Free” on the other hand, when offered by any for-profit company, should be approached warily . . . Continues here



I originally published this at Bloomberg, October 17, 2018. All of my Bloomberg columns can be found here and here



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